-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bm40ci5enFaY+dovvbRhHTfNi24eaAFoNFP57tmkcg5lpzz75kx6n4ltBg8jupQP ZlCaeIPkqxRztCsn8D03hw== 0000931763-96-000091.txt : 19960327 0000931763-96-000091.hdr.sgml : 19960327 ACCESSION NUMBER: 0000931763-96-000091 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TORCHMARK CORP CENTRAL INDEX KEY: 0000320335 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 630780404 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08052 FILM NUMBER: 96538388 BUSINESS ADDRESS: STREET 1: 2001 3RD AVE S CITY: BIRMINGHAM STATE: AL ZIP: 35233 BUSINESS PHONE: 2053254200 FORMER COMPANY: FORMER CONFORMED NAME: TORCHMARK CORP SAVINGS & INVESTMENT PLAN DATE OF NAME CHANGE: 19820825 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY NATIONAL INSURANCE HOLDING CO DATE OF NAME CHANGE: 19820701 10-K 1 FORM 10-K SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [_] Check the appropriate box: [_] Preliminary Proxy Statement [X] Definitive Proxy Statement [_] Definitive Additional Materials [_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12 TORCHMARK CORPORATION ----------------------------------------------------- (Name of Registrant as Specified In Its Charter) --Enter Company Name Here-- ----------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A. [_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a- 6(i)(3). [_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange ActRule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: [_] Fee paid previously with preliminary materials. [_] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: Notes: SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number December 31, 1995 1-8052 TORCHMARK CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 63-0780404 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR IDENTIFICATION NO.) ORGANIZATION) 2001 Third Ave. South, 35233 Birmingham, AL (ADDRESS OF PRINCIPAL (ZIP CODE) EXECUTIVE OFFICES) Registrant's telephone number, including area code: (205) 325-4200 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS CUSIP NUMBER: ON WHICH REGISTERED: Common Stock, $1.00 Par 891027104 New York Stock Exchange Value The International Stock Exchange, London, England Securities registered pursuant to Section 12(g) of the Act: None Securities reported pursuant to Section 15(d) of the Act: TITLE OF EACH CUSIP NUMBER: CLASS: 8 5/8% Sinking Fund 891027 AB 0 Debentures due 2017 9 5/8% Senior Notes 891027 AD 6 due 1998 8 1/4% Senior 891027 AE 4 Debentures due 2009 7 7/8% Notes due 891027 AF 1 2023 7 3/8% Notes due 891027 AG 9 2013 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH) AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K ((S)229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [_] THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT: $3,326,119,112 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF FEBRUARY 29, 1996: 71,722,245 DOCUMENTS INCORPORATED BY REFERENCE PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 25, 1996, PART III INDEX OF EXHIBITS (PAGES 63 THROUGH 65) TOTAL NUMBER OF PAGES INCLUDED ARE 72 PART 1 ITEM 1. BUSINESS Torchmark Corporation ("Torchmark"), an insurance and diversified financial services holding company, was incorporated in Delaware on November 19, 1979, as Liberty National Insurance Holding Company. Through a plan of reorganization effective December 30, 1980, it became the parent company for the businesses operated by Liberty National Life Insurance Company ("Liberty") and Globe Life And Accident Insurance Company ("Globe"). United American Insurance Company ("United American"), Waddell & Reed, Inc. ("W&R") and United Investors Life Insurance Company ("UILIC") along with their respective subsidiaries were acquired in 1981. The name Torchmark Corporation was adopted on July 1, 1982. Family Service Life Insurance Company ("Famlico") was purchased in July, 1990, and American Income Life Insurance Company ("American Income") was purchased in November, 1994. The following table presents Torchmark's business by primary distribution method:
PRIMARY DISTRIBUTION METHOD COMPANY PRODUCTS SALES FORCE - -------------------------------------------------------------------------------------------------------------- HOME SERVICE LIBERTY NATIONAL LIFE Individual life and 2,400 full-time sales repre- INSURANCE COMPANY health insurance. sentatives; 115 district offices Birmingham, Alabama in the Southeastern United States. - -------------------------------------------------------------------------------------------------------------- UNITED AMERICAN UNITED AMERICAN Senior life and health 51,000 independent agents GENERAL AGENCY INSURANCE COMPANY insurance including in the U.S., Puerto Rico and AND CAPTIVE AGENCY Dallas, Texas Medicare Supplement Canada; 1,000 career coverage and long-term care. agents in 67 branch offices. - -------------------------------------------------------------------------------------------------------------- DIRECT RESPONSE GLOBE LIFE AND Individual life and health in- Direct response, television, ACCIDENT surance including special senior magazine; nationwide. INSURANCE COMPANY life coverage, Medicare Oklahoma City, OK Supplement, long-term care. - -------------------------------------------------------------------------------------------------------------- AMERICAN INCOME AMERICAN INCOME Individual life and health in- 1,400 agents. CAPTIVE AGENCY INSURANCE COMPANY surance to union and credit Waco, Texas union members. - -------------------------------------------------------------------------------------------------------------- UNITED INVESTORS WADDELL & REED, INC. United and Waddell & Reed 2,450 Waddell & Reed CAPTIVE AGENCY Shawnee Mission, Groups of mutual funds, representatives; indepen- Kansas institutional investment dent agents; 165 offices UNITED INVESTORS LIFE management services includ- nationwide. INSURANCE COMPANY ing assets of Torchmark. Birmingham, Alabama Individual life insurance and annuities. - -------------------------------------------------------------------------------------------------------------- PRENEED FAMILY SERVICE LIFE Individual life insurance General Agency with 1,000 CAPTIVE AGENCY INSURANCE COMPANY to fund prearranged independent career agents Dallas, Texas funerals. nationwide.
Additional information concerning industry segments may be found in Management's Discussion and Analysis and in Note 17--Industry Segments in the Notes to Consolidated Financial Statements. INSURANCE LIFE INSURANCE Torchmark writes a variety of nonparticipating ordinary life insurance products. These include whole-life insurance in the form of traditional and interest-sensitive, term life insurance, and other life insurance. The following table presents selected information about Torchmark's life products:
(AMOUNTS IN THOUSANDS) ANNUALIZED ANNUALIZED PREMIUM ISSUED PREMIUM IN FORCE -------------------------- -------------------------- 1995 1994 1993 1995 1994 1993 -------- -------- -------- -------- -------- -------- Whole life: Traditional.............. $107,288 $ 63,108 $ 55,265 $469,581 $445,025 $312,905 Interest-sensitive....... 29,287 34,633 34,211 174,675 171,264 160,824 Term...................... 79,849 48,392 36,303 212,213 167,973 129,815 Other..................... 1,564 3,700 2,654 12,897 12,693 9,112 -------- -------- -------- -------- -------- -------- $217,988 $149,833 $128,433 $869,366 $796,955 $612,656 ======== ======== ======== ======== ======== ========
1 Life insurance products are sold through a variety of distribution channels, including home service agents, independent agents, exclusive agents, and direct response. These methods are discussed in more depth under the heading "Marketing." The following table presents life annualized premium issued by marketing method:
(AMOUNTS IN THOUSANDS) ANNUALIZED ANNUALIZED PREMIUM ISSUED PREMIUM IN FORCE -------------------------- -------------------------- 1995 1994 1993 1995 1994 1993 -------- -------- -------- -------- -------- -------- Direct response........... $ 63,900 $ 48,267 $ 36,031 $180,530 $154,130 $133,782 Home service.............. 48,549 51,461 48,474 297,418 291,813 282,059 Independent agents........ 31,630 24,894 22,335 112,797 101,721 94,392 Exclusive agents.......... 73,909 25,211 21,593 278,621 249,291 102,423 -------- -------- -------- -------- -------- -------- $217,988 $149,833 $128,433 $869,366 $796,955 $612,656 ======== ======== ======== ======== ======== ========
Permanent insurance products sold by Torchmark build cash values which are available to policyholders. Policyholders may borrow such funds using the policies as collateral. The aggregate value of policy loans outstanding at December 31, 1995 was $194 million and the average interest rate earned on these loans was 6.46% in 1995. Interest income earned on policy loans was $12.1 million in 1995, $10.0 million in 1994, and $9.1 million in 1993. Torchmark had 182 thousand and 154 thousand policy loans outstanding at year- end 1995 and 1994, respectively. The availability of cash values contributes to voluntary policy terminations by policyholders through surrenders. Torchmark's life insurance products may be terminated or surrendered at the election of the insured at any time, generally for the full cash value specified in the policy. Specific surrender procedures vary with the type of policy. For certain policies this cash value is based upon a fund less a surrender charge which decreases with the length of time the policy has been in force. This surrender charge is either based upon a percentage of the fund or a charge per $1,000 of face amount of insurance. The schedule of charges may vary by plan of insurance and, for some plans, by age of the insured at issue. Torchmark's ratio of aggregate face amount voluntary terminations to the mean amount of life insurance in force was 17.2% in 1995, 14.7% in 1994 and 14.9% in 1993. Excluding American Income, the 1995 and 1994 ratios would have been 16.1% and 15.2%, respectively. The following table presents an analysis of changes to Torchmark's life insurance business in force:
(AMOUNTS IN THOUSANDS) 1995 1994 1993 --------------------- --------------------- --------------------- NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF POLICIES INSURANCE POLICIES INSURANCE POLICIES INSURANCE --------- ----------- --------- ----------- --------- ----------- In force at January 1,.. 8,913 $74,858,214 8,110 $61,366,933 8,028 $58,306,295 New issues.............. 1,413 19,359,923 1,147 14,958,141 944 12,240,245 Business acquired....... -0- -0- 595 8,983,055 -0- -0- Other increases......... 1 64,128 1 10,961 -0- 35,530 Death benefits.......... (110) (271,451) (105) (228,354) (102) (213,785) Lapses.................. (856) (12,185,540) (688) (8,940,980) (625) (7,817,201) Surrenders.............. (135) (1,187,581) (106) (1,048,117) (106) (1,082,962) Other decreases......... (30) (246,317) (41) (243,425) (29) (101,189) ----- ----------- ----- ----------- ----- ----------- In force at December 31,.................... 9,196 $80,391,376 8,913 $74,858,214 8,110 $61,366,933 ===== =========== ===== =========== ===== =========== Average policy size (in dollar amounts)........ $ 8,742 $ 8,399 $ 7,567 =========== =========== ===========
2 HEALTH INSURANCE Torchmark offers an assortment of supplemental health insurance products. These are generally classified as (1) Medicare Supplement, (2) cancer and (3) other health related policies. Medicare Supplement policies are offered on both an individual and group basis through exclusive and independent agents, and direct response. These guaranteed renewable policies provide reimbursement for certain expenses not covered by the federal Medicare program. One popular feature available under Torchmark's Medicare Supplements is an automatic claim filing system for Medicare Part B benefits whereby policyholders do not have to file most claim forms because they are paid directly by Torchmark from Medicare records. Cancer policies are offered on an individual basis through exclusive and independent agents as well as direct response. These guaranteed renewable policies are designed to fill gaps in existing medical coverage and benefits are triggered by a diagnosis of cancer or health related events or medical expenses related to the treatment of cancer. Benefits may be in the form of a lump sum payment, stated amounts per diem, per medical procedure, or reimbursement for certain medical expenses. Other health related policies include accident, long term care and limited benefit hospital and surgical coverages. These generally guaranteed renewable policies are offered on an individual basis through exclusive and independent agents, and direct response. These policies are designed to supplement existing medical coverages. Benefits are triggered by certain health related events or incurred expenses. Benefit amounts are per diem, per health related event or defined expenses incurred up to stated maximum. The following table presents supplemental health annualized premium for the three years ended December 31, 1995 by marketing method:
ANNUALIZED ANNUALIZED PREMIUM ISSUED PREMIUM IN FORCE -------------------------- -------------------------- 1995 1994 1993 1995 1994 1993 -------- -------- -------- -------- -------- -------- Home service.............. $ 15,728 $ 23,423 $ 31,288 $117,846 $123,178 $128,000 Independent agents........ 44,438 62,088 98,946 468,691 516,294 555,320 Exclusive agents.......... 42,181 34,997 44,083 167,292 166,953 138,900 Direct response........... 171 674 1,711 929 1,162 1,162 -------- -------- -------- -------- -------- -------- $102,518 $121,182 $176,028 $754,758 $807,587 $823,382 ======== ======== ======== ======== ======== ========
The following table presents supplemental health annualized premium information for the three years ended December 31, 1995 by product category:
ANNUALIZED ANNUALIZED PREMIUM ISSUED PREMIUM IN FORCE -------------------------- -------------------------- 1995 1994 1993 1995 1994 1993 -------- -------- -------- -------- -------- -------- Medicare Supplement...... $ 64,638 $ 87,547 $136,050 $529,616 $572,221 $600,536 Cancer................... 11,338 8,101 10,012 114,972 114,495 105,773 Other health related pol- icies................... 26,542 25,534 29,966 110,170 120,871 117,073 -------- -------- -------- -------- -------- -------- $102,518 $121,182 $176,028 $754,758 $807,587 $823,382 ======== ======== ======== ======== ======== ========
ANNUITIES Annuity products offered by Torchmark include single-premium deferred annuities, flexible-premium deferred annuities, and variable annuities. Single-premium and flexible-premium annuities are fixed annuities where a portion of the interest credited is guaranteed. Additional interest may be credited on certain contracts. Variable annuity policyholders may select from a variety of mutual funds managed by W&R which offer different degrees of risk and return. The ultimate benefit on a variable annuity results from the account performance. The following table presents Torchmark subsidiaries' annuity collections and deposit balances by product type:
(AMOUNTS IN THOUSANDS) (AMOUNTS IN MILLIONS) COLLECTIONS DEPOSIT BALANCE FOR THE YEAR ENDED DECEMBER 31, AT DECEMBER 31, -------------------------------- -------------------------- 1995 1994 1993 1995 1994 1993 ---------- ---------- ---------- -------- -------- -------- Fixed annuities......... $ 130,115 $ 43,339 $ 46,573 $ 927.9 $ 801.2 $ 782.8 Variable annuities...... 189,188 196,105 213,982 1,052.2 692.8 529.7 ---------- ---------- ---------- -------- -------- -------- $319,303 $239,444 $260,555 $1,980.1 $1,494.0 $1,312.5 ========== ========== ========== ======== ======== ========
3 INVESTMENTS The nature, quality, and percentage mix of insurance company investments are regulated by state laws that generally permit investments in qualified municipal, state, and federal government obligations, corporate bonds, preferred and common stock, real estate, and mortgages where the value of the underlying real estate exceeds the amount of the loan. Torchmark's investments consist predominantly of high-quality, investment-grade securities. Fixed maturities represented 90% of total investments at December 31, 1995. Approximately 29% of fixed maturity investments were securities guaranteed by the United States Government or its agencies or investments that were collateralized by U.S. government securities. More than 74% of these investments were in GNMA securities that are backed by the full faith and credit of the United States government. The remainder of these government investments were U.S. Treasuries or collateralized mortgage obligations ("CMO's") that are fully backed by GNMA's. (See Note 3--Investment Operations in the Notes to Consolidated Financial Statements and Management's Discussion and Analysis.) The following table presents an analysis of Torchmark's fixed maturity investments at December 31, 1995. All of the securities are classified as available for sale and are, therefore, reported at fair market value.
AMOUNT (IN THOUSANDS) % -------------- ----- Securities of U.S. Government...................... $ 116,686 2.2% GNMA and MBS backed by GNMA collateral............. 1,339,125 25.7 Other U.S. Government guaranteed................... 48,645 0.9 Other investment grade............................. 3,541,184 68.0 Non-investment grade corporates.................... 164,584 3.2 ---------- ----- $5,210,224 100.0% ========== =====
The following table presents Torchmark's fixed maturity investments at December 31, 1995 on the basis of ratings as determined primarily by Moody's Investors Services. Standard and Poor's bond ratings are used when Moody's ratings are not available. Ratings of BAA and higher (or their equivalent) are considered investment grade by the rating services.
AMOUNT RATING (IN THOUSANDS) % ------ -------------- ----- AAA................................................ $2,258,689 43.3% AA................................................. 665,309 12.7 A.................................................. 1,921,875 36.9 BAA................................................ 169,016 3.2 BA................................................. 139,481 2.7 B.................................................. 13,191 0.3 Less than B........................................ 3,092 0.1 Not rated.......................................... 39,571 0.8 ---------- ----- $5,210,224 100.0% ========== =====
4 The following table presents the fixed maturity investments of Torchmark's insurance subsidiaries at December 31, 1995 on the basis of ratings as determined by the National Association of Insurance Commissioners ("NAIC"). Categories one and two are considered investment grade by the NAIC.
AMOUNT RATING (IN THOUSANDS) % -------------------- -------------- ----- 1. Highest quality.. $4,772,568 92.0% 2. High quality..... 252,152 4.8 3. Medium quality... 141,131 2.7 4. Low quality...... 20,249 0.4 5. Lower quality.... 3,167 0.1 6. In or near de- fault.............. 37 -0- ---------- ----- $5,189,304 100.0% ========== =====
Securities are assigned ratings when acquired. All ratings are reviewed and updated at least annually. Specific security ratings are updated as information becomes available during the year. PRICING Premium rates for life and health insurance products are established using assumptions as to future mortality, morbidity, persistency, and expenses, all of which are generally based on Torchmark's experience, and on projected investment earnings. Revenues for individual life and health insurance products are primarily derived from premium income, and, to a lesser extent, through policy charges to the policyholder account values on certain individual life products. Profitability is affected to the extent actual experience deviates from that which has been assumed in premium pricing and to the extent investment income exceeds that which is required for policy reserves. Collections for annuity products and certain life products are not recognized as revenues but are added to policyholder account values. Revenues from these products are derived from charges to the account balances for insurance risk and administrative costs. Profits are earned to the extent these revenues exceed actual costs. Profits are also earned from investment income on the deposits invested in excess of the amounts credited to policy accounts. UNDERWRITING The underwriting standards of Torchmark are established by management. Torchmark uses information from the application and, in some cases, inspection reports, doctors' statements and/or medical examinations to determine whether a policy should be issued in accordance with the application, with a different rating, with a rider, with reduced coverage or rejected. Torchmark requires medical information or examinations of applicants for life insurance in excess of certain prescribed amounts. These are graduated according to the age of the applicant and may vary with the kind of insurance. The maximum amount of insurance issued without medical information is $100,000 through age 40. Torchmark requests medical information of all applicants, regardless of age or amount, if information obtained from the application or other sources indicates that such information is warranted. In recent years, there has been considerable concern regarding the impact of the HIV virus associated with Acquired Immune Deficiency Syndrome ("AIDS"). Torchmark has implemented certain underwriting tests to detect the presence of the HIV virus and continue to assess the utility of other appropriate underwriting tests to detect AIDS in light of medical developments in this field. To date, AIDS claims have not had a material impact on claims experience. 5 REINSURANCE As is customary among insurance companies, Torchmark cedes insurance to other unaffiliated insurance companies on policies they issue in excess of retention limits. Reinsurance is an effective method for keeping insurance risk within acceptable limits. In the event insurance business is ceded, Torchmark remains contingently liable with respect to ceded insurance should any reinsurer be unable to meet the obligations it assumes (See Note 16-- Commitments and Contingencies in the Notes to Consolidated Financial Statements and Schedule IV--Reinsurance [Consolidated]). RESERVES The life insurance policy reserves reflected in Torchmark's financial statements as future policy benefits are calculated based on generally accepted accounting principles. These reserves, with the addition of premiums to be received and the interest thereon compounded annually at assumed rates, must be sufficient to cover policy and contract obligations as they mature. Generally, the mortality and persistency assumptions used in the calculations of reserves are based on company experience. Similar reserves are held on most of the health policies written by Torchmark's insurance subsidiaries, since these policies generally are issued on a guaranteed-renewable basis. A list of the assumptions used in the calculation of Torchmark's reserves are reported in the financial statements (See Note 9--Future Policy Benefit Reserves in the Notes to Consolidated Financial Statements). Reserves for annuity products consist of the policyholders' account values and are increased by policyholder deposits and interest credits and are decreased by policy charges and benefit payments. MARKETING Torchmark is licensed to sell insurance in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, New Zealand and Canada. Distribution is through direct response, home service agents, independent agents, and exclusive agents. Direct Response. Torchmark offers life insurance products directly to consumers through the use of direct mail, co-op mailings, national cable and local spot television, national newspaper supplements and national magazines. Torchmark operates a full service letterpress which enables the direct response operation to maintain high quality standards while producing materials much more efficiently than they could be purchased from outside vendors. Home Service. Torchmark sells and services life and health insurance through home service agents primarily in the seven state area of Alabama, Florida, Georgia, Tennessee, MIssissippi, South Carolina, and North Carolina. Home service agents are employees of Liberty and are primarily compensated by commissions based on sales and by a salary based on the amount of premium collected on policies assigned to them for servicing. During the past several years the home service operation has emphasized bank draft and direct bill collection of premium rather than agent collection. This trend will be encouraged in the future because of its lower cost and improved persistency. Agent collected sales will be discontinued in 1996. Independent Agents. Torchmark offers a variety of life and health insurance policies through approximately 51 thousand independent agents, brokers, and licensed sales representatives. Torchmark is not committed or obligated in any way to accept a fixed portion of the business submitted by any independent agent. All policy applications, both new and renewal, are subject to approval and acceptance by Torchmark. Torchmark is not dependent on any single agent or any small group of independent agents, the loss of which would have a materially adverse effect on insurance sales. Exclusive Agents. Torchmark sells individual life and fixed-benefit accident and health insurance through approximately 1,400 exclusive agents who target moderate income wage earners through the cooperation of labor unions, credit unions, and other associations. These agents are authorized to use the "union label" because this sales force is represented by organized labor. Torchmark sells life insurance as well as fixed and variable annuity products through the W&R sales force in conjunction with W&R's financial planning services. (See Asset Management--Mutual Funds for additional marketing information about the W&R sales force.) 6 Torchmark offers life and health insurance through approximately 1,500 exclusive agents, of which approximately 1,000 exclusive agents work out of 67 branch offices throughout the United States. These policies are targeted to various special markets. Torchmark also markets insurance products through a variety of other methods such as brokers and other special markets. RATINGS The following list indicates the ratings currently held by Torchmark's five largest insurance companies as rated by A.M. Best Company:
A.M. BEST STANDARD COMPANY & POOR'S --------------- --------- Liberty National Life Insurance Company A+ (Superior) Not rated Globe Life And Accident Insurance Company A+ (Superior) AA+ United Investors Life Insurance Company A+ (Superior) AA+ United American Insurance Company A+ (Superior) AA+ American Income Life Insurance Company A (Excellent) Not rated
A.M. Best states that it assigns A+ (Superior) ratings to those companies which, in its opinion, have demonstrated superior overall performance when compared to the norms of the life/health insurance industry. A+ (Superior) companies have a very strong ability to meet their obligations to policyholders over a long period of time. A.M. Best states that it assigns A (Excellent) ratings to those companies which, in its opinion, have demonstrated excellent overall performance when compared to the norms of the life/health insurance industry. A (Excellent) companies have an excellent ability to meet their obligations to policyholders over a long period of time. Standard & Poor's Corporation assigns a superior or AA rating to those companies who offer excellent financial security on an absolute and relative basis and whose capacity to meet policyholder obligations is overwhelming under a variety of economic and underwriting conditions. 7 ASSET MANAGEMENT Torchmark conducts its asset management and financial services businesses through United Investors Management Company ("United Management") and its subsidiaries. This segment's activity is mutual fund distribution and management. MUTUAL FUNDS Torchmark's mutual fund operations are carried out by a subsidiary of United Management, W&R, which markets and manages the seventeen mutual funds in the United Group of Mutual Funds, the six mutual funds in the Waddell & Reed Fund, Inc. ("W&R Funds"), and the ten mutual funds in the TMK/United Fund, Inc. ("TMK/United Funds"). Until 1995, two mutual funds in the Torchmark Fund ("Torchmark Funds") were also marketed. In 1995, the Torchmark Funds were discontinued and liquidated. These funds were valued as follows at December 31, 1995 and 1994:
(AMOUNTS IN MILLIONS) 1995 1994 ------- ------- United Funds $13,569 $10,947 W&R Funds 419 219 TMK/United Funds 1,099 725 Torchmark Funds -- 3 ------- ------- Total mutual fund assets under management 15,087 11,894 Institutional and private accounts 3,201 2,608 ------- ------- Total assets under management $18,288 $14,502 ======= =======
W&R's revenues consist of the following: (1) fees for managing the assets, which are based on the value of the assets managed, (2) commissions for the sale of products, and (3) fees for accounting and administration, which are based primarily on an annual charge per account. In addition to its mutual fund management and distribution activities, W&R manages accounts for individual and institutional investors for which asset management fees are received. Asset management activities are conducted by an experienced and qualified staff. As of December 31, 1995, the average industry experience of the fund managers for W&R was 21 years, and average company experience was 13 years. The following table indicates W&R revenues by component for the three years ending December 31, 1995:
(AMOUNTS IN THOUSANDS) 1995 1994 1993 -------- -------- -------- Investment product commissions*.............. $ 56,927 $ 59,450 $ 65,950 Insurance product commissions*............... 13,531 12,773 12,117 Asset management fees........................ 85,999 70,651 64,181 Service fees................................. 23,528 22,297 21,273 -------- -------- -------- $179,985 $165,171 $163,521 ======== ======== ========
*Commissions paid to W&R by affiliates for variable annuities and insurance products are eliminated in consolidation. W&R markets its mutual funds and other financial products, including life insurance and Medicare Supplement insurance, through a sales force of approximately 2,450 registered representatives in 50 states and the District of Columbia. These representatives concentrate on product sales of W&R and other Torchmark affiliates. W&R maintained 165 sales offices at December 31, 1995. W&R conducts money management seminars on a national scale to reach numerous potential clients every year. Individual financial plans are developed for clients through one-on-one consultations with the W&R sales representatives. Emphasis is placed on a long-term relationship with a client rather than a one-time sale. 8 COMPETITION The insurance industry is highly competitive. Torchmark competes with other insurance carriers through policyholder service, price, product design, and sales effort. In addition to competition with other insurance companies, Torchmark also faces increasing competition from other financial services organizations. While there are a number of larger insurance companies competing with Torchmark that have greater resources and have considerable marketing forces, there is no individual company dominating any of Torchmark's life or health markets. Torchmark's health insurance products compete with, in addition to the products of other health insurance carriers, health maintenance organizations, preferred provider organizations, and other health care related institutions which provide medical benefits based on contractual agreements. Generally, Torchmark companies operate at lower administrative expense levels than its peer companies, allowing Torchmark to have competitive rates while maintaining margins, or, in the case of Medicare Supplement business, to remain in the business while some companies have ceased new writings. Torchmark's years of experience in direct response business are a valuable asset in designing direct response products. Similarly, Torchmark's home service concentration of business has been considered a competitive advantage in hiring and retaining agents. On the other hand, Torchmark's insurance subsidiaries do not have the same degree of national name recognition as some other companies with which they compete. W&R competes with hundreds of other registered institutional investment advisers and mutual fund management and distribution companies which distribute their fund shares through a variety of methods including affiliated and unaffiliated sales forces, broker-dealers, and direct sales to the public. Although no one company or group of companies dominates the mutual fund industry, some are larger than W&R and have greater resources. Competition is based on the methods of distribution of fund shares, tailoring investment products to meet certain segments of the market, the changing needs of investors, the ability to achieve superior investment management performance, the type and quality of shareholder services, and the success of sales promotion efforts. REGULATION INSURANCE. Insurance companies are subject to regulation and supervision in the states in which they do business. The laws of the various states establish agencies with broad administrative and supervisory powers which include, among other things, granting and revoking licenses to transact business, regulating trade practices, licensing agents, approving policy forms, approving certain premium rates, setting minimum reserve and loss ratio requirements, determining the form and content of required financial statements, and prescribing the type and amount of investments permitted. Insurance companies can also be required under the solvency or guaranty laws of most states in which they do business to pay assessments up to prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. They are also required to file detailed annual reports with supervisory agencies, and records of their business are subject to examination at any time. Under the rules of the NAIC, insurance companies are examined periodically by one or more of the supervisory agencies. The most recent examinations of Torchmark's insurance subsidiaries were: Famlico, as of September 30, 1990; American Income as of December 31, 1990; Globe, as of December 31, 1991; Liberty, as of December 31, 1991; United American, as of December 31, 1993; and UILIC, as of December 31, 1993. NAIC Ratios. The NAIC developed the Insurance Regulatory Information System ("IRIS"), which is intended to assist state insurance regulators in monitoring the financial condition of insurance companies. IRIS identifies twelve insurance industry ratios from the statutory financial statements of insurance companies, which statements are based on regulatory accounting principles and are not based on generally accepted accounting principles ("GAAP"). IRIS specifies a standard or "usual value" range for each ratio, and a company's variation from this range may be either favorable or unfavorable. The 9 following table presents the IRIS ratios as determined by the NAIC for Torchmark's five largest insurance subsidiaries, which varied unfavorably from the "usual value" range for the years 1994 and 1993.
USUAL REPORTED COMPANY RATIO NAME RANGE VALUE - --------- ------------------------------------------------- ---------- -------- 1994: Liberty Investment in Affiliate to Capital and Surplus 0 to 100 202 Liberty Change in Capital and Surplus 50 to -10 -29 Globe Change in Capital and Surplus 50 to -10 -12 1993: Liberty Investment in Affiliate to Capital and Surplus 0 to 100 126 Globe Adequacy of Investment Income 125 to 900 959 Globe Change in Asset Mix 0 to 5 5.8 Globe Change in Capital and Surplus 50 to -10 -65 United American Change in Capital and Surplus 50 to -10 -13
Explanation of Ratios: Investment in Affiliate to Capital and Surplus--This ratio is determined by measuring total investment in affiliates against the capital and surplus of the company. The NAIC considers a ratio of more than 100% to be high, and to possibly impact a company's liquidity, yield, and overall investment risk. The large ratio in Liberty in 1994 and 1993 is brought about by its ownership of other large Torchmark insurance companies and the ownership of 81% of the stock of United Management. Profitability and growth in these subsidiaries have caused this ratio to gradually rise. All intercompany investment is eliminated in consolidation, and the internal organizational structure has no bearing on consolidated results. Adequacy of Investment Income--This ratio indicates that an insurer's investment income is adequate to meet interest requirements of policy reserves and is measured as a percentage of investment income to required interest. A ratio higher than 900% is considered to be too high and a ratio lower than 125% is considered to be too low by the NAIC. Globe's 959% ratio in 1993 was brought about by the NAIC's inclusion of dividends of various Torchmark subsidiaries in Globe's investment income. These dividends are generally passed through Globe to the parent company and should not be considered in meeting interest requirements. Intercorporate dividends are eliminated in consolidation and have no effect on consolidated results. Had these dividends been excluded, Globe's ratio would have been 220% in 1993, which was within the usual range. Change in Asset Mix--This ratio measures the average change in the percentage of total cash and invested assets. The NAIC considers a ratio greater than 5.0% to be unusual. The 5.8% ratio of Globe was caused by Globe dividending one of its subsidiaries, United American, to Torchmark. This dividend did not affect consolidated net equity of Torchmark at December 31, 1993. Change in Capital and Surplus--These ratios, calculated on both a gross and net basis, are a measure of improvement or deterioration in the company's financial position during the year. The NAIC considers ratios less than minus 10% and greater than 50% to be unusual. Liberty's ratio of minus 29 in 1994 was due to the payment of a large dividend by United Management, an 81% owned subsidiary, directly to Torchmark. Because Liberty waived its interest in this dividend, it reduced Liberty's capital and surplus. This transaction did not affect the consolidated equity of Torchmark at December 31, 1994. United American's ratio of minus 13% in 1993 was due primarily to the payment of a $112 million dividend to its parent, which was used by Torchmark to pay part of the purchase price of United Management. The payment of this dividend did not affect the consolidated equity of Torchmark at December 31, 1993. Globe's ratio of minus 65% in 1993 was caused by Globe dividending United American to Torchmark. The internal organizational structure has no bearing on consolidated results. Risk Based Capital: In December 1992, the NAIC adopted a model act that requires a risk based capital formula be applied to all life and health insurers. The requirement began in 1994 for information based on the 1993 annual statements. The risk based capital formula is a threshold formula rather than a target capital formula. It is designed only to identify companies that require regulatory attention and is not to be used to rate or rank companies that are adequately capitalized. All of the insurance subsidiaries of Torchmark are adequately capitalized under the risk based capital formula. 10 Guaranty Assessments. State solvency or guaranty laws provide for assessments from insurance companies into a fund which is used, in the event of failure or insolvency of an insurance company, to fulfill the obligations of that company to its policyholders. The amount which a company is assessed for these state funds is determined according to the extent of these unsatisfied obligations in each state. These assessments are recoverable to a great extent as offsets against state premium taxes. HOLDING COMPANY. States have enacted legislation requiring registration and periodic reporting by insurance companies domiciled within their respective jurisdictions that control or are controlled by other corporations so as to constitute a holding company system. Torchmark and its subsidiaries have registered as a holding company system pursuant to such legislation in Alabama, Delaware, Missouri, New York, Texas, and Indiana. Insurance holding company system statutes and regulations impose various limitations on investments in subsidiaries, and may require prior regulatory approval for the payment of certain dividends and other distributions in excess of statutory net gain from operations on an annual noncumulative basis by the registered insurer to the holding company or its affiliates. MUTUAL FUNDS. Torchmark's mutual fund management and distribution activities, as well as its investment advisory services, are subject to state and federal regulation and oversight by the National Association of Securities Dealers, Inc. Each of the funds in the United Group of Mutual Funds, the W&R Funds, the TMK/United Funds and the Torchmark Funds is or was a registered investment company under the Investment Company Act of 1940. W&R and Waddell & Reed Asset Management Company ("WRAM") are registered pursuant to the Investment Advisers Act of 1940. Additionally, W&R is regulated as a broker- dealer under the Securities Exchange Act of 1934. PERSONNEL At the end of 1995, Torchmark had 2,880 employees and 2,856 licensed employees under sales contracts. Additionally, approximately 61,000 independent agents and brokers, who were not employees of Torchmark, were associated with Torchmark's marketing efforts. ITEM 2. REAL ESTATE 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. Liberty leases approximately 160,000 square feet of this building to unrelated tenants and has another 5,000 square feet available for lease. Liberty also operates from 64 company- owned district office buildings used for agency sales personnel. Globe owns a 300,000 square foot office building at 204 North Robinson, Oklahoma City, Oklahoma, of which it occupies 56,138 square feet as its home office and the balance is available for lease. Globe also owns a 330,000 square foot office building complex at 14000 Quail Springs Parkway Plaza Boulevard, Oklahoma City, Oklahoma, and an 80,000 square foot office building at 120 Robert S. Kerr Avenue, Oklahoma City, which are available for lease to other tenants. United American owns and occupies a 125,000 square foot home office building at 2909 North Buckner Boulevard, Dallas, Texas. United American has purchased a 20 acre site in the Stonebridge Ranch development in McKinney, Texas (a north Dallas suburb) and is currently constructing a new 140,000 square foot facility on that site into which its home office will be relocated in 1996. The current home office building on Buckner will be sold. American Income owns and is the sole occupant of an office building located at 1200 Wooded Acres Drive, Waco, Texas. The building is a two story structure containing approximately 72,000 square feet of usable floor space. In addition, American Income leases office space in various cities throughout the United States. W&R owns and occupies a 116,000 square foot office building utilized as its corporate headquarters located in United Investors Park, a commercial development at 6300 Lamar Avenue, Shawnee Mission, Kansas. In addition, W&R owns three other office buildings in this development, each containing approximately 48,000 square feet, which are leased or are available for lease. 11 Liberty, Globe and W&R also lease district office space for their agency sales personnel. All of the other Torchmark companies lease their office space in various cities in the U.S. A Torchmark subsidiary, Torchmark Development Corporation ("TDC"), has completed two buildings consisting of 185,000 square feet and 90,000 square feet of office space within a 100 acre commercial development known as Liberty Park along Interstate 459 in Birmingham, Alabama. Approximately 250,000 square feet of this total office area is currently leased. A 25,000 square foot office building is currently under construction in this development and is scheduled for completion in the Spring of 1996. TDC also owns and manages a 70,000 square foot office and retail complex adjacent to Liberty Park of which approximately 60% is leased by an affiliated party. As a part of a joint venture with unaffiliated entities, TDC is also developing 2,800 contiguous acres as a planned community development. DATA PROCESSING EQUIPMENT Torchmark and its primary subsidiaries have significant automated information processing capabilities, supported by centralized computer systems. Torchmark also uses personal computers to support the user-specific information processing needs of its professional and administrative staffs. All centralized computer software support, information processing schedules and computer-readable data management requirements are supported by company- specific policies and procedures which ensure that required information processing results are produced and distributed in a timely manner. These policies and procedures provide for the copying, off-site physical storage and retention of significant company computer programs and business data files for backup purposes. ITEM 3. LEGAL PROCEEDINGS Torchmark and its subsidiaries continue to be named as parties to pending or threatened legal proceedings. These lawsuits involve tax matters, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of Torchmark's subsidiaries, employment discrimination, and miscellaneous other causes of action. Many of these lawsuits involve claims for punitive damages in state courts of Alabama, a jurisdiction particularly recognized for its large punitive damage verdicts. A number of such actions involving Liberty also name Torchmark as a defendant. As a practical matter, a jury's discretion regarding the amount of a punitive damage award is not limited by any clear, objective criteria under Alabama law. Accordingly, the likelihood or extent of a punitive damage award in any given case is virtually impossible to predict. Furthermore, the Alabama Supreme Court has recently ruled that one half of all punitive damage awards, after the deduction of attorneys fees, should go to the State of Alabama. This same ruling also provides for a bifurcated trial, with the first stage devoted to this issue of liability and the second stage relating to damages. The hearing on damages will enable the jury to hear evidence of the financial worth of the defendant. This potentially damaging evidence has not been previously admissible in Alabama courts. The Alabama Supreme Court has been asked to reconsider this ruling and this petition is still pending. As of December 31, 1995, Liberty was a party to approximately 185 active lawsuits (including 31 employment related cases and excluding interpleaders and stayed cases), more than 160 of which were Alabama proceedings in which punitive damages were sought. Liberty faces trial settings in these cases on an on- going basis. Torchmark has previously reported the entry of an Order and Final Judgment by the Circuit Court of Barbour County, Alabama in Robertson v. Liberty National Life Insurance Company (Case No. CV-92-021) approving a cancer policy class action settlement involving legal and equitable relief valued at a total of $55 million. The cost of this settlement increases over time as Liberty is prohibited from increasing the premium rates on this block of business for one year from final binding affirmance by the Alabama Supreme Court. This aspect of the settlement is expected to cost Torchmark an additional $2.5 million before tax in each quarter going forward until one year after final binding affirmance by the Alabama Supreme Court. In July 1994, certain intervenors in the Robertson litigation filed a notice of appeal of the Order and Final Judgment approving class certification and the settlement with the Supreme Court of Alabama. Oral argument on the appeal was held July 17, 1995 and on December 22, 1995, the Supreme Court unanimously affirmed the Robertson class action settlement. On February 16, 1996, the Alabama Supreme Court issued a notice overruling the petition for a rehearing in Robertson filed by certain intervenors. 12 On March 17, 1994, litigation was filed against Liberty, certain officers and present and former directors of Torchmark and KPMG Peat Marwick LLP, independent public accountants of Torchmark and its subsidiaries, in the Circuit Court of Marion County, Alabama (Miles v. Liberty National Life Insurance Company, Civil Action No. CV-94-67). The lawsuit asserted that it was brought on behalf of a class comprised of the shareholders of Torchmark. The complaint alleged a failure to timely and adequately report allegedly material contingent liabilities arising out of insurance policy litigation involving Liberty. Compensatory and punitive damages in an unspecified amount were sought. In April 1994, the complaint in Miles was amended to add an additional shareholder plaintiff and to name Torchmark as a defendant. The Miles case was dismissed upon the joint motion of all parties in September 1995. A second similar action (Oakley v. Torchmark Corporation, Case No. CV-94-47), filed on August 16, 1994 in the Circuit Court for Bibb County, Alabama, was dismissed by the plaintiff without prejudice. A third such action was filed on December 30, 1994, in the United States District Court for the Southern District of Alabama. This action, which seeks punitive damages, was subsequently transferred to the United States District Court for the Northern District of Alabama (Dismukes v. Torchmark Corporation, Case No. CV-94-1006-P-M). A class certification hearing in Dismukes was held on January 29, 1996, and the parties are awaiting the District Court's ruling on that motion and on defendant's motion for partial summary judgment. As previously reported, Torchmark, its insurance subsidiaries Globe and United American, and certain Torchmark officers were named as defendants in litigation filed April 22, 1994, as a purported class action in the District Court of Oklahoma County, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-65). The suit claims damages on behalf of individual health policyholders who are alleged to have been induced to terminate such policies and to purchase Medicare Supplement and/or other insurance coverages. The complaint seeks actual and punitive damages for each class member in excess of $10,000. Subsequent to the filing of this case, one of the plaintiffs was dismissed and the named plaintiff died. The complaint was amended to include new plaintiffs purporting to represent the class and restyled Tabor v. Torchmark Corporation. No class has been certified. A motion to dismiss filed by the defendants was denied and limited discovery as permitted by the Oklahoma Supreme Court is proceeding. The defendants intend to vigorously defend the action. Prior filings have reported that in July 1994, a purported class action alleging fraudulent and deceitful practices in premium billing and lapses of coverage on a payroll deduction insurance plan was filed in the Superior Court for Gordon County, Georgia against Liberty (Bryant v. Liberty National Life Insurance Company, Civil Action No. 28979). The complaint alleges actual damages in excess of $10 million and punitive damages of not less than $50 million as well as premium reimbursements. No class has been certified and no material proceedings have occurred in this case. Liberty removed this case to federal court, but the case has subsequently been remanded to the state court. Liberty intends to vigorously defend this action. Litigation was filed on April 26, 1995, in the Circuit Court of Houston County, Alabama against Liberty involving the sale of health insurance coverage and Omnibus Budget Reconciliation Act of 1990 (Stewart v. Liberty National Life Insurance Company, Case No. CV-95-345L; Tolar v. Liberty National Life Insurance Company, Case No. CV-95-346J; Ingram v. Liberty National Life Insurance Company, Case No. CV-95-348L; Burkett v. Liberty National Life Insurance Company, Case No. CV-95-347H). Liberty intends to vigorously defend these cases. On August 3, 1995, a $5.404 million verdict was rendered against Liberty in Allen v. Liberty National Life Insurance Company (Case No. CV-94-3634), by a jury in the Circuit Court of Jefferson County, Alabama. For a two month period beginning in September 1993, in reliance on federal law concerning the amount health care providers could collect from Medicare eligible individuals, Liberty limited the payment of benefits to such individuals to the amounts collectible under federal law. In November 1993, Liberty discontinued this practice and recalculated and repaid all claims as it had prior to September 1993. Mr. Allen nevertheless later brought suit against Liberty alleging the reduction in claims payments pursuant to his cancer policy was improper. He had been repaid in full with interest prior to filing suit, as had all other affected claimants. After reconsideration, the trial judge remitted the verdict to $2.7 million. An appeal was filed with the Alabama Supreme Court in January 1996. A purported class action was filed on August 8, 1995, against Liberty in the Circuit Court of Jefferson County, Alabama on behalf of Liberty cancer policyholders eligible for Medicare who submitted claims 13 during the approximately two month period in 1993 described in the foregoing paragraph (Adkins v. Liberty National Life Insurance Company, Case No. CV-95- 05634). The claims made in Adkins are identical to the individual claims in the Allen case above. More than 400 (and perhaps as many as 1,000) individuals appear to fit the proposed class definition in Adkins. Punitive damages and damages for mental anguish appear to be sought on behalf of the class. A class certification hearing is set in May 1996. The Company intends to oppose class certification and to vigorously defend the case. On August 25, 1995, a purported class action was filed against Torchmark, Globe, United American and certain officers of these companies in the United States District Court for the Western District of Missouri on behalf of all former agents of Globe (Smith v. Torchmark Corporation, Case No.: 95-3304-CV- S-4). This action alleges that the defendants breached independent agent contracts with the plaintiffs by treating them as captive agents and engaged in a pattern of racketeering activity wrongfully denying income and renewal commissions to the agents, restricting insurance sales, mandating the purchase of worthless leads, terminating agents without cause and inducing the execution of independent contracts based on misrepresentations of fact. Monetary damages in an unspecified amount are sought. A plaintiff class was certified by the District Court on February 26, 1996, although the certification does not go to the merit of the allegations in the complaint. The companies intend to vigorously defend this action. Much attention has been generated nationally with regard to so-called "vanishing premium" cases, where allegations that an interest sensitive life policy was sold with a projection that the policy would become paid-up or self-sustaining after a period of years. Plaintiffs in these cases typically assert that the projection amounted to a promise or misrepresentation. Liberty currently is a party to several individual lawsuits in the state courts of Alabama and was a party to one purported class action filed November 16, 1995 in the Circuit Court of Chambers County, Alabama (Mitcham v. Liberty National Life Insurance Company, Case No. CV-95-290), involving such claims. The Mitcham case was settled on a non-class basis on December 27, 1995. Another interest sensitive case (Carlton v. Liberty National Life Insurance Company, Case No. CV-96-22) filed on February 1, 1996, in the Circuit Court for Chambers County, Alabama, was amended on February 9, 1996, to allege a purported class action. Compensatory and punitive damages are sought. Liberty believes that appropriate projections were made in connection with the sale of the policies involved and intends to vigorously defend these cases. In 1978, the United States District Court for the Northern District of Alabama entered a final judgment in Battle v. Liberty National Life Insurance Company, et al. (CV-70-H-752-S), class action litigation involving Liberty, a class composed of all owners of funeral homes in Alabama and a class composed of all insureds (Alabama residents only) under burial or vault policies issued, assumed or reinsured by Liberty. The final judgment fixed the rights and obligations of Liberty and the funeral directors authorized to handle Liberty burial and vault policies as well as reforming the benefits available to the policyholders under the policies. It remains in effect to date. A motion filed in February 1990 to challenge the final judgment under Federal Rule of Civil Procedure 60(b) was rejected by both the District Court in 1991 and the Eleventh Circuit Court of Appeals in 1992 and a Writ of Certiorari was denied by the U.S. Supreme Court in 1993. In November 1993, an attorney (purporting to represent the funeral director class) filed a petition in the District Court seeking "alternative relief" under the final judgment. This petition was voluntarily withdrawn on November 8, 1995, by petitioners. On February 23, 1996, Liberty filed a petition with the District Court requesting that it order certain contract funeral directors to comply with their obligations under the Final Judgment in Battle and their funeral service contracts. Purported class action litigation was filed on January 2, 1996 against Torchmark, Torch Energy Advisors Incorporated ("Torch Energy"), and certain Torch Energy subsidiaries and affiliated limited partnerships in the Circuit Court of Pickens County, Alabama (Pearson v. Torchmark Corporation, Case No. CV-95-140). Plaintiff alleges improper payment of royalties and overriding royalties on coalbed methane gas produced and sold from wells in Robinson's Bend Coal Degasification Field, seeks certification of a class and claims unspecified compensatory and punitive damages on behalf of such class. A motion to dismiss and in the alternative to change venue, has been filed by Torchmark, and is awaiting a hearing. Torchmark intends to vigorously defend this action. Based upon information presently available, and in light of legal and other defenses available to Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not presently considered by management to be material. It should be noted, however, that the frequency of 14 large punitive damage awards bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has substantial business, particularly in Alabama, continues to increase universally, creating the potential for unpredictable material adverse judgments in any given punitive damage suit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of shareholders, through the solicitation of proxies or otherwise, during the fourth quarter of 1995. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The principal market in which Torchmark's common stock is traded is the New York Stock Exchange. There were 7,727 shareholders of record on December 31, 1995, excluding shareholder accounts held in nominee form. Information concerning restrictions on the ability of Torchmark's subsidiaries to transfer funds to Torchmark in the form of cash dividends is set forth in Note 15-- Shareholders' Equity in the Notes to the Consolidated Financial Statements. The market price and cash dividends paid by calendar quarter for the past two years are as follows:
1995 MARKET PRICE ------------ DIVIDENDS QUARTER HIGH LOW PER SHARE ------- ------- ------- --------- 1 $42.625 $34.875 $ .28 2 41.875 37.625 .28 3 42.250 37.375 .28 4 45.250 40.875 .29
Year-end closing price..................$45.250
1994 MARKET PRICE ------------ DIVIDENDS QUARTER HIGH LOW PER SHARE ------- ------- ------- --------- 1 $49.500 $39.500 $ .28 2 42.750 36.750 .28 3 44.125 38.000 .28 4 44.500 32.375 .28
Year-end closing price..................$34.875 15 ITEM 6. SELECTED FINANCIAL DATA The following information should be read in conjunction with Torchmark's Consolidated Financial Statements and related notes reported elsewhere in this Form 10-K: (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AND PERCENTAGE DATA)
1995 1994 1993 1992 1991 YEAR ENDED DECEMBER 31, ---------- ---------- ---------- ---------- ---------- Life premium............ $ 772,257 $ 601,633 $ 555,859 $ 544,467 $ 524,052 Health premium.......... 750,588 768,714 799,835 797,855 769,821 Other premium........... 23,438 18,527 137,216 111,640 71,940 Total premium........... 1,546,283 1,388,874 1,492,910 1,453,962 1,365,813 Net investment income... 381,865 347,637 368,494 370,617 355,158 Financial services reve- nue.................... 152,482 139,276 137,422 133,462 114,326 Realized investment gains (losses)......... (14,323) (2,551) 8,009 (948) 4,195 Total revenue........... 2,067,482 1,875,337 2,066,846 1,959,668 1,843,641 Net income from continu- ing operations......... 271,945 263,814 242,298 247,647 235,777 Net income.............. 143,235 268,946 297,979 265,477 246,489 Net income available to common shareholders........... 143,235 268,142 294,690 262,024 240,373 Annualized premium is- sued: Life.................. 217,988 149,833 128,433 131,726 133,741 Health................ 102,518 121,182 176,028 224,905 216,962 Total................. 320,506 271,015 304,461 356,631 350,703 Mutual fund collections. 1,182,594 1,180,477 1,237,747 1,141,928 813,737 Per common share: Net income from contin- uing operations....... 3.80 3.65 3.25 3.33 2.99 Net income............. 2.00 3.72 4.01 3.58 3.13 Net income excluding realized investment gains (losses), the related acquisition cost ad- justment, and discon- tinued operations..... 3.93 3.74 3.50 3.34 2.96 Cash dividends paid.... 1.13 1.12 1.08 1.07 1.00 Return on average common equity excluding effect of SFAS 115 and discontinued opera- tions.................. 18.5% 19.7% 21.3% 24.6% 24.4% Average shares outstand- ing.................... 71,594 72,096 73,502 73,237 76,728 - ------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 AS OF DECEMBER 31, ---------- ---------- ---------- ---------- ---------- Cash and invested assets (2).................... $5,874,037 $5,036,211 $5,200,588 $4,675,577 $4,348,111 Total assets............ 9,364,104 8,165,244 7,441,185 6,544,617 5,898,148 Short-term debt......... 189,372 250,116 107,108 195,102 5,825 Long-term debt.......... 791,988 791,518 791,090 496,622 496,332 Shareholders' equity.... 1,588,952 1,242,603 1,417,255 1,115,660 1,079,251 Per common share (3)... 22.17 17.37 18.80 14.54 13.11 Per common share ex- cluding effect of SFAS 115................... 20.33 19.31 17.29 14.54 13.11 Annualized premium in force: Life................... 869,366 796,955(1) 612,656 588,084 562,550 Health................. 754,758 807,587(1) 823,382 832,488 798,142 Total.................. 1,624,124 1,604,542 1,436,038 1,420,572 1,360,692 Assets under management at W&R................. 18,288,000 14,502,000 14,470,000 12,144,000 10,692,000
- ------------------------------------------------------------------------------- (1) Annualized life premium in force includes $144 million, and annualized health premium in force includes $37 million, representing the business acquired in the acquisition of American Income Life Insurance Company in 1994. (2) Includes accrued investment income. (3) Computed after deduction of preferred shareholders' equity. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the Selected Financial Data and Torchmark's Consolidated Financial Statements and Notes thereto appearing elsewhere in this report. RESULTS OF OPERATIONS In the fourth quarter of 1995, Torchmark decided to dispose of its coalbed methane gas development in the Black Warrior Basin of Alabama due to disappointments in production. During 1995, Torchmark experienced increased difficulties in obtaining significant gas production from the lower coal seams from this development, resulting in revisions to engineering estimates of reserves. Accordingly, the Black Warrior investment was written down to its estimated realizable value. The writedown amounted to an after-tax charge of $130 million, or $1.82 per share for 1995. Please refer to "Black Warrior Writedown" on page 24 of this report for more information. In addition to the Black Warrior disposal, Torchmark also determined earlier in 1995 to sell Torch Energy, its energy management subsidiary. Torchmark is currently negotiating the disposal of Torch Energy through a management-led buyout. It is anticipating that the transaction will result in total consideration of approximately $108 million, consisting of cash and other securities. A small gain is expected on the sale. As a result of the proposed sale of Torch Energy and the decision to dispose of Black Warrior, Torchmark has elected to exit the energy industry, accounting for such as a disposal of a segment. Therefore, Torchmark has modified the presentation in its financial statements for 1995 and all prior periods to set forth separately the net assets and results attributable to the discontinued energy segment as discontinued operations. Net income from continuing operations for 1995 was $272 million, increasing 3% over $264 million in 1994. On a per share basis, income from continuing operations was $3.80 in 1995, gaining 4% from $3.65. Net income was $143 million, or $2.00 per share in 1995, compared with $269 million or $3.72 per share in 1994. Excluding realized investment gains and losses and the associated adjustment to deferred acquisition costs, net income from continuing operations was $3.93 per share, rising 5% over the prior period amount of $3.74. In 1994, net income per share from continuing operations, excluding realized investment gains and the associated adjustment to deferred acquisition costs, rose 9% over $3.43 per share in 1993. The adjustment to deferred acquisition costs was made because of an accounting rule requiring that deferred acquisition costs on interest-sensitive insurance products be amortized in accordance with expected gross profits. Since realized investment gains or losses on assets backing such products change profit expectations, the adjustment is required. Realized investment losses for 1995 included a $15 million after-tax, or $.21 per share, writedown of an investment in Southwestern Life Corporation, which filed for Chapter 11 bankruptcy protection in the third quarter of 1995. In a comparison of 1995 results with those of 1994, attention should be given to the acquisition of American Income on November 3, 1994 for total consideration of $552 million. American Income's results were consolidated with Torchmark's after the acquisition date, being included for a full year in 1995 for the first time. American Income added approximately $17 million to Torchmark's net income, after taking into account goodwill amortization and financing costs. In comparison with 1993, a number of nonrecurring items should be considered. (1) In November, 1993, Torchmark sold 73% of its interest in Vesta Insurance Group, Inc. ("Vesta"), which was a wholly-owned property and casualty subsidiary prior to the sale. Such interest was sold for proceeds of $161 million and a $57 million pretax gain from the sale was recognized as other income. Vesta's operations were consolidated with Torchmark's in 1993 prior to the sale. (2) Results for 1993 included an $82 million pretax charge for nonoperating expenses, compared with $25 million for 1994. These charges related to legal costs, guaranty assessments, and other contingencies, some of which are discussed in more depth in "Item 3--Legal Proceedings" on page 12 of this report. The $25 million charge in 1994 was offset, however, by a reclassification of nonoperating expense to health benefits, since actual payments will be made in the form of health benefits. (3) Two new accounting standards which dealt with postretirement benefits and income taxes were implemented in 1993, increasing earnings $18.4 million. (4) Corporate tax legislation was enacted in 1993 which increased tax rates from 34% to 35%, resulting in an additional charge to 1993 earnings of $9.4 million to adjust the deferred tax liability relating to prior years. 17 Revenues increased 10% in 1995 to $2.07 billion from $1.88 billion in 1994, an increase of $192 million. The American Income acquisition accounted for the increase when adjusting for lost investment income from the purchase, adding $225 million to total revenues in 1995, compared with $31 million in 1994. In comparison with 1993, 1994 revenues decreased 9%. After exclusion of Vesta revenues and the one-time gain from the Vesta sale in 1993, the decrease in 1994 revenues would have been 2%. Premium income rose 11% in 1995 over the prior year to $1.55 billion, after having increased 1.4% in 1994 over the prior period, adjusting to exclude Vesta premium in 1993. The $157 million gain in premium in 1995 was caused by the inclusion of American Income premium for a full year, which increased $168 million over 1994. The components of Torchmark's revenues and operations are described in more detail in the discussion of segments and investment operations found on pages 18 through 26 of this report. Other operating expenses rose $27 million in 1995 over the prior year or 23%. The inclusion of American Income's expenses for a full year accounted for $7 million of the increase. After adjusting for American Income and Vesta, 1994 expenses declined 10% from 1993. Increases in goodwill amortization, interest expense, and the MIPS dividend were caused by the American Income acquisition in 1994 and the United Management acquisition in 1993. The American Income purchase added $10 million and the United Management purchase added $3 million in annual goodwill amortization. Please refer to the following sections of this report for a more complete discussion of these purchases and the related financing costs: "Acquisition of American Income" on page 27, "Capital Resources" on page 27, and "Merger with United Management" on page 28. The following is a discussion of Torchmark's operations by segment. INSURANCE Life insurance: Torchmark markets life insurance under a variety of different distribution channels. The following table presents life insurance premium income during each of the three years ended December 31, 1995 by distribution method: LIFE INSURANCE Premium by Distribution Method (Dollar amounts in thousands)
1995 1994 1993 -------------- -------------- -------------- % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL -------- ----- -------- ----- -------- ----- United American General Agency................. $ 28,305 3.7% $ 25,971 4.3% $ 25,625 4.6% United American Captive Agency................. 10,706 1.4 7,966 1.3 7,285 1.3 Direct Response......... 149,141 19.3 127,661 21.2 111,303 20.0 Home Service............ 275,089 35.6 268,460 44.6 261,741 47.1 American Income Captive Agency................. 153,914 19.9 21,055 3.5 0 0.0 Preneed Captive Agency.. 17,188 2.2 23,983 4.0 33,396 6.0 Waddell & Reed Captive Agency................. 69,498 9.0 64,940 10.8 60,666 10.9 Other................... 68,416 8.9 61,597 10.3 55,843 10.1 -------- ----- -------- ----- -------- ----- $772,257 100.0% $601,633 100.0% $555,859 100.0% ======== ===== ======== ===== ======== =====
Life insurance premium, including policy charges, grew 28% to $772 million for the year 1995. Life premium in 1994 was $602 million, increasing 8% over 1993. The American Income acquisition in late 1994 had a considerable impact on life insurance operations subsequent to the acquisition date. American Income life premium was $154 million in 1995, compared with $21 million in 1994, accounting for $133 million of the $171 million increase in life premium for 1995. Sales of life premium were strong in both 1994 and 1995. In terms of annualized premium in force issued, 1995 sales were $218 million and 1994 sales were $150 million, increasing 45% in 1995 and 17% in 1994. American Income, however, accounted for $51 million of 1995 sales, or 64% of the 1995 increase. 18 Annualized life premium in force climbed 9% in 1995 to $869 million at December 31. Annualized life premium in force was $797 million at December 31, 1994, rising 30% over 1993 year end. The 1994 increase was 7% after adjusting for the inclusion for American Income's annualized life premium in force of $141 million at the acquisition date. Annualized premium in force data includes amounts collected on certain interest-sensitive life products which are not recorded as premium income but exclude single premium income and policy charges. Torchmark's life annualized premium in force exceeded its health annualized premium in force at year-end 1995 for the first time since 1982 year end, underscoring Torchmark's emphasis on life insurance sales. Torchmark has emphasized increases in sales of life insurance product lines relative to health and other insurance products because profit margins for life insurance are superior. Additionally, assets backing the higher reserves required for life products allow Torchmark to increase investment income. Profit margins for life insurance operations, as measured by insurance operating income as a percentage of premium, has approximated 29% in each of the three years presented. LIFE INSURANCE Summary of Results (Dollar amounts in thousands)
1995 1994 1993 ----------------- ----------------- ----------------- % OF % OF % OF AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM -------- ------- -------- ------- -------- ------- Premium and policy charges................. $772,257 100.0% $601,633 100.0% $555,859 100.0% Policy obligations....... 507,444 65.7 412,799 68.6 377,017 67.8 Required reserve inter- est..................... (194,733) (25.2) (163,637) (27.2) (151,203) (27.2) -------- ----- -------- ----- -------- ----- Net policy obligations.. 312,711 40.5 249,162 41.4 225,814 40.6 Amortization of acquisi- tion costs.............. 126,695 16.4 90,573 15.1 86,098 15.5 Commissions and premium taxes................... 50,994 6.6 39,845 6.6 36,697 6.6 Other expense............ 60,767 7.9 46,814 7.8 43,790 7.9 -------- ----- -------- ----- -------- ----- Total expense........... 551,167 71.4 426,394 70.9 392,399 70.6 -------- ----- -------- ----- -------- ----- Insurance operating in- come.................... $221,090 28.6% $175,239 29.1% $163,460 29.4% ======== ===== ======== ===== ======== =====
As a percentage of premium, insurance operating income has remained constant in both 1995 and 1994 over the prior period. Excluding American Income, insurance margins have remained stable with a slight increase in policy obligations offset by lower amortization of acquisition costs. A major factor in maintaining stable margins is improved persistency. Improvements in persistency are beneficial to operating income margins because they lower the rate of amortization of acquisition costs and certain other expenses. In addition, improved persistency increases profits because the premium life is extended. Persistency improvements have resulted, at least in part, from revisions in agents' compensation formulas to encourage lower lapses. Improvements have also been attributable to the conversion of a large portion of agent-collected home service business to bank draft and direct billing premium, which have higher persistency. In fact, Torchmark will no longer sell agent-collected business starting in 1996. Agent-collected premium as a percentage of total home service premium was approximately 15% at year- end 1995, compared with 48% five years earlier. American Income's life business has an insurance operating income margin of approximately 26%, similar to other Torchmark life insurance products. However, as a percentage of premium, the American Income business is characterized by lower policy obligations and higher amortization of acquisition costs. The higher acquisition cost ratio is a result of the higher amortization of the value of insurance purchased relative to deferred acquisition costs. 19 The above presentation of life insurance results excludes a $22.8 million benefit in 1994 from the review of reserving assumptions on a block of burial reserves. An evaluation of assumptions regarding mortality, interest, and inflation pressures on burial costs indicated that sufficient experience existed to support a change in the level of reserves held on this block. Torchmark will continue to monitor its reserving assumptions for this block on an annual basis to ensure that reserves are adequate to meet contractual liabilities. Had this item been included, the 1994 ratio of policy obligations to premium would have been reduced and overall margin would have been increased 3.8%. Health insurance: Health products sold by Torchmark include Medicare Supplement insurance, cancer insurance, long-term care, and other under-age 65 medical and hospitalization products. As a percentage of annualized health premium in force at December 31, 1995, Medicare Supplement accounted for 70%, cancer accounted for 15%, and other products accounted for 15%. These products are marketed by general, captive, and home service agents, direct response, and through associations. The table below presents health insurance premium income during each of the three years ended December 31, 1995 by distribution method: HEALTH INSURANCE Premium by Distribution Method (Dollar amounts in thousands)
1995 1994 1993 -------------- -------------- -------------- % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL -------- ----- -------- ----- -------- ----- United American General Agen- cy............................ $466,751 62.2% $509,972 66.4% $537,232 67.2% United American Captive Agen- cy............................ 123,264 16.4 128,538 16.7 133,223 16.7 Direct Response................ 956 0.1 1,106 0.1 1,118 0.1 Home Service................... 118,327 15.8 123,011 16.0 128,262 16.0 American Income Captive Agen- cy............................ 41,290 5.5 6,087 0.8 0 0.0 -------- ----- -------- ----- -------- ----- $750,588 100.0% $768,714 100.0% $799,835 100.0% ======== ===== ======== ===== ======== =====
Health premium was $751 million in 1995, falling 2% from $769 million in 1994. Health premium declined 4% in 1994. Annualized premium in force stood at $755 million at December 31, 1995, declining 7% from 1994 year-end premium in force of $808 million. Annualized health premium in force declined 2% in 1994. Sales of health insurance products in terms of annualized premium issued declined 15% to $103 million in 1995, after having declined 31% in 1994. These declines in sales resulted in the diminished base of annualized health premium in force. The declines in sales of health annualized premium in both years were primarily due to decreases in Medicare Supplement product sales. Sales of Medicare Supplement insurance were $65 million in 1995, compared with $88 million in 1994. They declined 26% in 1995 and 36% in 1994. These sales declines caused annualized premium in force for Medicare Supplement to decrease from $601 million at year-end 1993 to $572 million at 1994 year end to $530 million at December 31, 1995. In the past few years, Torchmark has encountered considerable competition in the Medicare Supplement market with regard to price and "attained-age" pricing, whereby premium may be increased on a basis of increased age as well as increased medical costs. The increased price competition has had a negative impact on sales. Also, in recent years, there has been increased competition from health maintenance organizations in the Medicare Supplement market. Uncertainty has also been a factor negatively affecting sales. Particularly in 1993 and 1994, there was considerable uncertainty regarding various health care reforms proposed by both the Clinton Administration and Congress which had bearing on the Medicare Supplement market. Additionally, in recent years, this market has experienced a great deal of increased regulation including government mandated policy forms, a required minimum loss ratio of 65% on policies sold, and a required leveling of agents' commissions. The mandated loss ratio and leveling of commissions have put significant pressure on margins for Torchmark as well as the rest of the industry, thus discouraging sales. 20 Torchmark is implementing a number of measures to increase its sales of Medicare Supplement business. Torchmark's price increases on these products have not been as great as certain major competitors, which should give Torchmark the opportunity to compete more effectively on the basis of price. Torchmark has also obtained approval in a number of states to sell the "attained-age" product, thereby allowing Torchmark to compete on this basis. Also, Torchmark is continually developing new Medicare Supplement products and markets. One such new product is a group Medicare Supplement product targeted at employees, unions, and associations. While non-Medicare Supplement product sales also declined in 1994, this trend reversed in 1995. Non-Medicare Supplement health annualized premium issued rose 13% to $38 million in 1995 from $34 million in 1994. Cancer insurance annualized premium in force was $115 million at December 31, 1995, gaining slightly over the prior year end. Cancer sales in terms of annualized premium issued rose 40% to $11 million in 1995, compared with $8 million in 1994. Cancer sales were $10 million in 1993. Other health product annualized premium issued increased 4% to $27 million for 1995, after declining 15% in 1994. HEALTH INSURANCE Summary of Results (Dollar amounts in thousands)
1995 1994 1993 ----------------- ----------------- ----------------- % OF % OF % OF AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM -------- ------- -------- ------- -------- ------- Premium.................. $750,588 100.0% $768,714 100.0% $799,835 100.0% Other income............. 3,001 0.4 3,349 0.4 3,268 0.4 -------- ----- -------- ----- -------- ----- Total revenue........... 753,589 100.4 772,063 100.4 803,103 100.4 Policy obligations....... 453,127 60.3 458,066 59.5 486,855 60.9 Required reserve inter- est..................... (26,138) (3.5) (25,710) (3.3) (24,573) (3.1) -------- ----- -------- ----- -------- ----- Net policy obligations.. 426,989 56.8 432,356 56.2 462,282 57.8 Amortization of acquisi- tion costs.............. 68,448 9.1 74,701 9.7 83,385 10.4 Commissions and premium taxes................... 94,286 12.6 102,224 13.3 107,317 13.4 Other expense............ 47,207 6.3 42,673 5.6 44,194 5.6 -------- ----- -------- ----- -------- ----- Total expense........... 636,930 84.8 651,954 84.8 697,178 87.2 -------- ----- -------- ----- -------- ----- Insurance operating in- come.................... $116,659 15.6% $120,109 15.6% $105,925 13.2% ======== ===== ======== ===== ======== =====
As a percentage of premium, insurance operating income for Torchmark's health insurance grew from 13.2% in 1993 to 15.6% in 1994, where it stabilized at 15.6% in 1995. A primary reason for the increases in margins is the decline in the amortization of acquisition costs due to improved persistency. Improvement in the persistency of Torchmark's health business has continued throughout each of the years considered, resulting in lower ratios of acquisition costs to premium. These improvements have been brought about, at least in part, by the requirement in many states to level agents' commissions on Medicare Supplement products instead of paying a larger first-year commission. This leveling of commissions has encouraged persistency through the payment of a higher renewal commission. It has also encouraged persistency through the payment of a lower first-year commission, which discourages replacement. Excluded from the above presentation of health results in 1994 were increases in cancer policy benefits arising from the reclassification described on page 17 of this report. Annuities: Torchmark's annuity products serve a wide range of markets, such as providing retirement income, funding prearranged funerals, and offering long-term tax-deferred growth opportunities. Annuities are sold on both a fixed and variable basis. Fixed annuity deposits are held and invested by Torchmark and are obligations of the company. Amounts deposited for variable annuities are invested at the policyholder's direction into his choice among nine W&R managed mutual funds which vary in degree of investment risk and return. A fixed investment account is also available as a variable annuity investment option. These investments for variable annuity deposits are reported as "Separate Account Assets" and the corresponding deposit balances for variable annuities are reported as "Separate Account Liabilities." 21 Annuity premium is accounted for as a deposit and is not reflected in income. Revenues on both fixed and variable annuities are derived from charges to the annuity account balances 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 to the extent actual investment income exceeds the investment income which is credited to policyholders on fixed annuities. The following table presents the annuity account balance at each year end and the annuity collections for each year for both fixed and variable annuities:
ANNUITY DEPOSIT BALANCES ANNUITY COLLECTIONS -------------------------- -------------------------- (DOLLAR AMOUNTS IN (DOLLAR AMOUNTS IN MILLIONS) THOUSANDS) 1995 1994 1993 1995 1994 1993 -------- -------- -------- -------- -------- -------- Fixed..................... $ 927.9 $ 801.2 $ 782.8 $130,115 $ 43,339 $ 46,573 Variable.................. 1,052.2 692.8 529.7 189,188 196,105 213,982 -------- -------- -------- -------- -------- -------- Total.................... $1,980.1 $1,494.0 $1,312.5 $319,303 $239,444 $260,555 ======== ======== ======== ======== ======== ========
Annuity premium collections rose 33% to $319 million in 1995 over the prior year. Fixed annuity collections of $130 million were up over three times the 1994 collections of $43 million. The increase in fixed annuity collections resulted largely from the entry of the United American agents into annuity markets during the fourth quarter of 1994. These agents work primarily through banks and market annuity products to bank customers. These sales generated $76 million of collections in 1995. Fixed annuity collections declined 7% in 1994 from the prior year. Variable annuity collections declined 4% to $189 million in the 1995 period, after having fallen 8% in 1994. Weaker financial markets in 1994 and early 1995 were thought to have caused the declines in sales of variable annuities. Sales of these products recovered in the second half of 1995. Variable annuity sales rose 45% to $112 million in the second half of 1995 over $77 million in the first half. The variable annuity balance on deposit was $1.05 billion at 1995 year end, growing 52% over the prior year end. Growth was largely attributable to the strength of financial markets in mid and late 1995, but was also due to the additional deposit collections. The fixed annuity balance gained 16% to $928 million at December 31, 1995, as a result of the increased sales. ANNUITIES Summary of Results (Dollar amounts in thousands)
1995 1994 1993 ---------------- ---------------- ---------------- % OF % OF % OF MEAN MEAN MEAN AMOUNT RESERVE AMOUNT RESERVE AMOUNT RESERVE ------- ------- ------- ------- ------- ------- Policy charges.............. $19,049 1.1% $13,888 1.0% $9,454 0.7% Allocated investment in- come....................... 10,206 0.6 8,576 0.6 8,387 0.6 ------- ---- ------- ---- ------- ---- Total revenue.............. 29,255 1.7 22,464 1.6 17,841 1.3 Policy obligations.......... 48,012 2.8 42,275 3.0 43,032 3.3 Required reserve interest... (48,541) (2.8) (42,765) (3.0) (43,090) (3.3) ------- ---- ------- ---- ------- ---- Net policy obligations..... (529) 0.0 (490) 0.0 (58) 0.0 Amortization of acquisition costs...................... 9,125 0.5 5,772 0.4 4,596 0.3 Commissions and premium tax- es......................... 699 0.0 605 0.0 708 0.1 Other expense............... 2,573 0.2 2,345 0.2 663 0.0 ------- ---- ------- ---- ------- ---- Total expense.............. 11,868 0.7 8,232 0.6 5,909 0.4 ------- ---- ------- ---- ------- ---- Insurance operating income.. $17,387 1.0% $14,232 1.0% $11,932 0.9% ======= ==== ======= ==== ======= ====
Insurance operating margins for annuities as measured by the mean reserve have remained fairly stable throughout the three years examined. Annuity policy charges have increased in each period. 22 These charges were $19 million in 1995, gaining 37% over 1994 charges of $14 million, which in turn rose 47% over the prior year. Growth in these policy charges resulted from the increase in size of the annuity account balance over each of the prior years, the increase in the number of annuity contracts in force, and the cumulative effect of growth in sales over the past few years on which the sales charge is based. The allocated investment income, or the investment income earned in excess of policy requirements, also grew in each of the periods 1993 through 1995. These increases resulted from the growth in the fixed annuity deposit balances. ASSET MANAGEMENT Financial Services. Torchmark's financial services operations consist of the exclusive marketing, through professional financial planners, of 23 mutual funds, including the United Group and the W&R Group of funds. These representatives also market a variety of insurance products of Torchmark subsidiaries. Financial services operations also involve the management of mutual fund portfolios, the management of institutional portfolios, and the servicing of customer accounts. Revenues are derived from commissions for the sale of investment and insurance products, fees for management of investment asset portfolios, and fees for servicing the accounts. Financial services revenues climbed 9% to $152 million for the year 1995 from the prior year amount of $139 million. These revenues grew 1% in 1994. Asset management fees of $86 million in 1995 were the largest component of financial services revenues, gaining 22% over 1994 fees of $71 million. Asset management fees grew 10% in 1994 over 1993. Increases in these fees have occurred due to the growth in average mutual fund assets and institutional assets under management, on which asset management fees are based. Average assets under management rose 14% in 1995 and 10% in 1994. Growth in average assets under management resulted from added investment product sales in both the 1995 and 1994 periods. Additionally, 1995 asset growth was boosted by the strength in the financial markets. Assets under management were $18.3 billion at December 31, 1995 and $14.5 billion at December 31, 1994, rising 26% in 1995. The 1994 increase in assets under management was less than 1%. Commission revenues are derived from the sale of both investment and insurance products, with investment product commissions representing 81% of total commission revenues and insurance product commissions the balance. The commissions from insurance products and variable annuities are primarily from Torchmark insurance subsidiaries, and are eliminated in consolidation. Investment product commissions declined 4% to $57 million in 1995, after declining 10% in 1994. Investment product sales for 1995 and 1994 were level at $1.18 billion, after having declined 5% in 1994 from $1.24 billion in 1993. In 1995, sales of United Funds, a front-load product, declined 5% to $838 million, while sales of the W&R Funds, a deferred-load product, rose 47% to $158 million. Service fees grew 6% in 1995, after rising 5% in 1994. The number of accounts serviced were 1.22 million at December 31, 1995, compared with 1.15 million at year-end 1994 and 1.09 at year-end 1993. FINANCIAL SERVICES Summary of Results (Dollar amounts in thousands)
1995 1994 1993 ---------------- --------------- ---------------- % OF % OF % OF AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE -------- ------- ------- ------- -------- ------- Commission revenue........... $ 70,458 38.5% $72,223 43.1% $ 78,067 46.8% Asset management fees........ 85,999 47.0 70,651 42.2 64,181 38.5 Service fees................. 23,528 12.9 22,297 13.3 21,273 12.7 -------- ----- ------- ----- -------- ----- Financial services reve- nue*....................... 179,985 98.4 165,171 98.6 163,521 98.0 Investment and other income.. 2,947 1.6 2,264 1.4 3,293 2.0 -------- ----- ------- ----- -------- ----- Total revenue............... 182,932 100.0 167,435 100.0 166,814 100.0 Commissions and selling expenses.................... 63,882 34.9 62,285 37.2 70,735 42.4 Other expenses............... 24,708 13.5 21,252 12.7 23,265 14.0 -------- ----- ------- ----- -------- ----- Total expenses.............. 88,590 48.4 83,537 49.9 94,000 56.4 -------- ----- ------- ----- -------- ----- Pretax income................ $ 94,342 51.6% $83,898 50.1% $ 72,814 43.6% ======== ===== ======= ===== ======== =====
- -------- * Financial services revenue includes $27.5 million in 1995, $25.9 million in 1994 and $26.2 million in 1993 representing revenues from other Torchmark segments which are eliminated in consolidation. 23 Pretax operating margins improved in both 1995 and 1994 over the prior year, growing 12% in 1995 to $94 million after a 15% rise in 1994 to $84 million. As a percentage of financial services revenues, pretax income stood at 52% for 1995. The primary cause for the margin improvements has been the rapid growth in asset management fees in proportion to commission revenues. Asset management fees have a significantly greater profit margin than commissions. Commissions and selling expenses as a percentage of commission revenues declined from 91% in 1993 to 86% in 1994 but rose to 91% in 1995. The 1994 decline was caused by the implementation of a 12-b service fee which offsets certain direct expenses. While this fee increased in 1995, the decrease in expense was more than offset by additional expense from product promotion and efforts to expand the sales force. It is anticipated that these additional expenditures will result in increased product sales in future periods. Energy: As previously discussed on page 17 of this report, Torchmark intends to dispose of its energy operations and has classified such operations as discontinued operations in the financial statements. These energy operations involved the management of proven producing oil and gas properties for both Torchmark affiliates and unrelated parties by Torch Energy. Energy operations also included drilling of developmental wells, acquisition of properties and facilities, and marketing of oil and gas products by Torch Energy. They also involved the extraction and production of energy products through direct energy investments. Black Warrior Writedown: Torchmark has maintained an investment in a coalbed methane gas development since 1990 in the Black Warrior Basin of Alabama. The development was completed in 1993. During 1993 and 1994, production results were below expectations and losses were experienced in both years. Prior to 1995, Torchmark reviewed its investment quarterly and determined there were no impairments for reserves under successful efforts accounting. SFAS 121 was adopted by Torchmark at issuance of the Standard in March, 1995, and there were no impairments under the provisions of that Standard at the time of adoption. In the fourth quarter of 1995, production problems accelerated, and it became apparent that it was not cost-effective to incur the additional cost required to produce gas from the deeper coal seams. As a result, certain reserves of the Black Warrior investment were reclassified from proved to possible, causing an approximate 55 percent decline in the estimated proved gas reserves. Because of these factors, a decision was made by Torchmark in the fourth quarter of 1995 to sell the Black Warrior investment. As a result of these events, a review was made for impairment under the provisions of SFAS 121. In accordance with the requirements of SFAS 121 and in view of Torchmark's desire to dispose of Black Warrior, Torchmark wrote down its investment to its estimated net realizable value, resulting in an after- tax charge of $130 million, or $1.82 per share in 1995. Net realizable value was determined using a discounted cash flow model. Even though gas prices improved in 1995, the significant decline in proved reserves resulted in the impairment of Black Warrior's estimated net realizable value. Investments: Because Torchmark's Black Warrior coalbed methane investment and certain other energy investments are included in the disposed energy segment, these investments and the associated investment income are presented in the financial statements as discontinued operations. Therefore, all previously-reported amounts of invested assets and investment income have been reclassified accordingly. Net investment income increased 10% to $382 million in 1995, after having experienced a 6% decline from $368 million in 1993 to $348 million in 1994. In comparison of net investment income between these three periods, the acquisition of American Income and the disposition of Vesta must be taken into account. After adjusting for the effect of the American Income acquisition, 1995 net investment income rose 3% from $344 million in 1994 to $354 million. When excluding the effect of both transactions, 1994 investment income declined 4% from $357 million in 1993. In addition to the larger invested asset base caused by the American Income purchase, the increase in 1995 income over the prior year was also caused by certain other factors. First, nonrecurring investment income was received in the fourth quarter of 1995 on passive energy investments retained by Torchmark in the amount of $4.3 million from a legal settlement. Additionally, there was a slight improvement in yield on the portfolio. 24 The effects of accelerated mortgage-backed prepayments need to be considered when making a comparison with 1993 net investment income. The decline in interest rates in 1993 encouraged refinancing of mortgages, causing increased GNMA prepayments in 1993 and early 1994. These funds were reinvested at lower prevailing rates, causing a reduction in Torchmark's investment income in 1993 and an even greater reduction in subsequent years. It is estimated that GNMA repayments reduced 1994 investment income $16.1 million from 1993. As rates rose in 1994, the refinancing trend reversed and Torchmark was able to reinvest repayment proceeds in higher yielding securities. Torchmark reduced its exposure to GNMA securities during 1994 and, to a greater extent, during 1995, so that at December 31, 1995, GNMA investments represented 19% of invested assets, compared with 55% of the portfolio three years earlier. For this reason, the decline in rates during 1995 and the related increase in refinancings had little impact on Torchmark's 1995 net investment income. In 1995, a persistent easing of inflationary expectations helped create a significant bond market rally which more than offset the weakness of 1994. Yields available on fixed investments declined throughout the year, falling approximately 200 basis points when measured by the ten and thirty-year Treasury bond. In this environment, Torchmark emphasized the acquisition of call-protected corporate bonds, while continuing to reduce mortgage-backed investments and municipal holdings. During 1995, investment acquisitions in the amount of $1.87 billion were made at an average yield of 7.28%, compared with acquisitions of $1.29 billion yielding 7.13% in 1994. Corporate obligations represented 84% of total 1995 new purchases. The increased acquisition activity in 1995 resulted from (1) the inclusion of American Income's investment operations for the full year of 1995; and, (2) the reinvestment of proceeds from two sale programs executed during 1995 designed to lessen exposure to mortgage-backed holdings. The decline in rates in 1995 caused an increase in the market value of fixed maturity assets. During the year, the market value of these assets increased $818 million or 19% to $5.2 billion, exceeding $5 billion for the first time in 1995. At December 31, 1995, market value exceeded book value on fixed investments by $226 million. This is in contrast to year-end 1994 when book value exceeded market by $242 million. At year-end 1993, there was an unrealized gain of $192 million. The unrealized loss in 1994 resulted from the rise in rates in that year. With the decrease in GNMA holdings, the percentage of government and government-guaranteed holdings within Torchmark's fixed-income portfolio continued to decline. This percentage was 29% at year-end 1995, 47% at year- end 1994, and 59% at year-end 1993. Torchmark's preference for quality is demonstrated, however, by the fact that at December 31, 1995, 43% of the fixed income holdings were rated "AAA" by rating agencies and 96% were considered to be investment grade. Repayment of investment assets is a function of both maturity and the changing interest rate environment. The reduction in cash flow which resulted from GNMA sales during the year was more than offset by the acquisition of shorter maturity corporate bonds and the increased probability of early calls as rates declined. Accordingly, at year-end 1995, an estimated 37% of the fixed maturity portfolio should repay within five years, compared with 30% at year-end 1994 and 46% at year-end 1993. The following table is a presentation of the percentages of Torchmark's fixed investment portfolio by estimated maturity.
1995 1994 ----- ----- Short terms and under 1 year.. 8.6% 8.4% 2-5 years..................... 28.9 21.7 6-10 years.................... 38.3 44.0 11-15 years................... 10.8 18.9 16-20 years................... 2.5 3.9 Over 20 years................. 10.9 3.1 ----- ----- 100.0% 100.0% ===== =====
Because Torchmark's investment program is based upon high quality fixed maturity bonds, Torchmark's percentage ownership of other types of investments varies significantly from other companies in the industry. The following table presents Torchmark's holdings by asset type as of December 31, 1995 as contrasted with the industry averages prepared by the American Council of Life Insurance. 25
TORCHMARK ---------------- INDUSTRY % $ AMOUNTS % (1) ---------- ----- ---------- Investment grade bonds & short terms............... $5,109,870 88.4% 67.6% Noninvestment grade bonds.......................... 164,584 2.8 3.8 Equities........................................... 19,168 0.3 5.1 Mortgage loans..................................... 52,274 0.9 13.8 Real estate........................................ 143,356 2.5 2.8 Policy loans....................................... 193,877 3.4 5.5 Other.............................................. 95,744 1.7 1.4 ---------- ----- ----- $5,778,873 100.0% 100.0% ========== ===== =====
- -------- (1) Latest data available from the American Council of Life Insurance At year-end 1995, average life of the portfolio increased to 8.8 years, compared with 8.0 years at year-end 1994 and 6.0 years at year-end 1993. FINANCIAL CONDITION Liquidity: Torchmark is highly liquid, as evidenced by its positive cash flows, its marketable investments, and its credit facilities. Its insurance and asset management operations generate strong positive cash flows, well in excess of its immediate needs. Cash flows provided from operations, including deposit-product operations, were $478 million in 1995, compared with $337 million in 1994, an increase of 42%. This increase was primarily caused by increased deposit-product sales in 1995 and a one-time $48 million tax settlement paid in 1994 related to prior periods. Operating cash flows were $470 million in 1993. In addition to operating cash flows, Torchmark received $351 million in 1995 of scheduled investment maturities and repayments, further enhancing total positive cash flow. Such repayments were $796 million in 1994 and $485 million in 1993. Cash flows in excess of immediate requirements are used to build an investment base to fund future requirements. Cash and short-term investments were $86 million at December 31, 1995, compared with $120 million at year-end 1994. These liquid assets represented approximately 1% of total assets at December 31, 1995, compared with 1.5% at the end of the previous year. In addition to Torchmark's 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 $5.2 billion at December 31, 1995. Torchmark has in place a line of credit facility with a group of lenders which allowed unsecured borrowings up to $400 million at December 31, 1995. This line of credit is further designed as a backup credit line for a commercial paper program not to exceed $400 million, whereby Torchmark may borrow from either the credit line or issue commercial paper at any time but may not borrow in excess of a total of $400 million on the combined facilities. At December 31, 1995, $189 million in commercial paper was outstanding and there were no borrowings on the line of credit. A facility fee is charged on the entire $400 million balance. In accordance with the agreements, Torchmark is subject to certain covenants regarding capitalization and earnings. At December 31, 1995, 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. Dividends from insurance subsidiaries of Torchmark are limited to the greater of statutory net gain from operations on an annual noncumulative basis or 10% of surplus, in the absence of special approval, and 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. At December 31, 1995, a maximum amount of $237 million was available to Torchmark from insurance subsidiaries without regulatory approval. 26 Capital Resources: The carrying amount of Torchmark's long-term debt was $792 million at both year-ends 1995 and 1994. Major debt issues outstanding at December 31, 1995 were as follows:
PRINCIPAL AMOUNT INSTRUMENT DUE RATE ($ MILLIONS) ---------- ---- ----- ------------ Sinking Fund Debentures......................... 2017 8 5/8% $200 Senior Notes.................................... 1998 9 5/8 200 Senior Debentures............................... 2009 8 1/4 100 Notes........................................... 2023 7 7/8 200 Notes........................................... 2013 7 3/8 100 ---- $800 ====
In connection with the American Income purchase in November, 1994, Torchmark issued eight million shares or $200 million face amount Cumulative Monthly Income Preferred Securities, Series A ("MIPS") in October, 1994. The MIPS were issued at an annual dividend rate of 9.18%. They are subject to a mandatory redemption in full at September 30, 2024, although Torchmark may elect to extend the MIPS for up to an additional 20 years if certain conditions are met. They are redeemable at Torchmark's option at any time after September 30, 1999. While Torchmark is obligated to pay dividends at a fixed rate of 9.18%, Torchmark subsequently entered into a ten-year interest-rate swap agreement with an unaffiliated party whereby Torchmark agreed to pay a variable rate on the $200 million face amount in exchange for payment of the fixed dividend. Additionally, Torchmark acquired a five-year interest-rate cap on the swap agreement that insures the variable rate cannot exceed 10.39%. At December 31, 1995, the variable rate was 5.86%. During 1995, Torchmark's after-tax dividend cost for the MIPS was $10.3 million, compared with $11.9 million that would have been incurred without the swap and cap transactions. Short-term debt was $189 million at year-end 1995, compared with $250 million at the end of the previous year. Torchmark paid down a net of $61 million on its above-mentioned credit facility during 1995. Shareholders' equity rose to $1.59 billion at December 31, 1995, an increase of 28% from December 31, 1994 shareholders' equity of $1.24 billion. Book value per share was $22.17 at 1995 year end, compared with $17.37 and $18.80 at year-ends 1994 and 1993, respectively. After adjusting for the impact of interest-rate fluctuations on shareholders' equity required by accounting rules, book value per share was $20.33 at year-end 1995, an increase of 5% over $19.31 at year-end 1994. Comparative book value per share was $17.29 at year-end 1993. Return from continuing operations on common shareholders' equity was 18.5% in 1995, compared with 19.7% in 1994, declining in large part due to the growth in shareholders' equity. The return on equity ratio excludes the mark up or down of shareholders' equity for changes in interest rates required by accounting rules. Total debt as a percentage of total capitalization was 37% at December 31, 1995, with the MIPS counted as equity and excluding the effect of the above-mentioned accounting rule. This debt to capitalization ratio was 40% at year-end 1994 and 41% at year-end 1993. Torchmark's multiple of earnings before interest, taxes, and discontinued operations to interest requirements was 6.3 for 1995, compared with 6.2 in 1994 and 7.7 in 1993. OTHER ITEMS Acquisition of American Income: On November 3, 1994, Torchmark acquired American Income for a total cash purchase price of approximately $552 million. American Income sells life insurance to union and credit union members through exclusive agents. The addition of American Income's quality line of products and low-cost operation fits well with Torchmark's strategy of growing life insurance operations in niche markets. The results of operations of American Income were consolidated with those of Torchmark after the purchase date. Funds for the purchase were provided through a $200 million preferred stock offering which is discussed in more detail in the capital resources section above, a $175 million bridge loan from a group of banks, the sale of investments available for sale, and internal cash flow. 27 Restructure: Torchmark is exploring a strategic restructuring for the purpose of enhancing shareholder value. Many alternatives will be examined. One alternative includes the possibility that Torchmark could be divided into separate publicly-traded operating companies. Because there are many complex tax, accounting, business, operational, and capital issues to be resolved, should such a restructuring be undertaken, it is unknown at this time what the ultimate form of this restructuring might take . Litigation: Torchmark and its subsidiaries continue to be named as parties to pending or threatened litigation, most of which involve punitive damage claims based upon allegations of agent misconduct at Liberty in Alabama. Such punitive damage claims are tried in Alabama state courts where any punitive damage litigation has the potential for significant adverse results. It is impossible to predict the extent of punitive damages that may be awarded if liability is found in any given case, since the amount of punitive damages in Alabama is left largely to the discretion of the jury in each case. It is thus difficult to predict with certainty the liability of Torchmark or its subsidiaries in any given case because of the unpredictable nature of this type of litigation. Also, the class action litigation in Alabama over an exchange of Liberty's cancer policies continued in 1995. In May, 1994, a settlement was approved involving both equitable and monetary relief, valued by the court at $55 million. An appeal from the trial court's final approval of the settlement was taken to the Alabama Supreme Court, and final briefs in the case were submitted to the Supreme Court in February, 1995. The Supreme Court affirmed the trial court's decision in December, 1995. In February, 1996, the Alabama Supreme Court issued a notice overruling a petition for a rehearing. Merger with United Management: On October 1, 1993, Torchmark acquired the approximately 16% of United Management that it did not already own through the payment of $31.25 per share in cash for the remaining outstanding shares. Accordingly, United Management was merged into Torchmark. Including share purchases made in 1993, the total amount of consideration paid to the remaining United Management shareholders was approximately $230 million. Divestiture of Vesta: During 1993, Torchmark entered into a transaction whereby it disposed of approximately 73% of its common stock in Vesta, its wholly-owned subsidiary, which was at that time the holding company for Torchmark's property and casualty operations. On November 11, 1993, Vesta sold nine million shares of common stock in a public offering of which 6.8 million shares were owned by Torchmark prior to the sale and 2.2 million were newly issued shares. Torchmark's 6.8 million shares were sold for $25 per share less expenses, amounting to proceeds of approximately $161 million and resulting in a $57 million pretax gain. After the transaction, Torchmark continued to own 3.4 million shares of Vesta outstanding common stock or approximately 27% of the company. Torchmark also loaned Vesta $28 million in December, 1993, which was repaid in full in 1995 with interest. In January, 1996, Vesta declared and paid a three for two share stock dividend. After this dividend, Torchmark owned 5.1 million shares of Vesta stock, still representing approximately 27% of the company. NEW ACCOUNTING RULES Accounting for Stock-Based Compensation (FASB Statement No. 123) is effective for fiscal years beginning after December 15, 1995, with earlier adoption encouraged. This statement establishes and encourages a new accounting method for employee stock options based on a presumed fair market value of the option at the time of grant. Previously, accounting standards required these options to be valued at intrinsic value, or the difference between the market value of the stock and the option price. The cost of the options are to be charged to earnings generally over the option's vesting period. The new method of valuation of options is not required, but if the new method is not elected, disclosure of its impact on earnings on a pro forma basis is required. Additional disclosures are also required. Torchmark intends to continue to account for options using the accounting rules currently in effect. Therefore, while there will be no effect on future reported earnings and earnings per share, disclosure will be made giving the pro forma effect of valuing options at estimated fair value. No determination of fair value for Torchmark's options has been made, but such valuation should not have material impact on pro forma results. In 1995, Torchmark granted to employees stock options to purchase 739 thousand shares at a price of $43 3/8 per share. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ---- Independent Auditors' Report.............................................. 30 Consolidated Financial Statements: Consolidated Balance Sheet at December 31, 1995 and 1994................. 31 Consolidated Statement of Operations for each of the years in the three- year period ended December 31, 1995................................................. 32 Consolidated Statement of Shareholders' Equity for each of the years in the three-year period ended December 31, 1995.......................................... 33 Consolidated Statement of Cash Flow for each of the years in the three- year period ended December 31, 1995................................................. 34 Notes to Consolidated Financial Statements............................... 35
29 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Torchmark Corporation Birmingham, Alabama We have audited the consolidated financial statements of Torchmark Corporation and subsidiaries as listed in Item 8 and the supporting schedules as listed in Item 14(a). These financial statements and financial statement schedules are the responsibility of Torchmark's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial statement schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Torchmark Corporation and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 1, Torchmark adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (Statement) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in 1995. Also, as discussed in Notes 1, 11, and 12 to the consolidated financial statements, Torchmark adopted the provisions of the Financial Accounting Standards Board's Statement No. 109, Accounting for Income Taxes, and Statement No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions, in 1993. Also, Torchmark adopted the provisions of the Financial Accounting Standards Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, in 1993. KPMG PEAT MARWICK LLP Birmingham, Alabama January 31, 1996 except for Note 16 which is as of February 26, 1996 30 TORCHMARK CORPORATION CONSOLIDATED BALANCE SHEET (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- Assets: Investments: Fixed maturities--available for sale, at fair value (cost: 1995--$4,984,223; 1994--$4,634,594)................................... $5,210,224 $4,392,259 Equity securities, at fair value (cost: 1995--$4,758; 1994--$35,985)...................................... 10,551 31,547 Mortgage loans on real estate, at cost (estimated fair value: 1995--$50,686; 1994--$17,956)...................................... 52,274 17,997 Investment real estate, at cost (less allowance for depreciation: 1995--$32,463; 1994--$28,620)......... 143,356 132,554 Policy loans......................................... 193,877 181,988 Other long-term investments.......................... 95,744 93,090 Short-term investments............................... 72,847 108,362 ---------- ---------- Total investments................................... 5,778,873 4,957,797 Cash (includes restricted cash: 1995--$11,838; 1994-- $13,091)............................................. 13,158 11,298 Investment in unconsolidated subsidiaries............. 76,101 63,672 Accrued investment income............................. 82,006 67,116 Other receivables..................................... 122,108 125,671 Deferred acquisition costs............................ 1,121,325 1,017,467 Value of insurance purchased.......................... 277,297 274,124 Property and equipment................................ 47,185 47,368 Goodwill.............................................. 555,517 570,455 Other assets.......................................... 30,304 27,324 Discontinued operations assets........................ 174,386 287,749 Separate account assets............................... 1,085,844 715,203 ---------- ---------- Total assets........................................ $9,364,104 $8,165,244 ========== ========== Liabilities: Future policy benefits................................ $4,566,850 $4,229,916 Unearned and advance premiums......................... 83,473 90,871 Policy claims and other benefits payable.............. 209,773 201,754 Other policyholders' funds............................ 77,039 72,783 ---------- ---------- Total policy liabilities............................. 4,937,135 4,595,324 Accrued income taxes.................................. 362,005 173,003 Other liabilities..................................... 215,712 204,425 Short-term debt....................................... 189,372 250,116 Long-term debt (estimated fair value: 1995--$860,258; 1994--$751,603)...................................... 791,988 791,518 Separate account liabilities.......................... 1,085,844 715,203 ---------- ---------- Total liabilities.................................... 7,582,056 6,729,589 Commitments and contingencies Monthly income preferred securities (estimated fair value: 1995--$217,040; 1994--$200,000)....................................... 193,096 193,052 Shareholders' equity: Preferred stock, par value $1 per share--Authorized 5,000,000 shares; outstanding: -0- in 1995 and in 1994.............................. -0- -0- Common stock, par value $1 per share--Authorized 160,000,000 shares; outstanding: 73,784,228 issued in 1995 and in 1994, less 2,117,091 and 2,250,193 shares held in treasury in 1995 and 1994, respectively...... 73,784 73,784 Additional paid-in capital............................ 139,754 139,045 Unrealized gains (losses), net of applicable taxes.... 140,338 (140,756) Retained earnings..................................... 1,325,534 1,267,545 Treasury stock........................................ (90,458) (97,015) ---------- ---------- Total shareholders' equity........................... 1,588,952 1,242,603 ---------- ---------- Total liabilities and shareholders' equity........... $9,364,104 $8,165,244 ========== ==========
See accompanying Notes to Consolidated Financial Statements. 31 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- Revenue: Life premium............................. $ 772,257 $ 601,633 $ 555,859 Health premium........................... 750,588 768,714 799,835 Other premium............................ 23,438 18,527 137,216 ---------- ---------- ---------- Total premium.......................... 1,546,283 1,388,874 1,492,910 Net investment income.................... 381,865 347,637 368,494 Financial services revenue............... 152,482 139,276 137,422 Realized investment gains (losses)....... (14,323) (2,551) 8,009 Gain from sale of Vesta shares........... -0- -0- 57,234 Other income............................. 1,175 2,101 2,777 ---------- ---------- ---------- Total revenue.......................... 2,067,482 1,875,337 2,066,846 Benefits and expenses: Life policyholder benefits............... 507,444 389,976 377,017 Health policyholder benefits............. 453,127 488,066 486,855 Other policyholder benefits.............. 48,765 43,235 107,684 ---------- ---------- ---------- Total policyholder benefits............ 1,009,336 921,277 971,556 Amortization of deferred acquisition costs................................... 204,067 178,107 187,073 Commissions and premium taxes............ 144,333 141,158 172,801 Financial services selling expense....... 40,080 39,962 47,055 Other operating expense.................. 145,520 118,353 137,039 Nonoperating expenses.................... -0- -0- 82,000 Amortization of goodwill................. 14,977 6,584 2,917 Interest expense......................... 80,994 75,922 64,447 ---------- ---------- ---------- Total benefits and expenses............ 1,639,307 1,481,363 1,664,888 Income from continuing operations before income taxes and equity in earnings of unconsolidated subsidiaries.............. 428,175 393,974 401,958 Income taxes.............................. (157,539) (135,994) (149,506) Equity in earnings of unconsolidated sub- sidiaries................................ 11,626 7,971 542 Minority interests in consolidated subsid- iaries................................... -0- -0- (10,696) Monthly income preferred securities divi- dend..................................... (10,317) (2,137) -0- ---------- ---------- ---------- Net income from continuing operations.. 271,945 263,814 242,298 Income (loss) from discontinued operations of energy segment (less applicable income taxes of: 1995--$86,050, 1994--$11,677, 1993--($3,580)).......................... (128,710) 5,132 37,278 Cumulative effect of changes in accounting principles............................... -0- -0- 18,403 ---------- ---------- ---------- Net income............................. 143,235 268,946 297,979 Dividends to preferred shareholders....... -0- (804) (3,289) ---------- ---------- ---------- Net income available to common share- holders............................... $ 143,235 $ 268,142 $ 294,690 ========== ========== ========== Net income per share: Continuing operations.................... $ 3.80 $ 3.65 $ 3.25 Discontinued operations of energy seg- ment.................................... (1.80) 0.07 0.51 Cumulative effect of changes in account- ing principles.......................... 0.00 0.00 0.25 ---------- ---------- ---------- Net income per share................... $ 2.00 $ 3.72 $ 4.01 ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements. 32 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
ADDITIONAL UNREALIZED TOTAL PREFERRED COMMON PAID-IN GAINS RETAINED TREASURY SHAREHOLDERS' STOCK STOCK CAPITAL (LOSSES) EARNINGS STOCK EQUITY --------- ------- ---------- ---------- ---------- -------- ------------- Year Ended December 31, 1993 Balance at January 1, 1993................... $1,000 $73,512 $212,021 $ 9,182 $ 867,698 $(47,753) $1,115,660 Net income.............. 297,979 297,979 Common dividends de- clared ($1.09 a share). (80,357) (80,357) Preferred dividends declared and accrued... (3,289) (3,289) Issuance of common stock.................. 272 15,290 312 15,874 Grant of stock options.. 5,121 5,121 Acquisition of treasury stock--common.......... (44,689) (44,689) Net change in unrealized gains (losses)......... 110,956 110,956 ------ ------- -------- -------- ---------- -------- ---------- Balance at December 31, 1993.................. 1,000 73,784 232,432 120,138 1,082,031 (92,130) 1,417,255 Year Ended December 31, 1994 Net income.............. 268,946 268,946 Common dividends de- clared ($1.12 a share). (80,602) (80,602) Preferred dividends declared and accrued... (804) (804) Acquisition of treasury stock--preferred....... (46,982) (46,982) Acquisition of treasury stock--common.......... (59,072) (59,072) Retirement of treasury stock--preferred....... (1,000) (93,736) 94,736 -0- Exercise of stock op- tions.................. 349 (2,026) 6,433 4,756 Net change in unrealized gains (losses)......... (260,894) (260,894) ------ ------- -------- -------- ---------- -------- ---------- Balance at December 31, 1994.................. -0- 73,784 139,045 (140,756) 1,267,545 (97,015) 1,242,603 Year Ended December 31, 1995 Net income.............. 143,235 143,235 Common dividends de- clared ($1.14 a share). (81,643) (81,643) Exercise of stock options................ 709 (3,603) 6,557 3,663 Net change in unrealized gains (losses)......... 281,094 281,094 ------ ------- -------- -------- ---------- -------- ---------- Balance at December 31, 1995.................. $ -0- $73,784 $139,754 $140,338 $1,325,534 $(90,458) $1,588,952 ====== ======= ======== ======== ========== ======== ==========
See accompanying Notes to Consolidated Financial Statements. 33 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF CASH FLOW (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------ 1995 1994 1993 ---------- ----------- ----------- Net income.............................. $ 143,235 $ 268,946 $ 297,979 Adjustments to reconcile net income to cash provided from operations: Increase in future policy benefits.... 178,850 81,062 140,867 Increase in other policy benefits..... 4,877 23,990 7,548 Deferral of policy acquisition costs.. (362,837) (225,409) (214,318) Amortization of deferred policy acqui- sition costs......................... 204,067 178,107 187,073 Change in accrued income taxes........ 42,337 (39,942) (13,034) Depreciation and depletion............ 9,603 11,271 10,852 Realized (gains) losses on sale of in- vestments, subsidiaries, and properties......... 14,323 2,551 (8,009) Change in accounts payable and other liabilities.......................... (6,623) (45,093) 65,244 Change in receivables................. (31,670) (2,237) (14,742) Change in payables and receivables of unconsolidated affiliates............ (2,348) (1,251) 4,502 Other accruals and adjustments........ (2,951) 2,483 (45,554) Discontinued operations of energy seg- ment................................. 128,710 (5,132) (37,278) ---------- ----------- ----------- Cash provided from operations........... 319,573 249,346 381,130 Cash used for investment activities: Investments sold or matured: Fixed maturities available for sale-- sold................................. 1,177,874 582,611 245,689 Fixed maturities available for sale-- matured, called, and repaid.......... 351,246 796,064 485,112 Fixed maturities held to maturity-- sold................................. -0- -0- 58,028 Fixed maturities held to maturity--ma- tured, called, and repaid............ -0- -0- 669,998 Equity securities..................... 16,587 23,179 9,909 Mortgage loans........................ 1,856 1,128 2,654 Real estate........................... 2,566 1,292 7,351 Other long-term investments........... 21,666 16,552 17,179 ---------- ----------- ----------- Total investments sold or matured.... 1,571,795 1,420,826 1,495,920 Acquisition of investments: Fixed maturities--available for sale.. (1,870,445) (1,264,056) (99,453) Fixed maturities--held to maturity.... -0- -0- (1,761,776) Equity securities..................... (394) (23,739) (830) Real estate........................... (17,708) (20,587) (10,129) Net increase in policy loans.......... (11,889) (8,305) (5,093) Other long-term investments........... (67,241) (15,333) (9,048) ---------- ----------- ----------- Total investments acquired........... (1,967,677) (1,332,020) (1,886,329) Net (increase) decrease in short-term investments........................... 35,514 76,457 (120,000) Purchase of American Income............ -0- (551,501) -0- Purchase of Minority Interest.......... -0- -0- (229,063) Proceeds from sale of stock in subsidi- aries................................. -0- -0- 187,220 Loans made to unconsolidated affili- ates.................................. -0- (20,186) (109,954) Loans repaid by unconsolidated affili- ates.................................. 28,000 -0- 91,537 Dispositions of properties............. 1,198 1,332 978 Additions to properties................ (6,510) (5,632) (4,029) Dividends from unconsolidated affili- ates.................................. 684 513 620 ---------- ----------- ----------- Cash used for investment activities..... (336,996) (410,211) (573,100) Cash provided from (used for) financing activities: Issuance of common stock............... 2,953 4,408 5,461 Issuance of monthly income preferred securities............................ -0- 193,046 -0- Additions to debt...................... -0- 143,000 294,110 Cash dividends paid to shareholders.... (80,887) (82,336) (82,932) Cash distributions to minority inter- ests.................................. -0- -0- (1,968) Repayments on debt..................... (60,867) (70,108) (88,102) Loans repaid to unconsolidated affili- ates.................................. -0- -0- (10,000) Acquisition of treasury stock.......... -0- (106,054) (41,897) Net receipts from deposit product oper- ations................................ 158,084 87,701 88,675 ---------- ----------- ----------- Cash provided from financing activities. 19,283 169,657 163,347 ---------- ----------- ----------- Increase (decrease) in cash............ 1,860 8,792 (28,623) Cash at beginning of year.............. 11,298 2,506 31,129 ---------- ----------- ----------- Cash at end of year.................... $ 13,158 $ 11,298 $ 2,506 ========== =========== ===========
See accompanying Notes to Consolidated Financial Statements. 34 TORCHMARK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. Subsidiaries which are not majority- owned are reported on the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments. Torchmark classifies all of its fixed maturity investments, which include bonds and redeemable preferred stocks, as available for sale. Investments classified as available for sale are carried at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in shareholders' equity. Investments in equity securities, which include common and nonredeemable preferred stocks, are reported at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in shareholders' equity. Policy loans are carried at unpaid principal balances. Mortgage loans are carried at amortized cost. Investments in real estate are reported at cost less allowances for depreciation, which are calculated on the straight line method. Short-term investments include investments in certificates of deposit and other interest-bearing time deposits with original maturities within three months. Other long-term investments consist of investments in mutual funds managed by a Torchmark subsidiary. They are carried at fair value. Other long- term investments also include passive energy limited-partnership investments which are valued at partnership equity. If an investment becomes permanently impaired, such impairment is treated as a realized loss and the investment is adjusted to net realizable value. Gains and losses realized on the disposition of investments are recognized as revenues and are determined on a specific identification basis. Realized investment gains and losses and investment income attributable to separate accounts are credited to the separate accounts and have no effect on Torchmark's net income. Investment income attributable to other policyholders is included in Torchmark's net investment income. Net investment income for the years ended December 31, 1995, 1994 and 1993 included $279.6 million, $240.7 million, and $229.5 million, respectively, which was allocable to policyholder reserves or accounts. Realized investment gains and losses are not allocable to policyholders. 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, including the monthly income preferred securities, is valued based on quoted market prices. Cash: Cash consists of balances on hand and on deposit in banks and financial institutions. Overdrafts arising from the overnight investment of funds offset cash balances on hand and on deposit. 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). Variable annuity products are also assessed an investment management fee and a sales charge. Life premium 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) includes policy charges of $72.7 million, $74.2 million, and $76.2 million for the years ended December 31, 1995, 1994 and 1993, respectively. Other premium includes annuity policy charges for the years ended December 31, 1995, 1994, and 1993 of $19.0 million, $13.9 million, and $9.5 million, respectively. Profits are also earned to the extent that investment income exceeds policy requirements. The related benefits and expenses are matched with revenues by means of the provision of future policy benefits and the amortization of deferred acquisition costs in a manner which recognizes profits as they are earned over the same period. Future Policy Benefits: The liability for future policy benefits for universal life-type products according to SFAS 97 is represented by policy account value. The liability for future policy benefits for all other life and health products is provided on the net level premium method based on estimated investment yields, mortality, morbidity, persistency and other assumptions which were appropriate at the time the policies were issued. Assumptions used are based on Torchmark's experience as adjusted to provide for possible adverse deviation. These estimates are periodically reviewed and compared with actual experience. If it is determined future experience will probably differ significantly from that previously assumed, the estimates are revised. Deferred Acquisition Costs and Value of Insurance Purchased: The costs of acquiring new insurance business are deferred. Such costs consist of sales commissions, underwriting expenses, and certain other selling expenses. The costs of acquiring new business through the purchase of other companies and blocks of insurance business are also deferred. 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: Income taxes are accounted for under the asset and liability method in accordance with SFAS 109. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement book values and tax bases of assets and liabilities. 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. 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. Effective January 1, 1993, Torchmark adopted SFAS 109 and has reported the cumulative effect of that change in the method of accounting for income taxes in the 1993 consolidated statement of operations. Property and Equipment: Property and equipment is reported at cost less allowances for depreciation. Depreciation is recorded primarily on the straight line method over the estimated useful lives of these assets which range from two to twenty years for equipment and two to forty years for buildings and improvements. Ordinary maintenance and repairs are charged to income as incurred. Impairments: Torchmark adopted the provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, effective at the issuance of the standard in March, 1995. This standard requires that certain long-lived assets used in Torchmark's business as well as certain intangible assets be reviewed for impairment when circumstances indicate that these assets may not be recoverable, and further provides how such impairment shall be determined and 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) measured. It also requires that long-lived assets and intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. Except for the writedown of the energy investment described in Note 8, the adoption of this statement had no material impact on Torchmark's operations or financial position. Goodwill: The excess cost of businesses acquired over the fair value of their net assets is reported as goodwill and is amortized on a straight-line basis over a period not exceeding 40 years. Torchmark's unamortized goodwill is periodically reviewed to ensure that conditions are present to indicate the recorded amount of goodwill is recoverable from the estimated future profitability of the related business. If events or changes in circumstances indicate that future profits will not be sufficient to support the carrying amount of goodwill, goodwill is written down to the recoverable amount and is amortized over the original remaining period or a reduced period if appropriate. Treasury Stock: Torchmark accounts for purchases of treasury stock on the cost method. Reclassification: Certain amounts in the financial statements presented have been reclassified from amounts previously reported in order to be comparable between years. These reclassifications have no effect on previously reported shareholders' equity or net income during the periods involved. Litigation: Torchmark and its subsidiaries continue to be named as parties to legal proceedings. Because much of Torchmark's litigation is sought in Alabama, a jurisdiction known for excessive punitive damage verdicts bearing little or no relationship to actual damages, the ultimate outcome of any particular action cannot be predicted. It is reasonably possible that changes in the expected outcome of these matters could occur in the near term, but such changes should not be material to Torchmark's reported results or financial condition. Earnings Per Share: Earnings available to holders of common stock are computed after deducting dividends on the Adjustable Rate Cumulative Preferred Stock. Primary earnings per share are then calculated by dividing the earnings available to holders of common stock by the weighted average number of common shares outstanding during the period. The weighted average numbers of common shares outstanding for each period are as follows: 1995--71,593,774, 1994-- 72,095,657, 1993--73,501,654. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 2--STATUTORY ACCOUNTING Insurance subsidiaries of Torchmark are required to file statutory financial statements with state insurance regulatory authorities. Accounting principles used to prepare these statutory financial statements differ from GAAP. Consolidated net income and shareholders' equity on a statutory basis for the insurance subsidiaries were as follows:
NET INCOME SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, AT DECEMBER 31, -------------------------- --------------------- 1995 1994 1993 1995 1994 -------- -------- -------- ---------- ---------- Life....................... $245,552 $228,754 $364,421* $ 618,557 $552,906 Property and casualty...... -0- -0- 6,449 -0- -0-
*Includes equity in earnings of property and casualty subsidiaries The excess, if any, of shareholders' equity of the insurance subsidiaries on a GAAP basis over that determined on a statutory basis is not available for distribution to Torchmark without regulatory approval. A reconciliation of Torchmark's insurance subsidiaries' statutory net income to Torchmark's consolidated GAAP net income is as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1995 1994 1993 ---------- ---------- -------- Statutory net income................... $ 245,552 $228,754 $364,421 Deferral of acquisition costs.......... 328,598 225,409 214,318 Amortization of acquisition costs...... (204,067) (178,107) (187,073) Differences in insurance policy liabil- ities................................. 1,407 30,271 (42,364) Deferred income taxes.................. (40,380) (2,052) (22,281) Inter-affiliate dividends.............. (684) -0- (194,442) Income of noninsurance affiliates...... (207,164) 11,372 136,748 Other.................................. 19,973 (18,229) 28,652 Pre-acquisition adjustments............ -0- (28,472) -0- ---------- ---------- -------- GAAP net income........................ $ 143,235 $268,946 $297,979 ========== ========== ======== A reconciliation of Torchmark's insurance subsidiaries' statutory shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is as follows: YEAR ENDED DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- Statutory shareholders' equity......... $ 618,557 $ 552,906 Differences in insurance policy liabil- ities................................. 371,599 321,084 Deferred acquisition costs............. 1,121,325 1,017,467 Value of insurance purchased........... 277,297 274,124 Deferred income taxes.................. (407,267) (223,385) Debt of parent company................. (980,814) (1,040,972) Asset valuation reserves............... 161,573 96,814 Nonadmitted assets..................... 85,240 43,610 Net assets of noninsurance affiliates . 158,259 230,671 Other.................................. 183,183 (29,716) ---------- ---------- GAAP shareholders' equity.............. $1,588,952 $1,242,603 ========== ==========
38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 3--INVESTMENT OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 --------- --------- -------- Investment income is summarized as follows: Fixed maturities.......................... $ 350,931 $ 329,626 $349,403 Equity securities......................... 818 1,323 2,214 Mortgage loans on real estate............. 4,343 631 1,163 Investment real estate.................... 8,277 7,778 6,804 Policy loans.............................. 12,137 10,003 9,070 Other long-term investments............... 10,410 4,958 7,744 Short-term investments.................... 8,890 7,046 4,824 --------- --------- -------- 395,806 361,365 381,222 Less investment expense................... (13,941) (13,728) (12,728) --------- --------- -------- Net investment income..................... $ 381,865 $ 347,637 $368,494 ========= ========= ======== An analysis of gains (losses) from invest- ments is as follows: Realized investment gains (losses): Fixed maturities......................... $ 1,285 $ (5,049) $ 12,387 Equity securities........................ (15,033) 1,610 702 Other.................................... (575) 888 (5,080) --------- --------- -------- $ (14,323) $ (2,551) $ 8,009 ========= ========= ======== Net change in unrealized investment gains (losses) on equity securities before tax............. $ 10,125 $ (15,064) $ (1,855) Net change in unrealized investment gains on fixed maturities available for sale before tax............................... 468,336 (434,340) 192,007 Net change in unrealized investment gains on other long-term investments or foreign exchange translation adjustments......... 5,514 (4,088) 4,834 Adjustment to deferred acquisition costs.. (51,739) 52,334 (23,264) Applicable tax............................ (151,142) 140,264 (60,766) --------- --------- -------- Net change in unrealized gains (losses) on equity and fixed maturity securities available for sale....................... $ 281,094 $(260,894) $110,956 ========= ========= ========
39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 3--INVESTMENT OPERATIONS (CONTINUED) A summary of fixed maturities available for sale and equity securities by amortized cost and estimated market value at December 31, 1995 and 1994 is as follows:
GROSS GROSS AMOUNT PER AMORTIZED UNREALIZED UNREALIZED MARKET THE BALANCE COST GAINS LOSSES VALUE SHEET ---------- ---------- ---------- ---------- ----------- 1995: - ----- Fixed maturities avail- able for sale: Bonds: U.S. Government direct obligations and agencies............. $ 152,210 $ 4,645 $ (22) $ 156,833 $ 156,833 GNMAs................. 1,050,034 68,053 (1,221) 1,116,866 1,116,866 Mortgage-backed securities, GNMA collateral........... 214,186 8,136 (62) 222,260 222,260 Other mortgage-backed securities........... 230,981 11,527 (2,960) 239,548 239,548 State, municipalities and political subdivisions......... 762,943 21,383 (3,677) 780,649 780,649 Foreign governments... 71,489 5,303 (3) 76,789 76,789 Public utilities...... 258,840 13,276 (308) 271,808 271,808 Industrial and miscellaneous........ 2,235,811 103,443 (2,400) 2,336,854 2,336,854 Redeemable preferred stocks................ 7,729 888 0 8,617 8,617 ---------- -------- --------- ---------- ---------- Total fixed maturities........... 4,984,223 236,654 (10,653) 5,210,224 5,210,224 Equity securities: Common stocks: Banks and insurance companies............ 2,945 5,304 (10) 8,239 8,239 Industrial and all others............... 264 151 (7) 408 408 Non-redeemable preferred stocks...... 1,549 355 0 1,904 1,904 ---------- -------- --------- ---------- ---------- Total equity securities........... 4,758 5,810 (17) 10,551 10,551 ---------- -------- --------- ---------- ---------- Total fixed maturities and equity securities........... $4,988,981 $242,464 $ (10,670) $5,220,775 $5,220,775 ========== ======== ========= ========== ========== 1994: - ----- Fixed maturities avail- able for sale: Bonds: U.S. Government direct obligations and agencies............. $ 105,239 $ 502 $ (3,985) $ 101,756 $ 101,756 GNMAs................. 1,775,852 18,007 (78,796) 1,715,063 1,715,063 Mortgage-backed securities, GNMA collateral........... 242,567 1,661 (7,676) 236,552 236,552 Other mortgage-backed securities........... 161,216 804 (2,441) 159,579 159,579 State, municipalities and political subdivisions......... 835,740 1,693 (69,078) 768,355 768,355 Foreign governments... 104,478 190 (3,702) 100,966 100,966 Public utilities...... 243,776 247 (20,168) 223,855 223,855 Industrial and miscellaneous........ 1,155,968 2,377 (82,255) 1,076,090 1,076,090 Redeemable preferred stocks................ 9,758 290 (5) 10,043 10,043 ---------- -------- --------- ---------- ---------- Total fixed maturities ..................... 4,634,594 25,771 (268,106) 4,392,259 4,392,259 Equity securities: Common stocks: Banks and insurance companies............ 33,272 6,852 (11,542) 28,582 28,582 Industrial and all others............... 1,165 65 (103) 1,127 1,127 Non-redeemable preferred stocks...... 1,548 291 (1) 1,838 1,838 ---------- -------- --------- ---------- ---------- Total equity securities........... 35,985 7,208 (11,646) 31,547 31,547 ---------- -------- --------- ---------- ---------- Total fixed maturities and equity securities........... $4,670,579 $ 32,979 $(279,752) $4,423,806 $4,423,806 ========== ======== ========= ========== ==========
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 3--INVESTMENT OPERATIONS (CONTINUED) A schedule of fixed maturities by contractual maturity at December 31, 1995 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.
AMORTIZED MARKET COST VALUE ---------- ---------- Fixed maturities available for sale: Due in one year or less... $ 42,759 $ 43,167 Due from one to five years.................... 615,081 640,534 Due from five to ten years.................... 1,669,975 1,735,945 Due after ten years....... 1,121,792 1,170,951 ---------- ---------- 3,449,607 3,590,597 Redeemable preferred stocks................... 7,729 8,617 Mortgage- and asset-backed securities............... 1,526,887 1,611,010 ---------- ---------- $4,984,223 $5,210,224 ========== ==========
Proceeds from sales of fixed maturities available for sale were $1.18 billion in 1995, $583 million in 1994, and $246 million in 1993. Gross gains realized on those sales were $13.4 million in 1995, $14.6 million in 1994, and $8.3 million in 1993. Gross losses were $13.5 million in 1995, $20.8 million in 1994, and $176 thousand in 1993. Proceeds from sales of fixed investments held to maturity were $58 million in 1993. Gross gains and losses realized on those sales were $2.6 million and $138 thousand, respectively. 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. Torchmark had $25.7 million and $26.3 million in investment real estate at December 31, 1995 and 1994, respectively, which was nonincome producing during the previous twelve months. These properties included primarily construction in process and land. Fixed maturity investments, mortgage loans, and other long-term investments which were nonincome producing during the previous twelve months were $0.3 million and $0.6 million at December 31, 1995 and 1994, respectively. Derivative investments are immaterial to Torchmark at December 31, 1995. Torchmark's total carrying value of these investments was $23.9 million and $24.5 million at December 31, 1995 and 1994, respectively. Torchmark has no off-balance sheet exposure in connection with these investments. NOTE 4--PROPERTY AND EQUIPMENT A summary of property and equipment used in the business is as follows:
DECEMBER 31, 1995 DECEMBER 31, 1994 --------------------- --------------------- ACCUMULATED ACCUMULATED COST DEPRECIATION COST DEPRECIATION -------- ------------ -------- ------------ Company occupied real estate........ $67,528 $31,040 $65,584 $29,742 Data processing equipment........... 24,507 22,198 24,611 21,760 Transportation equipment............ 12,802 8,005 13,574 7,656 Furniture and office equipment...... 36,979 33,388 35,447 32,690 Other............................... 3,697 3,697 3,697 3,697 -------- ------- -------- ------- $145,513 $98,328 $142,913 $95,545 ======== ======= ======== =======
Depreciation expense on property used in the business was $5.7 million, $7.6 million, and $7.3 million in each of the years 1995, 1994, and 1993, respectively. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 5--DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE PURCHASED An analysis of deferred acquisition costs and the value of insurance purchased is as follows:
1995 1994 1993 ---------------------- ---------------------- --------------------- DEFERRED VALUE OF DEFERRED VALUE OF DEFERRED VALUE OF ACQUISITION INSURANCE ACQUISITION INSURANCE ACQUISITION INSURANCE COSTS PURCHASED COSTS PURCHASED COSTS PURCHASED ----------- --------- ----------- --------- ----------- --------- Balance at beginning of year................... $1,017,467 $274,124 $ 901,565 $131,602 $904,147 $152,421 Additions: Deferred during peri- od: Commissions........... 192,427 -0- 134,032 -0- 142,869 -0- Other expenses........ 136,170 -0- 91,377 -0- 71,449 -0- ---------- -------- ---------- -------- -------- -------- Total deferred....... 328,597 -0- 225,409 -0- 214,318 -0- Value of Insurance purchased -0- 34,240 -0- 158,788 -0- -0- Adjustment attributable to unrealized investment losses(1)............ -0- -0- 52,334 -0- -0- -0- Reassumed business.... -0- -0- -0- -0- -0- -0- ---------- -------- ---------- -------- -------- -------- Total additions...... 328,597 34,240 277,743 158,788 214,318 -0- ---------- -------- ---------- -------- -------- -------- Deductions: Amortized during peri- od................... (172,764) (31,067) (154,697) (16,266) (166,863) (20,210) Adjustment attributable to unrealized investment gains(1)............. (51,739) -0- -0- -0- (23,264) -0- Adjustment attribut- able to realized in- vestment gains(1).... (236) -0- (7,144) -0- -0- -0- Business disposed..... -0- -0- -0- -0- (26,773) (609) ---------- -------- ---------- -------- -------- -------- Total deductions..... (224,739) (31,067) (161,841) (16,266) (216,900) (20,819) ---------- -------- ---------- -------- -------- -------- Balance at end of year.. $1,121,325 $277,297 $1,017,467 $274,124 $901,565 $131,602 ========== ======== ========== ======== ======== ========
- -------- (1)Represents amounts pertaining to investments relating to universal life- type products. The amount of interest accrued on the unamortized balance of value of insurance purchased was $20.0 million, $11.7 million, and $10.8 million, for the years ended December 31, 1995, 1994 and 1993, respectively. The average interest accrual rates used for the years ended December 31, 1995, 1994 and 1993 were 7.26%, 7.72% and 7.57%, respectively. The estimated amount of the unamortized balance at December 31, 1995 to be amortized during each of the next five years is: 1996, $32.3 million; 1997, $27.7 million; 1998, $22.3 million; 1999, $20.5 million; and 2000, $19.2 million. In the event of lapses or early withdrawals in excess of those assumed, deferred acquisition costs and the value of insurance purchased may not be recoverable. NOTE 6--SALE OF VESTA SHARES In November, 1993, Torchmark sold approximately 73% of Vesta Insurance Group, Inc. ("Vesta"), Torchmark's holding company for its property and casualty insurance operations. The sale was made through an initial public offering of common stock for net proceeds of $161 million for a pretax gain of $57.2 million. Torchmark maintains a 27% interest in Vesta and accounts for its investment on the equity method, recording its investment as an unconsolidated subsidiary. In connection with the public offering, Torchmark loaned Vesta $28 million at an interest rate of 6.1% for a term of five years, which was outstanding at both December 31, 1994 and 1993. In July, 1995, this note was repaid in full. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 7--ACQUISITIONS 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 $126 million which will be amortized over approximately 40 years on a straight line basis. All other purchase accounting adjustments were immaterial. On November 3, 1994, Torchmark acquired all of the outstanding common stock of American Income Holding, Inc., whose primary operating subsidiary is American Income Life Insurance Company ("American Income") for $35 per share or a total purchase price of $552 million, including expenses. American Income is a life insurance company which sells individual supplemental life and fixed-benefit accident and health insurance through labor union locals, credit unions, and other employment related associations. The purchase was financed with a combination of internal funds, sales of securities, bank borrowings, and the issuance by a finance subsidiary of 9.18% Cumulative Monthly Income Preferred Securities, Series A ("MIPS"). The transaction resulted in goodwill of approximately $403 million which will be amortized on a straight line basis over 40 years. The acquisition was accounted for as a purchase, and the results of operations since the acquisition date have been consolidated. A summary of the net assets acquired is as follows: Assets acquired: Investments.................................................. $ 434,677 Cash......................................................... 0 Value of insurance purchased................................. 158,788 Goodwill..................................................... 402,791 Other assets................................................. 62,808 --------- Total....................................................... 1,059,064 Liabilities assumed: Policy liabilities........................................... 397,184 Other liabilities............................................ 110,379 --------- Total....................................................... 507,563 --------- Total purchase price.......................................... $ 551,501 =========
The table below presents supplemental pro forma information for 1994 and 1993 as if the American Income acquisition were made at January 1, 1993 at the same purchase price, based on estimates and assumptions considered appropriate:
YEAR ENDED DECEMBER 31, --------------------- 1994 1993 ---------- ---------- Revenues.......................................... $2,086,987 $2,350,691 Net income before extraordinary items............. 278,533 301,209 Net income........................................ 277,014 301,209 Net income per common share before extraordinary items............................................ 3.86 4.10 Net income per common share....................... 3.84 4.10
NOTE 8--DISCONTINUED OPERATIONS OF ENERGY SEGMENT During 1995, Torchmark decided to dispose of Torch Energy Advisors Incorporated ("Torch Energy"), its energy management subsidiary. At year end 1995, Torchmark was negotiating to sell Torch Energy to an unaffiliated party. Also in 1995, Torchmark decided to dispose of its coalbed methane gas development in the Black Warrior basin of Alabama due to disappointments in production. Torchmark intends to sell this development, and implemented a plan to dispose of this investment in the fourth quarter of 1995. In view of the proposed sale of the Black Warrior investment, and in accordance with the provisions of SFAS 121, Torchmark wrote this investment down to its estimated net realizable value, resulting in an after-tax charge of $130 million or $1.82 per share. Since, on a combined basis, the activities of Torch Energy and the Black Warrior investment represent Torchmark's energy management and development activities, the disposition of these operations qualify for disposal of a segment 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 8--DISCONTINUED OPERATIONS OF ENERGY SEGMENT (CONTINUED) accounting treatment. Therefore, Torchmark has modified the presentation in its financial statements for 1995 and all prior periods to set forth separately the net assets and results attributable to the discontinued energy segment as discontinued operations. At December 31, 1995, discontinued operations assets consisted of: Trade and other receivables.................................. $118,266 Energy properties and investments............................ 158,238 Other assets................................................. 74,639 -------- Total assets................................................ 351,143 Trade and other payables..................................... (157,827) Other liabilities............................................ (18,930) -------- Total liabilities........................................... (176,757) -------- Net discontinued assets................................... $174,386 ========
No proceeds for disposal of discontinued assets have been received. NOTE 9--FUTURE POLICY BENEFIT RESERVES A summary of the assumptions used in determining the liability for future policy benefits at December 31, 1995 is as follows: INDIVIDUAL LIFE INSURANCE INTEREST ASSUMPTIONS:
PERCENT OF YEARS OF ISSUE INTEREST RATES LIABILITY -------------- --------------------- ---------- 1917-1995 3.00% 3% 1947-1954 3.25% 1 1927-1989 3.50% 1 1955-1961 3.75% 2 1925-1995 4.00% 13 1962-1969 4.50% graded to 4.00% 3 1970-1980 5.50% graded to 4.00% 5 1970-1995 5.50% 1 1929-1995 6.00% 7 1986-1994 7.00% graded to 6.00% 10 1943-1992 7.50% graded to 6.00% 1 1954-1995 8.00% graded to 6.00% 10 1951-1985 8.50% graded to 6.00% 11 1980-1987 8.50% graded to 7.00% 1 1975-1991 9.50% graded to 8.00% 6 1984-1995 Interest Sensitive 25 --- 100% ===
MORTALITY ASSUMPTIONS: For individual life, the mortality tables used are various statutory mortality tables and modifications of: 1950-54 Select and Ultimate Table 1954-58 Industrial Experience Table 1955-60 Ordinary Experience Table 1965-70 Select and Ultimate Table 1955-60 Inter-Company Table 1970 United States Life Table 1979-81 United States Life Table 1975-80 Select and Ultimate Table X-18 Ultimate Table WITHDRAWAL ASSUMPTIONS: Withdrawal assumptions are based on Torchmark's experience. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 9--FUTURE POLICY BENEFIT RESERVES (CONTINUED) HEALTH INSURANCE INTEREST ASSUMPTIONS:
PERCENT OF YEARS OF ISSUE INTEREST RATES LIABILITY -------------- --------------------- ---------- 1962-1995 3.00% 1% 1969-1980 5.50% graded to 4.00% 5 1982-1995 4.50% 1 1993-1995 6.00% 14 1986-1992 7.00% graded to 6.00% 55 1955-1995 8.00% graded to 6.00% 8 1951-1986 8.50% graded to 6.00% 16 --- 100% ===
MORBIDITY ASSUMPTIONS: For health, the morbidity assumptions are based on either Torchmark's experience or the assumptions used in calculating statutory reserves. TERMINATION ASSUMPTIONS: Termination assumptions are based on Torchmark's experience. OVERALL INTEREST ASSUMPTIONS The overall average interest assumption for determining the liability for future life and health insurance benefits in 1995 was 6.3%. NOTE 10--LIABILITY FOR UNPAID HEALTH CLAIMS Activity in the liability for unpaid health claims is summarized as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 -------- -------- -------- Balance at beginning of year: $166,731 $131,161 $137,350 Addition due to acquisition of American In- come....................................... -0- 9,185 -0- Incurred related to: Current year............................... 502,018 514,814 471,615 Prior year................................. (8,295) (14,985) (25,052) -------- -------- -------- Total incurred.............................. 493,723 499,829 446,563 -------- -------- -------- Paid related to: Current year............................... 342,905 332,273 321,196 Prior year................................. 146,983 141,171 131,556 -------- -------- -------- Total paid.................................. 489,888 473,444 452,752 -------- -------- -------- Balance at end of year...................... $170,566 $166,731 $131,161 ======== ======== ========
The liability for unpaid health claims is included with "Policy claims and other benefits payable" on the Balance Sheet. Health benefits for 1994 include a $30 million charge resulting from a reclassification of nonoperating expense to health benefits, since actual payments will be made in the form of health benefits. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 11--INCOME TAXES Torchmark and most of its subsidiaries file a life-nonlife consolidated federal income tax return. Famlico and Sentinel file their own consolidated federal income tax return and will not be eligible to join Torchmark's consolidated return group until 1996 and 1997, respectively. American Income and Trust Life Insurance Company file their own consolidated federal income tax return and will not be eligible to join Torchmark's consolidated return group until 2000. As discussed in Note 1, Torchmark adopted Statement 109 on January 1, 1993. The cumulative effect of this change in accounting for income taxes was a $26.1 million addition to net income for the year ended December 31, 1993. This amount is included in the cumulative effect of changes in accounting principles line on the consolidated statement of operations. Total income taxes were allocated as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 -------- -------- -------- Income from continuing operations............. $157,539 $135,994 $149,506 Discontinued operations....................... (86,050) (11,677) 3,580 Change in accounting standards for post-re- tirement benefits other than pensions........ -0- -0- (4,124) Monthly income preferred securities dividend.. (5,555) (1,148) -0- Shareholders' equity Unrealized gains (losses).................... 157,200 (147,520) 60,768 Tax basis compensation expense in excess of amounts recognized for financial reporting purposes from the exercise of stock options. (709) (349) (5,637) Other........................................ (6,169) 9,424 (5,163) -------- -------- -------- $216,256 $(15,276) $198,930 ======== ======== ========
Income tax expense attributable to income from continuing operations consists of:
YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 1993 -------- -------- -------- Current income tax expense...................... $110,652 $113,215 $188,004 Increase in January 1, 1993 deferred income tax liability due to increase in corporate income tax rate to 35%................................ -0- -0- 8,763 Deferred income tax expense (benefit)........... 46,887 22,779 (47,261) -------- -------- -------- $157,539 $135,994 $149,506 ======== ======== ========
The effective income tax rate differed from the expected 35% rate in 1995, 1994, and 1993 as shown below:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1995 % 1994 % 1993 % -------- --- -------- --- -------- --- Expected income taxes............. $149,861 35% $137,891 35% $140,685 35% Increase (reduction) in income taxes resulting from: Tax-exempt investment income..... (7,965) (2) (10,625) (2) (4,404) (1) Effect of tax rate change on de- ferred liability................ -0- 0 -0- 0 8,763 2 Other............................ 15,643 4 8,728 2 4,462 1 -------- --- -------- --- -------- --- Income taxes...................... $157,539 37% $135,994 35% $149,506 37% ======== === ======== === ======== ===
46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 11--INCOME TAXES (CONTINUED) The significant components of deferred income tax expense before the cumulative effect of the change in accounting principles and adjustments to shareholders' equity are as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1995 1994 1993 ------- ------- -------- Deferred income tax expense (exclusive of the effect of the component listed below).. $46,887 $22,779 $(47,261) Adjustments to deferred tax assets and lia- bilities for the increase in the corporate income tax rate from 34% to 35%............ -0- -0- 8,763 ------- ------- -------- $46,887 $22,779 $(38,498) ======= ======= ========
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
DECEMBER 31, ------------------ 1995 1994 -------- -------- Deferred tax assets: Fixed maturities, equity securities, and investment real estate, principally due to write-downs of investments to net realizable value for financial reporting purposes.... $ 6,897 $ 13,754 Future policy benefits, unearned and advance premiums, and policy claims............................................ 27,432 20,628 Other liabilities, principally due to the current nonde- ductibility for tax purposes of certain accrued expenses. 18,344 35,715 Unrealized investment losses.............................. -0- 82,792 -------- -------- Total gross deferred tax assets........................... 52,673 152,889 Less valuation allowance.................................. (2,111) (2,111) -------- -------- Net deferred tax assets................................... 50,562 150,778 -------- -------- Deferred tax liabilities: Energy investments and other unconsolidated affiliates, principally due to accelerated depletion deductions for tax purposes........ 11,305 27,424 Deferred acquisition costs................................ 322,900 286,444 Unrealized investment gains............................... 74,408 -0- Other..................................................... 8,321 9,921 -------- -------- Total gross deferred tax liabilities...................... 416,934 323,789 -------- -------- Net deferred tax liability................................. $366,372 $173,011 ======== ========
The valuation allowance for deferred tax assets as of December 31, 1994 and 1995 was $2.1 million. Subsequently recognized tax benefits of $2.1 million relating to the December 31, 1995 valuation allowance will be allocated to goodwill. Torchmark has not recognized a deferred tax liability for the undistributed earnings of its wholly-owned subsidiaries because such earnings are remitted to Torchmark on a tax-free basis. A deferred tax liability will be recognized in the future if the remittance of such earnings becomes taxable to Torchmark. In addition, Torchmark has not recognized a deferred tax liability of approximately $60 million that arose prior to 1984 on temporary differences related to the policyholders' surplus accounts in the life insurance subsidiaries. A current tax expense will be recognized in the future if and when these amounts are distributed. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 12--POSTRETIREMENT BENEFITS Pension Plans: Torchmark has retirement benefit plans and savings plans which cover substantially all employees. There is also a nonqualified excess benefit plan which covers certain employees. The total cost of these retirement plans charged to operations was as follows:
DEFINED EXCESS DEFINED BENEFIT BENEFIT YEAR ENDED CONTRIBUTION PENSION PENSION DECEMBER 31, PLANS PLANS PLAN ------------ ------------ ------- ------- 1995.................... $3,208 $6,820 $ 524 1994.................... $3,201 $6,922 $1,800 1993.................... $ 740 $6,733 $1,450
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 $9.5 million and $11.8 million at December 31, 1995 and 1994, 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. The excess benefit pension plan provides the benefits that an employee would have otherwise received from a defined benefit pension plan in the absence of the Internal Revenue Code's limitation on benefits payable under a qualified plan. Although this plan is unfunded, pension cost is determined in a similar manner as for the funded plans. Liability for the excess benefit plan was $5.5 million and $3.2 million as of December 31, 1995 and 1994, respectively. Net periodic pension cost for the defined benefit plans by expense component was as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 1993 -------- -------- ------- Service cost--benefits earned during the period.................................... $ 7,190 $ 8,323 $ 8,298 Interest cost on projected benefit obliga- tion...................................... 8,867 8,242 7,711 Actual return on assets.................... (17,927) (2,302) (8,697) Net amortization and deferral.............. 9,214 (5,541) 871 -------- -------- ------- Net periodic pension cost.................. $ 7,344 $ 8,722 $ 8,183 ======== ======== =======
A reconciliation of the funded status of the defined benefit plans with Torchmark's pension liability was as follows:
AT DECEMBER 31, ------------------ 1995 1994 -------- -------- Fair market value of assets available for benefits. $113,193 $ 94,207 Projected benefit obligation: Vested............................................ 89,170 72,119 Nonvested......................................... 5,441 4,141 -------- -------- Accumulated benefit obligation................... 94,611 76,260 Effect of projected future salary increases 27,003 27,195 -------- -------- Total projected benefit obligation............... 121,614 103,455 -------- -------- Funded status...................................... (8,421) (9,248) Unamortized prior service costs.................... 147 (1,531) Unamortized transition asset....................... (1,220) (2,183) Unrecognized (gain) or loss........................ (5,462) (2,061) -------- -------- Accrued pension costs included in liabilities.... $(14,956) $(15,023) ======== ========
The weighted average assumed discount rates used in determining the actuarial benefit obligations were 7.25% in 1995 and 8.0% in 1994. The rate of assumed compensation increase was 4.25% in 1995 and 5.0% in 1994 and the expected long-term rate of return on plan assets was 8.0% in 1995 and 1994. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 12--POSTRETIREMENT BENEFITS (CONTINUED) Torchmark accrues expense for the defined contribution plans based on a percentage of the employees' contributions. The plans are funded by the employee contributions and a Torchmark contribution equal to the amount of accrued expense. Postretirement 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. For retired employees over age sixty-five, Torchmark does not provide postretirement benefits other than pensions. Torchmark does provide a portion of the cost for health insurance benefits for employees who retired before February 1, 1993 and before age sixty-five, covering them until they reached age sixty-five. Eligibility for this benefit was generally achieved at age fifty-five with at least fifteen years of service. This subsidy is minimal to employees who did not retire before February 1, 1993. This plan is unfunded. Torchmark adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective January 1, 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. Torchmark elected to recognize the effect of the adoption of this standard immediately as a change in accounting principle as permitted by SFAS 106. The cumulative effect of this change in accounting resulted in a $7.7 million after-tax charge to net income in 1993. 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 were not restated to apply the provisions of this statement. Net periodic postretirement benefit cost included the following components:
YEAR ENDED DECEMBER 31, --------------------- 1995 1994 1993 ----- ------ ------ Service cost............................................ $ 284 $ 444 $ 411 Interest cost on accumulated postretirement benefit ob- ligation............................................... 678 831 954 Actual return on plan assets............................ -0- -0- -0- Net amortization and deferral........................... (559) (237) (14) ----- ------ ------ Net periodic postretirement benefit cost................ $ 403 $1,038 $1,351 ===== ====== ======
The following table sets forth the plans' combined benefit obligation with the amount shown in Torchmark's balance sheet:
AT DECEMBER 31, --------------- 1995 1994 ------- ------- Accumulated postretirement benefit obligation: Retirees....................................................... $ 4,880 $ 5,811 Fully eligible active plan participants........................ 1,231 1,386 Other active plan participants................................. 3,145 3,546 ------- ------- Total accumulated postretirement benefit obligation........... 9,256 10,743 Plan assets at fair value....................................... -0- -0- ------- ------- Accumulated postretirement benefit obligation in excess of plan assets......................................................... 9,256 10,743 Unrecognized net gain from past experience different from that assumed and from changes in assumptions........................ 1,423 734 Prior service cost not yet recognized in net periodic post re- tirement benefit cost.......................................... 262 280 ------- ------- Accrued postretirement benefit cost included in liabilities..... $10,941 $11,757 ======= =======
49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 12--POSTRETIREMENT BENEFITS (CONTINUED) For measurement purposes, a 11% to 14% annual rate of increase in a per capita cost of covered health care benefits was assumed for 1995; the rate was assumed to decrease gradually to 4.5% by the year 2008 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the health care cost trend by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995 by $855 million and would increase the net periodic postretirement cost for the year ended December 31, 1995 by approximately $146 thousand. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% to 8.0% in 1995 and 8.0% in 1994. NOTE 13--NOTES PAYABLE An analysis of notes payable is as follows:
DECEMBER 31, ----------------------------------------- 1995 1994 -------------------- -------------------- SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM DEBT DEBT DEBT DEBT ---------- --------- ---------- --------- Sinking Fund Debentures........... $198,033 $197,941 Senior Notes, due 1998............ 199,343 199,103 Senior Debentures, due 2009....... 99,881 99,703 Notes, due 2023................... 195,877 195,836 Notes, due 2013................... 98,432 98,390 Borrowings under Torchmark line of credit........................... $250,000 Commercial paper.................. $189,248 Other notes and mortgages payable at various interest rates; collateralized by buildings ..... 124 422 116 545 -------- -------- -------- -------- $189,372 $791,988 $250,116 $791,518 ======== ======== ======== ========
The amount of debt that becomes due during each of the next five years is: 1996, $189 million; 1997, $132 thousand; 1998, $200 million; 1999, $150 thousand; and 2000, $-0-. Additionally, during the thirty-day period beginning June 15, 1996, senior debenture debt holders have the option to require Torchmark to repay $100 million. The 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 Notes, due May 1, 1998, are not redeemable prior to maturity. They were issued in the principal amount of $200 million. Interest is payable on May 1 and November 1 of each year at a rate of 9 5/8%. These notes have equal priority with other Torchmark unsecured indebtedness. The Senior Debentures, principal amount of $100 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, 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. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 13--NOTES PAYABLE (CONTINUED) The Notes, due May 15, 2023, were issued in May, 1993 in the principal amount of $200 million. Proceeds of the issue, net of issue costs, were $196 million. Interest is payable on May 15 and November 15 of each year at a rate of 7 7/8%. These notes are not redeemable prior to maturity and have equal priority with other Torchmark unsecured indebtedness. The Notes, due August 1, 2013, were issued in July, 1993 in the principal amount of $100 million for net proceeds of $98 million. Interest is payable on February 1 and August 1 of each year at a rate of 7 3/8%. These notes are not redeemable prior to maturity and have equal priority with other Torchmark unsecured indebtedness. Torchmark has entered into revolving credit agreements with a group of lenders under which it may borrow on an unsecured basis up to $400 million. One-half of the commitment matures December 3, 1996 and the balance matures December 6, 1999. Borrowings, pro rata under each facility, are at interest rates selected by Torchmark based on either the prime rate or the Eurodollar rate at the time of borrowings. At December 31, 1994, borrowings totalled $250 million and were made at an average rate of 6.40%. There were no borrowings outstanding at December 31, 1995. The revolving credit agreements are designed to back up a commercial paper program which began in March, 1995. The short- term borrowings under the revolving credit agreements and in the commercial paper market averaged $221 million during 1995, and were made at an average yield of 5.97%. At December 31, 1995, commercial paper was outstanding in the face amount of $190.4 million. Torchmark is subject to certain covenants for the revolving credit agreements regarding capitalization and earnings, for which it was in compliance at December 31, 1995, and pays a facility fee based on size of the lines. Interest in the amount of $1.6 million, $1.8 million and $10.5 million was capitalized during 1995, 1994, 1993, respectively. NOTE 14--MONTHLY INCOME PREFERRED SECURITIES In October, 1994, Torchmark, through its wholly-owned finance subsidiary, Torchmark Capital L.L.C., completed a public offering of eight million shares of 9.18% MIPS at a face amount of $200 million. The securities are subject to a mandatory redemption in full at September 30, 2024, although Torchmark may elect to extend the MIPS for up to an additional 20 years if certain conditions are met. They are redeemable at Torchmark's option after September 30, 1999. Torchmark subsequently entered into a ten-year swap agreement with an unaffiliated party whereby Torchmark agreed to pay a variable rate on the $200 million face amount in exchange for payment of the fixed dividend. In a related transaction, Torchmark purchased a five-year cap on the swap agreement that insures that the variable rate cannot exceed 10.39% through September 30, 1999. The interest rate was 5.86% at December 31, 1995 and 7.02% at December 31, 1994. Torchmark pays a yearly fee of $860 thousand for the cap agreement. The market value of the swap agreement was a benefit of $26.5 million at December 31, 1995 and an obligation of $4.1 million at December 31, 1994. The market value of the cap agreement, net of the present value of future annual payments, was an obligation of $2.1 million at December 31, 1995 and a benefit of $517 thousand at December 31, 1994. Except as otherwise described in "Note 3--Investments" on page 42 of this report, Torchmark is a party to no other derivative instruments as defined by SFAS 119. Net proceeds from the MIPS offering of approximately $193 million were loaned from Torchmark Capital to Torchmark to provide part of the financing of the acquisition of American Income Holding, Inc. The carrying value of the MIPS at December 31, 1995 and 1994 was $193 million. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 15--SHAREHOLDERS' EQUITY Share Data: A summary of preferred and common share activity is as follows:
PREFERRED STOCK COMMON STOCK --------------------- --------------------- TREASURY TREASURY ISSUED STOCK ISSUED STOCK ---------- --------- ---------- ---------- 1993: Balance at January 1, 1993....... 1,000,000 (530,180) 73,512,034 -0- Issuance of common stock due to exercise of stock options...... 272,194 6,341 Other treasury stock acquired... (895,475) ---------- --------- ---------- ---------- Balance at December 31, 1993.... 1,000,000 (530,180) 73,784,228 (889,134) 1994: Issuance of common stock due to exercise of stock options...... 130,641 Other treasury stock acquired... (469,820) (1,491,700) Retirement of preferred treasury stock.......................... (1,000,000) 1,000,000 ---------- --------- ---------- ---------- Balance at December 31, 1994.... -0- -0- 73,784,228 (2,250,193) 1995: Issuance of common stock due to exercise of stock options...... 133,102 ---------- --------- ---------- ---------- Balance at December 31, 1995.... -0- -0- 73,784,228 (2,117,091) ========== ========= ========== ==========
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994 --------------------- --------------------- PREFERRED COMMON PREFERRED COMMON STOCK STOCK STOCK STOCK --------- ----------- --------- ----------- Par value per share................ $1.00 $1.00 $1.00 $1.00 Authorized shares.................. 5,000,000 160,000,000 5,000,000 160,000,000
Adjustable Rate Preferred Stock: One million shares of adjustable rate preferred stock were issued in 1983 at an issue price of $100 per share. Prior to 1993, Torchmark acquired 530 thousand shares which were reported as treasury stock and had a total cost basis of $47.8 million and a total redemption value of $52.9 million. During 1994, Torchmark acquired the remaining 470 thousand shares at a cost of $100 per share plus accrued dividends. The acquisition was completed at an aggregate price of $47 million. The preferred treasury stock was immediately retired. Acquisition of Common Shares: Torchmark shares are acquired from time to time for the following reasons: (1) open market purchases under the Torchmark stock repurchase program, in which share purchases in the amount of $106 million for 1.5 million shares and $42 million for 850 thousand shares were made in 1994 and 1993, respectively, (2) for future employee stock option exercises, and (3) for payment of the option price and taxes upon exercise of stock options by employees. Stock Options: Under the provisions of the 1984 Torchmark Corporation Stock Option Plan ("1984 Option Plan") and the Torchmark Corporation 1987 Stock Incentive Plan ("1987 Option Plan"), certain employees and directors have been granted options to buy shares of Torchmark stock at the market value of the stock on the date of grant. In conjunction with the buyback of the minority interest of United Management, the United Investors Management Company 1986 Employee Stock Incentive Plan was amended to allow the granting of Torchmark stock options. The options are exercisable during the period commencing from three months to three years after grant until expiring ten years or ten years and two days after grant. In October, 1993, Torchmark implemented a policy to issue shares for the exercise of stock options out of treasury stock. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 15--SHAREHOLDERS' EQUITY (CONTINUED) A summary of option activity in terms of shares is as follows:
AVAILABLE FOR GRANT OUTSTANDING ------------------------------ ------------------------------- 1995 1994 1993 1995 1994 1993 --------- --------- -------- --------- --------- --------- Balance at January 1.... 1,998,134 289,091 533,175 3,820,707 3,660,391 3,051,883 Additional shares available due to United Management merger...... 642,959 Additional shares available due to amendment of plan ..... 2,000,000 Granted................. (760,200) (316,600) (910,789) 760,200 316,600 910,789 Exercised............... (133,102) (130,641) (278,535) Expired................. 12,855 25,643 23,746 (12,855) (25,643) (23,746) --------- --------- -------- --------- --------- --------- Balance at December 31.. 1,250,789 1,998,134 289,091 4,434,950 3,820,707 3,660,391 ========= ========= ======== ========= ========= =========
Option information by exercise price is listed in the following table. Those options shown as granted on October 1, 1993 represent United Management options which were converted to Torchmark options in conjunction with the merger.
OUTSTANDING AT DECEMBER 31, EXERCISED DURING EXERCISE ----------------------------- ----------------------- PRICE GRANT DATE 1995 1994 1993 1995 1994 1993 -------- -------------------- --------- --------- --------- ------- ------- ------- $11.300 October 1, 1993(3) 16,893 18,393 18,393 1,500 -0- -0- 12.625 October 4, 1985 -0- 33,004 34,004 33,004 1,000 2,141 13.110 October 1, 1993(3) 13,828 13,828 13,828 -0- -0- -0- 14.000 March 26, 1985 -0- 11,246 15,746 11,246 4,500 5,250 14.125 January 30, 1986 12,375 16,875 16,875 4,500 -0- 1,000 15.000 December 3, 1987 -0- 854 854 854 -0- 400 16.000 December 16, 1987 7,500 7,500 7,500 -0- -0- -0- 19.875 February 25, 1988 5,217 5,217 5,217 -0- -0- -0- 20.375 January 3, 1989 30,003 30,003 30,003 -0- -0- -0- 22.600 October 1, 1993(3) 35,981 35,981 35,981 -0- -0- -0- 24.410 October 1, 1993(3) 5,532 5,532 5,532 -0- -0- -0- 25.625 October 11, 1990(1) 779,396 840,055 852,955 60,659 12,900 7,313 28.480 October 1, 1993(3) 85,158 85,158 85,158 -0- -0- -0- 31.125 January 15, 1991 532,926 532,926 538,856 -0- 5,930 97,118 32.500 January 2, 1991 63,000 63,000 63,000 -0- -0- -0- 33.125 January 25, 1990(1) 63,000 63,000 63,000 -0- -0- -0- 34.000 October 1, 1993(4) 58,567 60,682 207 -0- -0- 34.000 December 14, 1993(4) 295,006 301,881 3,875 -0- -0- 34.000 December 7, 1992(4) 138,403 142,433 3,530 -0- -0- 34.000 December 16, 1994 292,600 292,600 -0- -0- 34.350 October 1, 1993(3) 35,611 35,611 35,611 13,727 -0- -0- 34.375 December 12, 1991 658,278 673,666 679,977 -0- 6,311 27,869 34.875 January 3, 1995 21,000 -0- 36.000 February 7, 1991 -0- -0- 100,000 -0- 100,000 137,444 36.610 October 1, 1993(3) 27,997 27,997 65,774 -0- -0- -0- 38.375 January 2, 1992 63,000 63,000 63,000 -0- -0- -0- 43.375 December 20, 1995 739,200 -0- 43.500 December 14, 1993(2) 251,004 253,900 567,781 -0- -0- -0- 45.000 January 3, 1994 24,000 24,000 -0- -0- 46.560 October 1, 1993(3) 33,651 33,651 57,130 -0- -0- -0- 52.000 December 7, 1992 121,824 124,714 280,216 -0- -0- -0- 57.750 January 3, 1993 24,000 24,000 24,000 -0- -0- -0- --------- --------- --------- ------- ------- ------- --- 4,434,950 3,820,707 3,660,391 133,102 130,641 278,535 ========= ========= ========= ======= ======= ======= === Exercisable at December 31, 3,243,647 2,936,867 2,668,264 ========= ========= =========
(1) Options to purchase 1,098,090 shares previously granted December 31, 1989 at $37.13 per share, 521,100 shares previously granted January 25, 1990 at $33.13 per share, and 389,870 shares originally granted August 1, 1990 at $33.88 per share were allowed by recipients to expire voluntarily and were reissued October 11, 1990 along with 675,200 additional shares at $25.63 per share. (2) Includes 173,650 shares granted under the United Investors Management Company 1986 Employee Stock Incentive Plan. (3) Issued from the United Investors Management Company 1986 Employee Stock incentive plan. (4) Options to purchase 37,777 shares previously granted at $36.61, options to purchase 301,881 shares previously granted at $43.50, options to purchase 22,905 shares previously granted at $46.56, and options to purchase 142,433 shares previously granted at $52.00 were repriced to $34.00 per share on December 16, 1994. The vesting schedules of these options did not change. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 15--SHAREHOLDERS' EQUITY (CONTINUED) Grant of Restricted Stock: A grant of 60,000 Torchmark shares was made on May 1, 1991 to a Torchmark senior officer. The shares are restricted as to resale, vesting 6,000 shares per year for 10 years on the anniversary date of the grant. The market value of Torchmark stock was $34.92 per share on the grant date. Restrictions: Restrictions exist on the flow of funds to Torchmark from its insurance subsidiaries. Statutory regulations require life insurance subsidiaries to maintain certain minimum amounts of capital and surplus. These restrictions generally limit the payment of dividends by insurance subsidiaries to statutory net gain on an annual noncumulative basis in the absence of special approval. Additionally, insurance companies are not permitted to distribute the excess of shareholders' equity as determined on a GAAP basis over that determined on a statutory basis. In 1996, $237 million will be available to Torchmark for dividends from insurance subsidiaries in compliance with statutory regulations without prior regulatory approval. NOTE 16--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 $2.5 million per life. Life insurance ceded represents less than 1% of total life insurance in force at December 31, 1995. Insurance ceded on life and accident and health products represents 1.0% of premium income for 1995. 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. Insurance affiliates also assume insurance risks of other companies. Life reinsurance assumed represents less than 0.1% of life insurance in force at December 31, 1995 and reinsurance assumed on life and accident and health products represents 0.3% of premium income for 1995. 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 $6.3 million, $7.9 million, and $7.6 million for 1995, 1994, and 1993, respectively. Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 1995 are as follows: 1996, $4.3 million; 1997, $2.4 million; 1998, $1.4 million; 1999, $851 thousand; 2000, $440 thousand; and in the aggregate, $9.4 million. Restrictions on cash: A portion of the cash held in financial service subsidiaries that function as broker-dealers has been segregated for the benefit of customers in compliance with security regulations. This amount was $11.8 million at December 31, 1995 and $13.1 million at December 31, 1994. Concentrations of Credit Risk: Torchmark maintains a highly-diversified investment portfolio with limited concentration in any given region, industry, or economic characteristic. At December 31, 1995, the investment portfolio consisted of securities of the U.S. government or U.S. government-backed securities (26%); non government-guaranteed mortgage-backed securities (4%); short-term investments, which generally mature within one month (1%); securities of state and municipal governments (14%); securities of foreign governments (1%); and investment-grade corporate bonds (42%). The remainder of the portfolio was in oil and gas investments (1%) and real estate (3%), which are not considered financial instruments according to GAAP; policy loans (3%), which are secured by the underlying insurance policy values; and equity securities, mortgages, noninvestment grade corporate securities and other long-term investments (5%). Investments in municipal governments and corporations are made throughout the U.S. with no concentration in any given state. Substantially all investments in foreign government securities are in Canadian government obligations. Corporate equity and debt investments are made in a wide range of industries. At December 31, 1995, 1% or more of the portfolio was invested in the following industries or security types: Financial services (15%); regulated utilities (5%); chemicals (5%); transportation (4%); miscellaneous manufacturing (3%); foods (3%); petroleum (2%); retailing (2%); electronics (1%); media (1%); and paper and allied products (1%). Otherwise, no individual industry represented 1% or more of Torchmark's investments. At year-end 1995, 3% of the carrying value of fixed maturities was rated below investment grade (Ba or lower as rated by Moody's service or the equivalent 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED) NAIC designation). Par value of these investments was $162.1 million, amortized cost was $160.3 million, and market value was $164.6 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 are in government, government-secured, or corporate securities, the requirement for collateral is rare. Torchmark's mortgages are secured by collateral, although new mortgages are no longer being acquired. Litigation: Torchmark and its subsidiaries continue to be named as parties to pending or threatened legal proceedings. These lawsuits involve tax matters, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of Torchmark's subsidiaries, employment discrimination, and miscellaneous other causes of action. Many of these lawsuits involve claims for punitive damages in state courts of Alabama, a jurisdiction particularly recognized for its large punitive damage verdicts. A number of such actions involving Liberty National Life Insurance Company ("Liberty") also name Torchmark as a defendant. As a practical matter, a jury's discretion regarding the amount of a punitive damage award is not limited by any clear, objective criteria under Alabama law. Accordingly, the likelihood or extent of a punitive damage award in any given case is virtually impossible to predict. Furthermore, the Alabama Supreme Court has recently ruled that one half of all punitive damage awards, after the deduction of attorneys fees, should go to the State of Alabama. This same ruling also provides for a bifurcated trial, with the first stage devoted to this issue of liability and the second stage relating to damages. The hearing on damages will enable the jury to hear evidence of the financial worth of the defendant. This potentially damaging evidence has not been previously admissible in Alabama courts. The Alabama Supreme Court has been asked to reconsider this ruling and this petition is still pending. As of December 31, 1995, Liberty was a party to approximately 185 active lawsuits (including 31 employment related cases and excluding interpleaders and stayed cases), more than 160 of which were Alabama proceedings in which punitive damages were sought. Liberty faces trial settings in these cases on an on- going basis. Torchmark has previously reported the entry of an Order and Final Judgment by the Circuit Court of Barbour County, Alabama in Robertson v. Liberty National Life Insurance Company (Case No. CV-92-021) approving a cancer policy class action settlement involving legal and equitable relief valued at a total of $55 million. The cost of this settlement increases over time as Liberty is prohibited from increasing the premium rates on this block of business for one year from final binding affirmance by the Alabama Supreme Court. This aspect of the settlement is expected to cost Torchmark an additional $2.5 million before tax in each quarter going forward until one year after final binding affirmance by the Alabama Supreme Court. In July 1994, certain intervenors in the Robertson litigation filed a notice of appeal of the Order and Final Judgment approving class certification and the settlement with the Supreme Court of Alabama. Oral argument on the appeal was held July 17, 1995 and on December 22, 1995, the Supreme Court unanimously affirmed the Robertson class action settlement. On February 16, 1996, the Alabama Supreme Court issued a notice overruling the petition for a rehearing in Robertson filed by certain intervenors. On March 17, 1994, litigation was filed against Liberty, certain officers and present and former directors of Torchmark and KPMG Peat Marwick LLP, independent public accountants of Torchmark and its subsidiaries, in the Circuit Court of Marion County, Alabama (Miles v. Liberty National Life Insurance Company, Civil Action No. CV-94-67). The lawsuit asserted that it was brought on behalf of a class comprised of the shareholders of Torchmark. The complaint alleged a failure to timely and adequately report allegedly material contingent liabilities arising out of insurance policy litigation involving Liberty. Compensatory and punitive damages in an unspecified amount were sought. In April 1994, the complaint in Miles was amended to add an additional shareholder plaintiff and to name Torchmark as a defendant. The Miles case was dismissed upon the joint motion of all parties in September 1995. A second similar action (Oakley v. Torchmark Corporation, Case No. CV-94-47), filed on August 16, 1994 in the Circuit Court for Bibb County, Alabama, was dismissed by the plaintiff without 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED) prejudice. A third such action was filed on December 30, 1994, in the United States District Court for the Southern District of Alabama. This action, which seeks punitive damages, was subsequently transferred to the United States District Court for the Northern District of Alabama (Dismukes v. Torchmark Corporation, Case No. CV-94-1006-P-M). A class certification hearing in Dismukes was held on January 29, 1996, and the parties are awaiting the District Court's ruling on that motion and on defendant's motion for partial summary judgment. As previously reported, Torchmark, its insurance subsidiaries Globe Life And Accident Insurance Company ("Globe") and United American Insurance Company ("United American"), and certain Torchmark officers were named as defendants in litigation filed April 22, 1994, as a purported class action in the District Court of Oklahoma County, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-65). The suit claims damages on behalf of individual health policyholders who are alleged to have been induced to terminate such policies and to purchase Medicare Supplement and/or other insurance coverages. The complaint seeks actual and punitive damages for each class member in excess of $10,000. Subsequent to the filing of this case, one of the plaintiffs was dismissed and the named plaintiff died. The complaint was amended to include new plaintiffs purporting to represent the class and restyled Tabor v. Torchmark Corporation. No class has been certified. A motion to dismiss filed by the defendants was denied and limited discovery as permitted by the Oklahoma Supreme Court is proceeding. The defendants intend to vigorously defend the action. Prior filings have reported that in July 1994, a purported class action alleging fraudulent and deceitful practices in premium billing and lapses of coverage on a payroll deduction insurance plan was filed in the Superior Court for Gordon County, Georgia against Liberty (Bryant v. Liberty National Life Insurance Company, Civil Action No. 28979). The complaint alleges actual damages in excess of $10 million and punitive damages of not less than $50 million as well as premium reimbursements. No class has been certified and no material proceedings have occurred in this case. Liberty removed this case to federal court, but the case has subsequently been remanded to the state court. Liberty intends to vigorously defend this action. Litigation was filed on April 26, 1995, in the Circuit Court of Houston County, Alabama against Liberty involving the sale of health insurance coverage and Omnibus Budget Reconciliation Act of 1990 (Stewart v. Liberty National Life Insurance Company, Case No. CV-95-345L; Tolar v. Liberty National Life Insurance Company, Case No. CV-95-346J; Ingram v. Liberty National Life Insurance Company, Case No. CV-95-348L; Burkett v. Liberty National Life Insurance Company, Case No. CV-95-347H). Liberty intends to vigorously defend these cases. On August 3, 1995, a $5.404 million verdict was rendered against Liberty in Allen v. Liberty National Life Insurance Company (Case No. CV-94-3634), by a jury in the Circuit Court of Jefferson County, Alabama. For a two month period beginning in September 1993, in reliance on federal law concerning the amount health care providers could collect from Medicare eligible individuals, Liberty limited the payment of benefits to such individuals to the amounts collectible under federal law. In November 1993, Liberty discontinued this practice and recalculated and repaid all claims as it had prior to September 1993. Mr. Allen nevertheless later brought suit against Liberty alleging the reduction in claims payments pursuant to his cancer policy was improper. He had been repaid in full with interest prior to filing suit, as had all other affected claimants. After reconsideration, the trial judge remitted the verdict to $2.7 million. An appeal was filed with the Alabama Supreme Court in January 1996. A purported class action was filed on August 8, 1995, against Liberty in the Circuit Court of Jefferson County, Alabama on behalf of Liberty cancer policyholders eligible for Medicare who submitted claims during the approximately two month period in 1993 described in the foregoing paragraph (Adkins v. Liberty National Life Insurance Company, Case No. CV-95-05634). The claims made in Adkins are identical to the individual claims in the Allen case above. More than 400 (and perhaps as many as 1,000) individuals appear to fit the proposed class definition in Adkins. Punitive damages and damages for mental anguish appear to be sought on behalf of the class. A class certification hearing is set in May 1996. The Company intends to oppose class certification and to vigorously defend the case. On August 25, 1995, a purported class action was filed against Torchmark, Globe, United American and certain officers of these companies in the United States District Court for the Western District of 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED) Missouri on behalf of all former agents of Globe (Smith v. Torchmark Corporation, Case No.: 95-3304-CV-S-4). This action alleges that the defendants breached independent agent contracts with the plaintiffs by treating them as captive agents and engaged in a pattern of racketeering activity wrongfully denying income and renewal commissions to the agents, restricting insurance sales, mandating the purchase of worthless leads, terminating agents without cause and inducing the execution of independent contracts based on misrepresentations of fact. Monetary damages in an unspecified amount are sought. A plaintiff class was certified by the District Court on February 26, 1996, although the certification does not go to the merit of the allegations in the complaint. The companies intend to vigorously defend this action. Much attention has been generated nationally with regard to so-called "vanishing premium" cases, where allegations that an interest sensitive life policy was sold with a projection that the policy would become paid-up or self-sustaining after a period of years. Plaintiffs in these cases typically assert that the projection amounted to a promise or misrepresentation. Liberty currently is a party to several individual lawsuits in the state courts of Alabama and was a party to one purported class action filed November 16, 1995 in the Circuit Court of Chambers County, Alabama (Mitcham v. Liberty National Life Insurance Company, Case No. CV-95-290), involving such claims. The Mitcham case was settled on a non-class basis on December 27, 1995. Another interest sensitive case (Carlton v. Liberty National Life Insurance Company, Case No. CV-96-22) filed on February 1, 1996, in the Circuit Court for Chambers County, Alabama, was amended on February 9, 1996, to allege a purported class action. Compensatory and punitive damages are sought. Liberty believes that appropriate projections were made in connection with the sale of the policies involved and intends to vigorously defend these cases. In 1978, the United States District Court for the Northern District of Alabama entered a final judgment in Battle v. Liberty National Life Insurance Company, et al. (CV-70-H-752-S), class action litigation involving Liberty, a class composed of all owners of funeral homes in Alabama and a class composed of all insureds (Alabama residents only) under burial or vault policies issued, assumed or reinsured by Liberty. The final judgment fixed the rights and obligations of Liberty and the funeral directors authorized to handle Liberty burial and vault policies as well as reforming the benefits available to the policyholders under the policies. It remains in effect to date. A motion filed in February 1990 to challenge the final judgment under Federal Rule of Civil Procedure 60(b) was rejected by both the District Court in 1991 and the Eleventh Circuit Court of Appeals in 1992 and a Writ of Certiorari was denied by the U.S. Supreme Court in 1993. In November 1993, an attorney (purporting to represent the funeral director class) filed a petition in the District Court seeking "alternative relief" under the final judgment. This petition was voluntarily withdrawn on November 8, 1995, by petitioners. On February 23, 1996, Liberty filed a petition with the District Court requesting that it order certain contract funeral directors to comply with their obligations under the Final Judgment in Battle and their funeral service contracts. Purported class action litigation was filed on January 2, 1996 against Torchmark, Torch Energy and certain Torch Energy subsidiaries and affiliated limited partnerships in the Circuit Court of Pickens County, Alabama (Pearson v. Torchmark Corporation, Case No. CV-95-140). Plaintiff alleges improper payment of royalties and overriding royalties on coalbed methane gas produced and sold from wells in Robinson's Bend Coal Degasification Field, seeks certification of a class and claims unspecified compensatory and punitive damages on behalf of such class. A motion to dismiss and in the alternative to change venue, has been filed by Torchmark, and is awaiting a hearing. Torchmark intends to vigorously defend this action. Based upon information presently available, and in light of legal and other defenses available to Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not presently considered by management to be material. It should be noted, however, that the frequency of large punitive damage awards bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has substantial business, particularly in Alabama, continues to increase universally, creating the potential for unpredictable material adverse judgments in any given punitive damage suit. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 17--INDUSTRY SEGMENTS Torchmark operates primarily in two industry segments, insurance and asset management. Operations in the insurance industry involve the sale and administration of life insurance, health insurance and annuities. It also includes investment operations related to insurance segment investments. Operations in the asset management industry include the management, distribution, and servicing of various mutual funds. Torchmark markets its products in all fifty states. Certain insurance company investments are managed by the asset management segment. 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. Total revenues by segment include revenues from other segments in addition to unaffiliated parties. Intersegment revenues include commission revenue and investment income which eliminate in consolidation. Pre-tax income for operating segments is total revenue less operating costs and expenses for the segment. Corporate pre-tax income includes transactions which are nonoperating in nature and are not related to the activities of a segment. Such items include parent company interest expense, goodwill amortization, and similar items. A summary of segment data is as follows:
ADJUSTMENTS ASSET AND CONSOLIDATED INSURANCE MANAGEMENT CORPORATE ELIMINATIONS TOTAL ---------- ---------- --------- ------------ ------------ 1995: Revenues--unaffiliated.. $1,926,516 $156,519 $ (15,553) $ -0- $2,067,482 Intersegment revenues... 7,497 27,503 (2,174) (32,826) -0- ---------- -------- --------- -------- ---------- Total revenues.......... $1,934,013 $184,022 $ (17,727) $(32,826) $2,067,482 ========== ======== ========= ======== ========== Pretax income........... $ 462,001 $ 96,371 $(124,380) $ (5,817) $ 428,175 Depreciation............ 6,135 3,327 141 9,603 Capital expenditures.... 7,094 15,227 193 22,514 Identifiable assets at year end............... 8,933,970 244,003 379,856 (193,725) 9,364,104 1994: Revenues--unaffiliated.. $1,721,650 $141,807 $ 11,880 $ -0- $1,875,337 Intersegment revenues... 2,724 25,895 (6,302) (22,317) -0- ---------- -------- --------- -------- ---------- Total revenues.......... $1,724,374 $167,702 $ 5,578 $(22,317) $1,875,337 ========== ======== ========= ======== ========== Pretax income........... $ 402,562 $ 84,975 $ (89,582) $ (3,981) $ 393,974 Depreciation............ 8,260 2,869 142 11,271 Capital expenditures.... 5,117 20,952 160 26,229 Identifiable assets at year end............... 7,697,456 180,881 442,639 (155,732) 8,165,244 1993: Revenues--unaffiliated.. $1,836,347 $140,827 $ 89,672 $ -0- $2,066,846 Intersegment revenues... 2,167 27,624 (2,782) (27,009) -0- ---------- -------- --------- -------- ---------- Total revenues.......... $1,838,514 $168,451 $ 86,890 $(27,009) $2,066,846 ========== ======== ========= ======== ========== Pretax income........... $ 325,842 $ 73,385 $ 730 $ 2,001 $ 401,958 Depreciation............ 8,111 2,584 157 10,852 Capital expenditures.... 4,311 9,613 233 14,157 Identifiable assets at year end............... 6,809,570 185,057 510,879 (64,321) 7,441,185
58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 18--RELATED PARTY TRANSACTIONS Investment in Related Parties: Other long-term investments include investment by Torchmark subsidiaries in the United Group of Mutual Funds and certain other funds for which Waddell & Reed, Inc. is sole advisor. These investments were $26.2 million and $24.4 million at December 31, 1995 and 1994, respectively. Investment income derived from these investments is included in net investment income. Rental Income: Torchmark leases office space to Vesta, a 27% owned subsidiary. Total rental income received from Vesta was $494 thousand, $461 thousand, and $66 thousand, for the years ended December 31, 1995, 1994 and 1993, respectively. NOTE 19--SUPPLEMENTAL DISCLOSURES FOR CASH FLOW STATEMENT The following table summarizes Torchmark's noncash transactions, which are not reflected on the Statement of Cash Flow as required by GAAP:
YEAR ENDED DECEMBER 31, ----------------- 1995 1994 1993 ----- ---- ------ Treasury stock accepted for exercise of stock options.... $ -0- $-0- $2,480 Paid in capital from tax benefit for stock option exer- cises................................................... 709 349 6,412 Grant of options in conjunction with United Management merger.................................................. -0- -0- 5,122
The following table summarizes certain amounts paid during the period:
YEAR ENDED DECEMBER 31, ------------------------- 1995 1994 1993 ------- -------- -------- Interest paid..................................... $82,642 $ 77,114 $ 64,193 Income taxes paid................................. $99,298 $182,052 $133,392
59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 20--SELECTED QUARTERLY DATA (UNAUDITED) The following is a summary of quarterly results for the two years ended December 31, 1995. 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.
THREE MONTHS ENDED ----------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ 1995: - ----- Premium and policy charges...... $390,834 $384,759 $383,962 $386,728 Financial services revenue...... 34,774 37,223 39,108 41,377 Net investment income........... 92,808 92,883 93,762 102,412 Realized investment gains (loss- es)............................ (920) 304 (15,700) 1,993 Total revenues.................. 517,688 515,597 501,383 532,814 Policy benefits................. 253,369 252,640 252,547 250,780 Amortization of acquisition ex- penses......................... 50,185 49,936 51,150 52,796 Pretax income from continuing operations..................... 107,362 108,530 94,457 117,826 Income (loss) from discontinued operations..................... 288 569 2,017 (131,584) Net income...................... 68,621 70,023 60,974 (56,383) Net income per common share from continuing operations.......... 0.96 0.97 0.82 1.05 Net income per common share from discontinued operations........ 0.00 0.01 0.03 (1.84) Net income per common share..... 0.96 0.98 0.85 (0.79) Net income per common share ex- cluding realized gains, the re- lated DPAC adjustment, and dis- continued operations........... 0.96 0.97 0.97 1.03 1994: - ----- Premium and policy charges...... $348,148 $340,166 $336,533 $364,027 Financial services revenue...... 36,544 35,572 33,747 33,413 Net investment income........... 88,281 85,236 85,226 88,894 Realized investment gains (loss- es)............................ 12,595 (9,304) (1,278) (4,564) Total revenues.................. 485,858 452,426 454,637 482,416 Policy benefits................. 232,482 222,924 223,757 242,114 Amortization of acquisition ex- penses......................... 49,822 40,106 41,327 46,852 Pretax income from continuing operations..................... 108,912 94,829 94,536 95,697 Income (loss) from discontinued operations..................... 2,606 461 421 1,644 Net income...................... 75,572 64,903 64,698 63,773 Net income per common share from continuing operations.......... 0.99 0.89 0.90 0.87 Net income per common share from discontinued operations........ 0.04 0.00 0.01 0.02 Net income per common share..... 1.03 0.89 0.91 0.89 Net income per common share ex- cluding realized gains, the re- lated DPAC adjustment, and dis- continued operations........... 0.94 0.98 0.91 0.91
60 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure have been reported on a Form 8-K within the twenty-four months prior to the date of the most recent financial statements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Information required by this item is incorporated by reference from the sections entitled "Election of Directors," "Profiles of Directors and Nominees," "Executive Officers" and "Compliance with Section 16(a) of the Securities Exchange Act" in the Proxy Statement for the Annual Meeting of Stockholders to be held April 25, 1996 (the "Proxy Statement"), which is to be filed with the Securities and Exchange Commission. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference from the section entitled "Compensation and Other Transactions with Executive Officers and Directors" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF MANAGEMENT (a)Security ownership of certain beneficial owners: Information required by this item is incorporated by reference from the section entitled "Principal Stockholders" in the Proxy Statement. (b)Security ownership of management: Information required by this item is incorporated by reference from the section entitled "Stock Ownership" in the Proxy Statement. (c)Changes in control: Torchmark knows of no arrangements, including any pledges by any person of its securities, the operation of which may at a subsequent date result in a change of control. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference from the section entitled "Compensation and Other Transactions with Executive Officers and Directors" in the Proxy Statement. 61 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (a)Index of documents filed as a part of this report:
PAGE OF THIS REPORT ----------- Financial Statements: Torchmark Corporation and Subsidiaries: Independent Auditors' Report.................................... 30 Consolidated Balance Sheet at December 31, 1995 and 1994........ 31 Consolidated Statement of Operations for each of the years in the three-year period ended December 31, 1995.................. 32 Consolidated Statement of Shareholders' Equity for each of the years in the three-year period ended December 31, 1995......... 33 Consolidated Statement of Cash Flow for each of the years in the three-year period ended December 31, 1995...................... 34 Notes to Consolidated Financial Statements...................... 35 Schedules Supporting Financial Statements for each of the years in the three-year period ended December 31, 1995................ II.Condensed Financial Information of Registrant (Parent Compa- ny)............................................................. 67 III.Supplementary Insurance Information (Consolidated).......... 70 IV.Reinsurance (Consolidated)................................... 71
Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X. 62 EXHIBITS
Page of this Report ------- (3)(i) Restated Certificate of Incorporation of Torchmark Corpora- tion, as amended (ii) By-Laws of Torchmark Corporation, as amended (incorporated by reference from Exhibit 3(b) to Form 10-K for the fiscal year ended December 31, 1989) (4)(a) Specimen Common Stock Certificate (incorporated by reference from Exhibit 4(a) to Form 10-K for the fiscal year ended De- cember 31, 1989) (b) Trust Indenture dated as of February 1, 1987 between Torchmark Corporation and Morgan Guaranty Trust Company of New York, as Trustee (incorporated by reference from Exhibit 4(b) to Form S-3 for $300,000,000 of Torchmark Corporation Debt Securities and Warrants (Registration No. 33-11816)) (10)(a) Torchmark Corporation and Affiliates Retired Lives Reserve Agreement, as amended, and Trust (incorporated by reference from Exhibit 10(b) to Form 10-K for the fiscal year ended December 31, 1991) (b) Capital Accumulation and Bonus Plan of Torchmark Corpora- tion, as amended, (incorporated by reference from Exhibit 10(c) to Form 10-K for the fiscal year ended December 31, 1988) (c) Torchmark Corporation Supplementary Retirement Plan (incor- porated by reference from Exhibit 10(c) to Form 10-K for the fiscal year ended December 31, 1992) (d) Certified Copies of Resolutions Establishing Retirement Pol- icy for Officers and Directors of Torchmark Corporation, Providing for Advisory Directors, and Providing Retirement Benefits for Directors (incorporated by reference from Ex- hibit 10(e) to Form 10-K for the fiscal year ended December 31, 1989) (e) Torchmark Corporation Restated Deferred Compensation Plan for Directors, Advisory Directors, Directors Emeritus and Officers, as amended (incorporated by reference from Exhibit 10(e) to Form 10-K for the fiscal year ended December 31, 1992) (f) The Torchmark Corporation 1987 Stock Incentive Plan (g) The 1984 Torchmark Corporation Stock Option Plan (incorpo- rated by reference from Form S-8 for The 1984 Torchmark Cor- poration Stock Option Plan (Registration No. 2-93760)) (h) General Agency Contract between Liberty National Life Insur- ance Company and Independent Research Agency For Life Insur- ance, Inc. (incorporated by reference from Exhibit 10(i) to Form 10-K for the fiscal year ended December 31, 1990) (i) Form of Marketing and Administrative Services Agreement be- tween Liberty National Fire Insurance Company, Liberty Na- tional Insurance Corporation and Liberty National Life In- surance Company (incorporated by reference from Exhibit 10.2 to Form S-1 Registration Statement No. 33-68114) (j) Form of Deferred Compensation Agreement Between Torchmark Corporation or Subsidiary and Officer at the Level of Vice President or Above Eligible to Participate in the Torchmark Corporation and Affiliates Retired Lives Reserve Agreement and to Retire Prior to December 31, 1986 (incorporated by reference from Exhibit 10(k) to Form 10-K for the fiscal year ended December 31, 1991)
63
Page of this Report ------- (k) Form of Deferred Compensation Agreement between Torchmark Corporation or Subsidiary and Officer at the Level of Vice President or Above Eligible to Participate in the Torchmark Corporation and Affiliates Retired Lives Reserve Agreement and Not Eligible to Retire Prior to December 31, 1986 (in- corporated by reference from Exhibit 10(l) to Form 10-K for the fiscal year ended December 31, 1991) (l) Torchmark Corporation Supplemental Savings and Investment Plan (incorporated by reference from Exhibit 10(m) to Form 10-K for the fiscal year ended December 31, 1992) (m) Service Agreement, dated as of January 1, 1991, between Torchmark Corporation and Liberty National Life Insurance Company (prototype for agreements between Torchmark Corpora- tion and other principal operating subsidiaries) (incorpo- rated by reference from Exhibit 10(n) to Form 10-K for the fiscal year ended December 31, 1992) (n) The Torchmark Corporation Pension Plan (incorporated by ref- erence from Exhibit 10(o) to Form 10-K for the fiscal year ended December 31, 1992) (o) United Investors Management Company Retirement Income Plan (incorporated by reference from Exhibit 10(p) to Form 10-K for the fiscal year ended December 31, 1992) (p) Waddell & Reed, Inc. Career Field Retirement Plan (incorpo- rated by reference from Exhibit 10(q) to Form 10-K for the fiscal year ended December 31, 1992) (q) United Investors Management Company 1986 Employee Stock In- centive Plan (incorporated by reference from Exhibit 10(r) to Form 10-K for the fiscal year ended December 31, 1993) (r) The Torchmark Corporation Savings and Investment Plan (in- corporated by reference from Exhibit 10(s) to Form 10-K for the fiscal year ended December 31, 1992) (s) United Investors Management Company Savings and Investment Plan (incorporated by reference from Exhibit 10(t) to Form 10-K for the fiscal year ended December 31, 1992) (t) Credit Agreements dated as of December 6, 1994 among Torchmark Corporation, the Lenders and The First National Bank of Chicago, as Agent (364 Day and Five Year) (incorpo- rated by reference from Exhibit 10(t) to Form 10-K for the fiscal year ended December 31, 1995) (u) Coinsurance and Servicing Agreement between Security Benefit Life Insurance Company and Liberty National Life Insurance Company, effective as of December 31, 1995 (v) Form of Deferred Compensation Agreement Between Torchmark Corporation or Subsidiary and Officer at the Level of Vice President or Above Not Eligible to Participate in Torchmark Corporation and Affiliates Retired Lives Reserve Agreement (incorporated by reference from Exhibit 10(j) to Form 10-K for the fiscal year ended December 31, 1991) (11) Statement re computation of per share earnings 66 (20) Proxy Statement for Annual Meeting of Stockholders to be held April 25, 1996 (21) Subsidiaries of the registrant 66 (23)(a) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, and February 26, 1996 into Form S-8 of The Torchmark Corporation Savings and Investment Plan (Registration No. 2-76378) (b) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, and February 26, 1996 into Form S-8 of The United Investors Management Company Savings and Investment Plan (Registration No. 2- 76912) (c) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, and February 26, 1996 into Form S-8 and the accompanying Form S-3 Pro- spectus of The 1984 Torchmark Corporation Stock Option Plan (Registration No. 2-93760)
64
Page of this Report ------- (d) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, and February 26, 1996 into Form S-8 and the accompanying Form S-3 Pro- spectus of the Torchmark Corporation 1987 Stock Incentive Plan (Registration No. 33-23580) (e) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, and February 26, 1996 into Form S-8 and the accompanying Form S-3 Pro- spectus of The Capital Accumulation and Bonus Plan of Torchmark Corporation (Registration No. 33-1032) (f) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, and February 26, 1996 into Form S-8 of the Liberty National Life Insur- ance Company 401(k) Plan (24) Powers of attorney (27) Financial Data Schedule (99)(a) Form 11-K for The Torchmark Corporation Savings and Invest- ment Plan for the fiscal year ended December 31, 1995* (b) Form 11-K for The United Investors Management Company Sav- ings and Investment Plan for the fiscal year ended December 31, 1995* (c) Form 11-K for The Liberty National Life Insurance Company 401(k) Plan for the fiscal year ended December 31, 1995*
- -------- *To be filed under cover of a Form 10K-A as an Amendment to Form 10-K for the fiscal year ended December 31, 1995. 65 (b) Reports on Form 8-K. No reports on Form 8-K were filed by the registrant during the fourth quarter of 1995. (c) Exhibits Exhibit 11. Statement re computation of per share earnings TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
1995 1994 1993 ------------- ------------ ------------ Net income from continuing opera- tions.............................. $271,945,720 $263,814,601 $242,297,802 Income/(loss) of discontinued energy segment............................ (128,710,390) 5,131,667 37,278,339 Cumulative effect of changes in ac- counting principles................ 0 0 18,402,739 ------------- ------------ ------------ Net income.......................... 143,235,330 268,946,268 297,978,880 Preferred dividends................. 0 (804,130) (3,289,568) ------------- ------------ ------------ Adjusted net income................. $143,235,330 $268,142,138 $294,689,312 ============= ============ ============ Weighted average shares outstanding. 71,593,774 72,095,657 73,501,654 ============= ============ ============ Primary earnings per share: From continuing operations......... $ 3.80 $ 3.65 $ 3.25 From discontinued operations....... (1.80) 0.07 0.51 From cumulative effect of account- ing change........................ 0.00 0.00 0.25 ------------- ------------ ------------ Net income........................ $ 2.00 $ 3.72 $ 4.01 ============= ============ ============
There were no common stock equivalents included in weighted average shares outstanding. Exhibit 21. Subsidiaries of the Registrant The following table lists subsidiaries of the registrant which meet the definition of "significant subsidiary" according to Regulation S-X:
STATE OF NAME UNDER WHICH COMPANY INCORPORATION COMPANY DOES BUSINESS ----------------------- ------------- --------------------- Family Service Life Family Service Life Insurance Company Texas Insurance Company Globe Life And Accident Globe Life And Accident Insurance Company Delaware Insurance Company Liberty National Life Liberty National Life Insurance Company Alabama Insurance Company United American United American Insurance Company Delaware Insurance Company United Investors Life United Investors Life Insurance Company Missouri Insurance Company Waddell & Reed, Inc. Delaware Waddell & Reed, Inc. American Income Life American Income Life Insurance Company Indiana Insurance Company
All other exhibits required by Regulation S-K are listed as to location in the "Index of documents filed as a part of this report" on pages 63 through 65 of this report. Exhibits not referred to have been omitted as inapplicable or not required. 66 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET (AMOUNTS IN THOUSANDS)
DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- Assets: Investments: Long-term investments--available for sale........ $ 9,655 $ 21,448 Short-term investments........................... 994 806 ---------- ---------- Total investments................................. 10,649 22,254 Investment in affiliates.......................... 2,820,323 2,404,431 Due from affiliates............................... 105,887 85,387 Accrued investment income......................... 94 83 Other assets...................................... 3,636 3,822 Discontinued operations assets.................... 61,109 108,467 ---------- ---------- Total assets..................................... $3,001,698 $2,624,444 ========== ========== Liabilities and shareholders' equity: Liabilities: Short-term debt.................................. $ 189,248 $ 250,000 Long-term debt................................... 791,566 790,972 Due to affiliates................................ 195,193 97,523 Other liabilities................................ 43,643 50,294 ---------- ---------- Total liabilities................................ 1,219,650 1,188,789 Monthly income preferred securities............... 193,096 193,052 Shareholders' equity: Preferred stock.................................. -0- -0- Common stock..................................... 73,784 73,784 Additional paid-in capital....................... 139,754 139,045 Unrealized investment gains (losses)............. 140,338 (140,756) Retained earnings................................ 1,325,534 1,267,545 Treasury stock................................... (90,458) (97,015) ---------- ---------- Total shareholders' equity....................... 1,588,952 1,242,603 ---------- ---------- Total liabilities and shareholders' equity....... $3,001,698 $2,624,444 ========== ==========
See accompanying Notes to Condensed Financial Statements. 67 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) CONDENSED STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 -------- -------- -------- Net investment income............................ $ 1,261 $ 5,183 $ 8,540 Realized investment gains (losses)............... (23,516) (4,422) 9,301 Other income..................................... 11 11 27,435 -------- -------- -------- Total revenue.................................. (22,244) 772 45,276 General operating expenses....................... 7,823 14,442 15,174 Non-operating expenses--related to affiliates.... 0 (71,417) 67,718 Reimbursements from affiliates................... (13,260) (15,218) (18,599) Interest expense................................. 91,825 79,762 64,859 -------- -------- -------- Total expenses................................. 86,388 7,569 129,152 -------- -------- -------- Operating loss before income taxes and equity in earnings of affiliates................................... (108,632) (6,797) (83,876) Income taxes .................................... 37,363 2,022 29,391 -------- -------- -------- Net operating loss before equity in earnings of affiliates...................................... (71,269) (4,775) (54,485) Equity in earnings of affiliates................. 326,822 271,992 360,991 Minority interests............................... 0 0 (11,073) Monthly income preferred securities dividend..... (10,317) (2,137) 0 -------- -------- -------- Net income from continuing operations.......... 245,236 265,080 295,433 Income (loss) from discontinued operations of en- ergy segment.................................... (102,001) 3,866 4,797 Cumulative effect of changes in accounting prin- ciples.......................................... -0- -0- (2,251) -------- -------- -------- Net income..................................... $143,235 $268,946 $297,979 ======== ======== ========
See accompanying Notes to Condensed Financial Statements. 68 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued) CONDENSED STATEMENT OF CASH FLOW (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- Cash provided from operations before dividends from subsidiaries............................ $ (86,764) $ (48,378) $ (20,435) Cash dividends from subsidiaries............. 185,500 270,500 188,709 --------- --------- --------- Cash provided from operations................. 98,736 222,122 168,274 Cash provided from (used for) investing activ- ities: Disposition of investments................... 116 225,573 478,859 Acquisition of investments................... (1,556) (202,579) (526,421) Sale of subsidiaries......................... -0- -0- 76,744 Investment in subsidiaries................... (83,211) (70,000) (55,651) Purchase of minority interest................ -0- -0- (229,063) Purchase of American Income.................. -0- (476,501) -0- Loans to subsidiaries........................ (49,043) (28,916) (8,881) Repayment of loans by subsidiaries........... -0- -0- 31,924 Net decrease (increase) in temporary invest- ments....................................... (188) 1,529 (799) Additions to properties...................... (146) (113) (74) --------- --------- --------- Cash used for investing activities............ (134,028) (551,007) (233,362) Cash provided from (used for) financing activ- ities: Issuance of debt............................. -0- 143,000 294,110 Issuance of monthly income preferred securi- ties........................................ -0- 193,046 -0- Repayments of debt........................... (60,752) -0- (88,000) Issuance of stock to subsidiaries............ 77,766 -0- -0- Issuance of stock............................ 2,808 4,408 6,670 Acquisitions of treasury stock............... -0- (106,054) (41,897) Borrowed from subsidiaries................... 101,857 176,821* -0- Repayment on borrowings from subsidiaries.... (5,500) -0- (24,000) Payment of dividends......................... (80,887) (82,336) (83,646) --------- --------- --------- Cash provided from financing activities....... 35,292 328,885 63,237 Net increase in cash.......................... -0- -0- (1,851) Cash balance at beginning of period........... -0- -0- 1,851 --------- --------- --------- Cash balance at end of period................. $ -0- $ -0- $ -0- ========= ========= =========
* Includes an $80.3 million note payable to subsidiary which was forgiven in 1994 in the form of a dividend from the subsidiary. TORCHMARK CORPORATION (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS) NOTE A--DIVIDENDS FROM SUBSIDIARIES Cash dividends paid to Torchmark from the consolidated subsidiaries were as follows:
1995 1994 1993 -------- -------- -------- Consolidated subsidiaries..................... $185,500 $270,500 $188,709 ======== ======== ========
69 TORCHMARK CORPORATION SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION (CONSOLIDATED) (AMOUNTS IN THOUSANDS)
AMORTIZATION OF DEFERRED PREMIUM AND NET POLICY OTHER POLICY INVESTMENT OTHER BENEFITS ACQUISITION OPERATING CHARGES INCOME INCOME AND CLAIMS COSTS EXPENSES ----------- ---------- -------- ---------- ------------ --------- FOR THE YEAR ENDED DE- CEMBER 31, 1995: - ------------------------ Insurance.............. $1,546,283 $384,619 $ 3,111 $1,009,336 $205,509 $257,167 Asset management....... 4,021 180,001 87,651 Corporate.............. (3,418) (14,309) 106,653 Eliminations and ad- justments............. (3,357) (29,469) (1,442) (25,567) ---------- -------- -------- ---------- -------- -------- Total................. $1,546,283 $381,865 $139,334 $1,009,336 $204,067 $425,904 ========== ======== ======== ========== ======== ======== FOR THE YEAR ENDED DE- CEMBER 31, 1994: - ------------------------ Insurance.............. $1,388,874 $331,679 $ 3,821 $921,277 $172,493 $228,042 Asset management....... 2,443 165,259 82,727 Corporate.............. 8,103 (2,525) 95,160 Eliminations and ad- justments............. 5,412 (27,729) 5,614 (23,950) ---------- -------- -------- ---------- -------- -------- Total................. $1,388,874 $347,637 $138,826 $921,277 $178,107 $381,979 ========== ======== ======== ========== ======== ======== FOR THE YEAR ENDED DE- CEMBER 31, 1993: - ------------------------ Insurance.............. $1,492,910 $341,659 $ 3,945 $971,556 $188,283 $352,833 Asset management....... 4,620 163,831 95,066 Corporate.............. 21,589 65,301 86,160 Eliminations and ad- justments............. 626 (27,635) (1,210) (27,800) ---------- -------- -------- ---------- -------- -------- Total................. $1,492,910 $368,494 $205,442 $971,556 $187,073 $506,259 ========== ======== ======== ========== ======== ========
70 TORCHMARK CORPORATION SCHEDULE IV. REINSURANCE (CONSOLIDATED) (AMOUNTS IN THOUSANDS)
PERCENTAGE CEDED ASSUMED OF AMOUNT GROSS TO OTHER FROM OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET ----------- --------- ---------- ----------- ---------- FOR THE YEAR ENDED DE- CEMBER 31, 1995: - ---------------------- Life insurance in force $80,377,021 $636,961 $ 14,355 $79,754,415 0.0% =========== ======== ======== =========== ===== Premiums:* Life insurance......... $ 702,993 $ 3,305 $ 4,283 $ 703,971 0.6% Health insurance....... 761,573 10,985 -0- 750,588 0.0% ----------- -------- -------- ----------- Total premiums........ $ 1,464,566 $ 14,290 $ 4,283 $ 1,454,559 0.3% =========== ======== ======== =========== ===== FOR THE YEAR ENDED DE- CEMBER 31, 1994: - ---------------------- Life insurance in force $74,834,644 $633,485 $ 23,570 $74,224,729 0.0% =========== ======== ======== =========== ===== Premiums:* Life insurance......... $ 535,141 $ 4,386 $ 1,316 $ 532,071 0.2% Health insurance....... 781,207 12,493 -0- 768,714 0.0% ----------- -------- -------- ----------- Total premiums........ $ 1,316,348 $ 16,879 $ 1,316 $ 1,300,785 0.1% =========== ======== ======== =========== ===== FOR THE YEAR ENDED DE- CEMBER 31, 1993: - ---------------------- Life insurance in force $61,349,446 $594,416 $ 17,487 $60,772,517 0.0% =========== ======== ======== =========== ===== Premiums:* Life insurance......... $ 488,632 $ 4,862 $ 576 $ 484,346 0.1% Health insurance....... 814,456 14,621 -0- 799,835 0.0% Property and liability insurance............. 78,512 60,245 104,790 123,057 85.2% ----------- -------- -------- ----------- Total premiums........ $ 1,381,600 $ 79,728 $105,366 $ 1,407,238 7.5% =========== ======== ======== =========== =====
- -------- * Excludes policy charges 71 SIGNATURES Pursuant to the requirements of Section 12 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Torchmark Corporation /s/ R.K. Richey By: ________________________________ R.K. RICHEY, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND DIRECTOR /s/ Keith A. Tucker By: ________________________________ KEITH A. TUCKER, VICE CHAIRMAN AND DIRECTOR (PRINCIPAL FINANCIAL OFFICER) /s/ Gary L. Coleman By: ________________________________ GARY L. COLEMAN, VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER (PRINCIPAL ACCOUNTING OFFICER) Date: March 20, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ J.P. Bryan* /s/ Harold T. McCormick* By: ________________________________ By: ________________________________ J.P. BRYAN HAROLD T. MCCORMICK DIRECTOR DIRECTOR /s/ Joseph M. Farley* /s/ Joseph W. Morris* By: ________________________________ By: ________________________________ JOSEPH M. FARLEY JOSEPH W. MORRIS DIRECTOR DIRECTOR /s/ Louis T. Hagopian* /s/ George J. Records* By: ________________________________ By: ________________________________ LOUIS T. HAGOPIAN GEORGE J. RECORDS DIRECTOR DIRECTOR /s/ C.B. Hudson* /s/ Yetta G. Samford, Jr.* By: ________________________________ By: ________________________________ C.B. HUDSON YETTA G. SAMFORD, JR. DIRECTOR DIRECTOR /s/ Joseph L. Lanier, Jr.* By: ________________________________ JOSEPH L. LANIER, JR. DIRECTOR Date: March 20, 1996 /s/ Gary L. Coleman *By: _______________________________ GARY L. COLEMAN ATTORNEY-IN-FACT Date: March 20, 1996 72 EX-3 2 CERT OF INCORPORATION [LOGO OF THE STATE OF DELAWARE APPEARS HERE] STATE OF DELAWARE ---------- OFFICE OF SECRETARY OF STATE I, Michael Harkins, Secretary of State of the State of Delaware, do hereby certify that the attached is a true and correct copy of Restated Certificate of Incorporation filed in this office on November 3, 1987 /s/ Michael Harkins --------------------------------------- Michael Harkins, Secretary of State ----------------------------------- [SEAL OF THE SECRETARY OF STATE OF DELAWARE BY: /s/ J Rolins APPEARS HERE] ----------------------------------- DATE: March 19, 1990 --------------------------------- RESTATED CERTIFICATE OF INCORPORATION OF TORCHMARK CORPORATION Torchmark Corporation, a corporation incorporated under the name of Liberty National Insurance Holding Company by the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware on November 29, 1979, desiring to integrate into a single instrument all the provisions of its Certificate of Incorporation now in effect and operative without further amending its Certificate of Incorporation as theretofore amended or supplemented, does hereby certify as follows: 1. Said Certificate of Incorporation, as heretofore amended and supplemented, is hereby restated and integrated so as to read as follows: FIRST: The name of the corporation (which is hereinafter referred to as the "Corporation") is: TORCHMARK CORPORATION SECOND: The address of the Corporation's registered office in the State of Delaware is 229 South State Street, in the City of Dover, County of Kent. The name of the Corporation's registered agent at such address is United States Corporation Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue shall be one hundred sixty-five million (165,000,000), of which five million (5,000,000) shares are to be Preferred Stock of the par value of one dollar ($1.00) each; and one hundred sixty million (160,000,000) shares are to be Common Stock, of the par value of one dollar ($1.00) each. 1. Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock, for such consideration and on such terms as it may determine, as Preferred Stock of one or more series and in connection with the creation of any such series to fix by the resolution or resolutions providing for the issue of shares thereof the designation, powers and relative participating, optional, or -2- other special rights of such series, and the qualifications, limitations, or restrictions thereof. Such authority of the Board of Directors with respect to each such series shall include, but not be limited to, the determination of the following: a. the distinctive designation of, and the number of shares comprising, such series, which number may be increased (except where otherwise provided by the Board of Directors in creating such series) or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the Board of Directors; b. the dividend rate or amount for such series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes or any other series of any class or classes of stock, and whether such dividends shall be cumulative, and if so, from which date or dates for such series; c. whether or not the shares of such series shall be subject to redemption by the Corporation and the times, prices, and other terms and conditions of such redemption; d. whether or not the shares of such series shall be subject to the operation of a sinking fund or -3- purchase fund to be applied to the redemption or purchase of such shares and if such a fund be established, the amount thereof and the terms and provisions relative to the application thereof; e. whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or classes, or of any other series of any class or classes, of stock of the Corporation and if provision be made for conversion or exchange, the times, prices, rates, adjustments, and other terms and conditions of such conversion or exchange; f. whether or not the shares of such series shall have voting rights, in addition to the voting rights provided by law, and if they are to have such additional voting rights, the extent thereof; g. the rights of the shares of such series in the event of any liquidation, dissolution, or winding up of the Corporation or upon any distribution of its assets; and h. any other powers, preferences, and relative, participating, optional, or other special rights of the shares of such series, and the qualifications, limitations, or restrictions thereof, to -4- the full extent now or hereafter permitted by law and not inconsistent with the provisions hereof. 2. Authority is hereby expressly granted to the Board of Directors from time to time to issue any authorized but unissued shares of Common Stock for such consideration and on such terms as it may determine. 3. All shares of any one series Preferred Stock shall be identical in all respects except as to the dates from which dividends thereon may be cumulative. All series of the Preferred Stock shall rank equally and be identical in all respects except as otherwise provided in the resolution or resolutions providing for the issue of any series of Preferred Stock. 4. Whenever dividends upon the Preferred Stock at the time outstanding, to the extent of the preference to which such stock is entitled, shall have been paid in full or declared and set apart for payment for all past dividend periods, and after the provisions for any sinking or purchase fund or funds for any series of Preferred Stock shall have been complied with, the Board of Directors may declare and pay dividends on the Common Stock, payable in cash, stock or otherwise; and the holders of shares of Preferred Stock shall not be entitled to share therein, subject to the provisions of the resolution or resolutions creating any series of Preferred Stock. -5- 5. In the event of any liquidation, dissolution, or winding up of the Corporation or upon the distribution of the assets of the Corporation remaining, after the payment to the holders of the Preferred Stock of the full preferential amounts to which they shall be entitled as provided in the resolution or resolutions creating any series thereof, the remaining assets of the Corporation shall be divided and distributed among the holders of the Common Stock ratably, except as may otherwise be provided in any such resolution or resolutions. Neither the merger or consolidation of the Corporation with another corporation nor the sale or lease of all or substantially all the assets of the Corporation shall be deemed to be a liquidation, dissolution, or winding up of the Corporation or a distribution of its assets. 6. Except as otherwise required by law or provided by a resolution or resolutions of the Board of Directors creating any series of Preferred Stock, the holders of Common Stock shall have the exclusive power to vote and shall have one vote in respect of each share of such stock held by them; and the holders of Preferred Stock shall have no voting power whatsoever. Except as otherwise provided in such a resolution or resolutions, the number of authorized shares of the Preferred Stock may be increased or decreased by the -6- affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Corporation entitled to vote. FIFTH: Unless and except to the extent that the By-Laws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. SIXTH: Except as otherwise provided in this Article Sixth, the Board of Directors is expressly authorized and empowered to make, alter and repeal the By-Laws of the Corporation, subject to the power of the stockholders of the Corporation to alter or repeal any Bylaws made by the Board of Directors. The affirmative vote of the holders of at least 80% of the voting power of all of the shares of the Corporation entitled to vote generally in the election of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, any provision in Article II or Article III of the By-Laws as those By-Laws read at the close of the annual meeting of stockholders on April 26, 1984. SEVENTH: Any director or any officer of the Corporation elected or appointed by the stockholders of the Corporation or by its Board of Directors may be removed at any time in such manner as shall be provided in the By-Laws of the Corporation. EIGHTH: No holder of Preferred Stock or Common Stock of the Corporation shall have any preemptive right as such holder (other than such right, if any, as the Board of Directors in its discretion may by resolution determine pursuant to this Article -7- Eighth) to purchase, subscribe for or otherwise acquire any shares of stock of the Corporation of any class now or hereafter authorized, or any securities convertible into or exchangeable for any such shares, or any warrants or any instruments evidencing rights or options to subscribe for, purchase or otherwise acquire any such shares, whether such shares, securities, warrants or other instruments are now, or shall hereafter be, authorized, unissued or issued and thereafter acquired by the Corporation. NINTH: Section 1. Elimination of Certain Liability of Directors. A director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Section 2. Indemnification and Insurance. (a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of -8- whom he or she is the legal representative, is or was a director of officer, of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another company or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Company to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in paragraph (b) hereof, the Company shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized -9- by the Board of Directors of the Company. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Company the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Company of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. The Company may, by action of its Board of Directors, provide indemnification to employees and agents of the Company with the same scope and effect as the foregoing indemnification of directors and officers. (b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of this Section is not paid in full by the Company within thirty days after a written claim has been received by the Company, the claimant may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be -10- entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Company) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Company to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Company (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (c) Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section shall not be exlcusive of any other right which any person may have or hereafter acquire under any statute, -11- provision of the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or disinterested directors or otherwise. (b) Insurance. The Company may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Company or another company, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. TENTH: Section 1. Vote Required for Certain Business Combinations. A. Higher Vote for Certain Business Combinations. In addition to any affirmative vote required by law or this Certificate of Incorporation, and except as otherwise expressly provided in Section 2 of this Article Tenth: (i) any merger or consolidation of the Corporation or any subsidiary (as hereinafter defined) with (a) any Interested Stockholder (as hereinafter defined) or (b) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or -12- (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value of $5,000,000 or more; or (iii) The issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $5,000,000 or more; or (iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder; or (v) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or -13- into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder; shall require the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (the Voting Stock), voting together as a single class (it being understood that for purposes of this Article Tenth, each share of the Voting Stock shall have the number of votes granted to it pursuant to Article Fourth of this Certificate of Incorporation). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. B. Definition of "Business Combination." The term "Business Combination" as used in this Article Tenth shall mean any transaction which is referred to in any one or more of clauses (i) through (v) of paragraph A of this Section 1. -14- Section 2. When Higher Vote is nOt Required. The provisions of Section 1 of this Article Tenth shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of this Certificate of Incorporation, if all of the conditions specified in either of the following paragraphs A and B are met: A. Approval by Continuing Directors. The Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined). B. Price and Procedure Requirements. All of the following conditions shall have been met: (i) The aggregate amount of the cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following: (a) the higher of (1) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of Common Stock acquired by it within the two-year period immediately prior to an -15- announcement of the proposal of the Business Combination (the Announcement Date) or (2) the highest per share price paid in the transaction in which it became an Interested Stockholder, and (b) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (such latter date is referred to in this Article Tenth as the Determination Date), whichever is higher. (ii) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any other class of outstanding Voting Stock (other than Institutional Voting Stock, as hereinafter defined) shall be at least equal to the highest of the following (it being intended that the requirements or this paragraph B (ii) shall be required to be met with respect to every class of outstanding Voting Stock (other than Institutional Voting Stock), whether or not the Interested Stockholder has -16- previously acquired any shares of a particular class of Voting Stock): (a) the highest of (1) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it within the two-year period immediately prior to the Announcement Date or (2) the highest per share price paid in the transaction in which it became an Interested Stockholder; (b) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and (c) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. (iii) The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Stockholder has -17- previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. (iv) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (a) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on the outstanding Preferred Stock; (b) there shall have been (1) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Continuing Directors, and (2) an increase in such annual rate of dividends as necessary in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the -18- number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors; and (c) such Interested Stockholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder. (v) After such Interested Stockholder has become an Interested Stockholder such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (vi) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to public stockholders of the Corporation at least 30 days -19- prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). Section 3. Certain Definitions. For the purposes of this Article Tenth: A. A "person" shall mean any individual, firm, corporation or other entity. B. "Interested Stockholder" shall mean any person (other than the Corporation or any Subsidiary) who or which: (i) is the beneficial owner, directly or indirectly, of more than 10% of the voting power of the outstanding Voting Stock; or (ii) is an Affiliate of the Corporation and at any time within the two- year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Voting Stock; or (iii) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not -20- involving a public offering within the meaning of the Securities Act of 1933. C. A person shall be a "beneficial owner" of any Voting Stock: (i) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; (ii) which such person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. D. For the purposes of determining whether a person is an Interested Stockholder pursuant to paragraph B of this Section 3, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned -21- through application of paragraph C of this Section 3 but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. E. "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on March 16, 1984. F. "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in paragraph B of this section 3, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. G. "Continuing Director" means any member of the Board of Directors of the Corporation (the Board) who is unaffiliated with the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Continuing Director who is unaffiliated with the Interested Stockholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board. -22- H. "Fair Market Value" means: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board in good faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board in good faith. -23- I. "Institutional Voting Stock" shall mean any class of Voting Stock which was issued to and continues to be held solely by one or more insurance companies, pension funds, commercial banks, savings banks or similar financial institutions or institutional investors. J. In the event of any Business Combination in which the Corporation survives, the phrase "other consideration to be received" as used in paragraph B(i) and (ii) of Section 2 of this Article Tenth shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. Section 4. Power of Directors. The directors of the Corporation shall have the power and duty to determine for the purposes of this Article Tenth, on the basis of information known to them after reasonable inquiry, (A) whether a person is an Interested Stockholder, (B) the number of shares of Voting Stock beneficially owned by any person, (C) whether a person is an Affiliate or Associate of another, (D) whether a class of Voting Stock is Institutional Voting Stock and (E) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation -24- or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $5,000,000 or more. Section 5. No Effect on Fiduciary Obligations of Interested Stockholders. Nothing contained in this Article Tenth shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. Section 6. Amendment, Repeal, etc. Notwithstanding any other provisions of this Certificate of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or the By-Laws of the Corporation), the affirmative vote of the holders of 80% or more of the voting power of the shares of the then outstanding Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, this Article Tenth of this Certificate of Incorporation. ELEVENTH: The Corporation reserves the right at any time from time to time to amend, alter, change, or repeal any provision contained in this Certificate of Incorporation, and other provisions authorized by the laws of the State of Delaware at the time in force and not inconsistent with the provisions in this Certificate of Incorporation or in the By-Laws may be added or inserted in the manner now or hereafter prescribed by law. All rights, preferences, privileges of whatsoever nature -25- conferred upon stockholders, directors or any other persons whosoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this Article. 2. This Restated Certificate of Incorporation has been duly adopted by the Board of Directors of the Corporation in accordance with the provisions of Section 245, of the General Corporation Law of the State of Delaware and has been duly adopted in accordance with the provisions of the Certificate of Incorporation of the Corporation heretofore amended. 3. This Restated Certificate of Incorporation shall become effective at the time it is filed in the office of the Secretary of State of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be affixed hereto and this instrument to be signed in its name by its Chairman and attested by its Secretary. TORCHMARK CORPORATION /s/ R.K. Richey ------------------------ Chairman Attest: /s/ Samuel E. Upchurch, Jr. - --------------------------- Secretary [LOGO OF THE STATE OF DELAWARE APPEARS HERE] STATE OF DELAWARE ---------- OFFICE OF SECRETARY OF STATE I, Michael Harkins, Secretary of State of the State of Delaware, do hereby certify that the attached is a true and correct copy of Designation of Incorporation filed in this office on February 26, 1990 /s/ Michael Harkins --------------------------------------- Michael Harkins, Secretary of State ----------------------------------- [SEAL OF THE SECRETARY OF STATE OF DELAWARE BY: /s/ J Rolins APPEARS HERE] ----------------------------------- DATE: March 19, 1990 --------------------------------- CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK, SERIES A OF TORCHMARK CORPORATION Pursuant to Section 151 of the General Corporation Law of the State of Delaware TORCHMARK CORPORATION, a Delaware corporation (the "Corporation"), certifies that pursuant to the authority contained in ARTICLE FOURTH of its Certificate of Incorporation, and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, its Board of Directors duly adopted resolutions on October 27, 1983, creating a series of its Preferred Stock designated as Adjustable Rate Cumulative Preferred Stock, Series A: RESOLVED, that a series of the class of authorized Preferred Stock of the Corporation be hereby created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. ----------------------- The shares of such series shall be designated as "Adjustable Rate Cumulative Preferred Stock, Series A" (the "Preferred Stock") and shall have a "face value" of $100.00 per share. The number of shares constituting such series shall be 1,000,000. Section 2. Dividends and Distributions. ---------------------------- (A) Holders of Preferred Stock will be entitled to receive, when and as declared by the Board of Directors of the Corporation out of assets of the Corporation legally available for payment, cumulative cash dividends at the rate of 10.60% of the face value per share per annum from the date of issuance to and including February 1, 1984 and at the Applicable Rate (as defined in clause (B) of this section), which shall not be less than 7% nor greater than 13%, from time to time in effect, for each quarterly dividend period thereafter. Dividends on the Preferred Stock will accrue from the date of issuance and will be payable quarterly on February 1, May 1, August 1 and November 1 of each year (or, if such day is not a business day, then the next preceding business day) to the holders of record on such respective dates, not exceeding 30 days preceding the payment date thereof, as may be determined by the Board of Directors. The first dividend will be payable February 1,1984. The dividends payable on the Preferred Stock for the period from the date of issuance to and including February 1, 1984 and for any period less than a full quarterly dividend period shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in the period for which the dividends are payable. The dividends payable for each full quarterly period commencing after February 1, 1984 shall be computed by dividing the annual dividend rate for such dividend period by four and applying the resulting rate against the face value per share of the Preferred Stock. No full dividends shall be declared or paid or set apart for payment on the preferred stock of any series ranking, as to dividends, on a parity with the Preferred Stock for any period unless full cumulative dividends have been, or contemporaneously are, declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full cumulative dividends. When dividends are not paid in full upon the Preferred Stock and any other preferred stock ranking on a parity as to dividends with the Preferred Stock, all dividends declared and paid or set aside for payment upon shares of Preferred Stock and any other preferred stock ranking on a parity as to dividends shall be declared and paid or set aside for payment pro rata so that the amount of dividends declared and paid or set aside for payment per share on the Preferred Stock and such other preferred stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of Preferred Stock and such other preferred stock bear to each other. Except as provided in Section 3 hereof, in the event that full cumulative quarterly dividends on the Preferred Stock have not been declared and paid or set apart for payment, the Corporation may not declare or pay any dividend on, or make any distribution on, or payment on account of the purchase, redemption or other retirement of, its Common Stock or any other stock of the Corporation ranking as to dividends junior to the Preferred Stock, except that dividends may be declared and paid, and distributions and payments may be made, in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock or other stock ranking as to dividends and upon 2 distribution of assets junior to the Preferred Stock. No interest shall be payable in respect of any dividend payment which may be in arrears. (B) Except as provided below, the "Applicable Rate" for each quarterly dividend period after February 1, 1984 will be (a) 1.25% less than (b) the highest of the Treasury Bill Rate, the Ten Year Constant Maturity Rate or the Twenty Year Constant Maturity Rate, each as hereinafter defined. In the event that the Corporation determines in good faith that for any reason (i) any one of the Treasury Bill Rate, the Ten Year Constant Maturity Rate or the Twenty Year Constant Maturity Rate cannot be determined for any dividend period, then the Applicable Rate for such dividend period shall be 1.25% per annum less than the higher of whichever two of such Rates can be so determined; (ii) only one of the Treasury Bill Rate, the Ten Year Constant Maturity Rate or the Twenty Year Constant Maturity Rate can be determined for any dividend period, then the Applicable Rate for such dividend period shall be 1.25% per annum less than whichever such Rate can be so determined; (iii) none of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate can be determined for any dividend period, the Applicable Rate in effect for the preceding dividend period shall be continued for such dividend period. However, the Applicable Rate for any dividend period shall in no event be less than 7% per annum nor greater than 13% per annum. Except as provided below in this paragraph, the "Treasury Bill Rate" for each dividend period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period (as defined below)) for three-month U.S. Treasury bills, as published by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") during the Calendar Period immediately prior to the ten calendar days immediately preceding the February 1, May 1, August 1, or November 1, as the case may be, prior to the dividend period for which the dividend rate on the Preferred Stock is being determined. If the Federal Reserve Board does not publish such a weekly per annum market discount rate during any such Calendar Period, then the Treasury Bill Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) for three-month U.S. Treasury bills, published during such Calendar Period by any Federal Reserve Bank or by any U.S. 3 Government department or agency selected by the Corporation. If a weekly per annum market discount rate for three-month U.S. Treasury bills shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, the Treasury Bill Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) for all the U.S. Treasury bills then having maturities of not less than 80 nor more than 100 days, published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such rates, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If the Corporation determines in good faith that for any reason no such U.S. Treasury bill rates are published as provided above during such Calendar Period, then the Treasury Bill Rate for such dividend period shall be the arithmetic average of the per annum secondary market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable non-interest bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Corporation by at least three recognized dealers in U.S. Government securities selected by the Corporation. If the Corporation determines in good faith that for any reason the Corporation cannot determine the Treasury Bill Rate for any dividend period as provided above in this paragraph, the Treasury Bill Rate for such dividend period shall be the arithmetic average of the per annum secondary market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable interest-bearing U.S. Treasury securities with a maturity of not less than 80 nor more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Corporation by at least three recognized dealers in U.S. Government securities selected by the Corporation. Except as provided below in this paragraph, the "Ten Year Constant Maturity Rate" for each dividend period shall be the arithmetic average of the two most recent weekly per annum Ten Year Average Yields, as defined below (or the one weekly per annum Ten Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period), published by the Federal Reserve Board during the Calendar Period immediately prior to the ten calendar days immediately preceding the February 1, May 1, August 1 or November 1, as the case may be, prior to the dividend period for which the dividend rate on the Preferred Stock is being determined. If the Federal Reserve 4 Board does not publish such a weekly per annum Ten Year Average Yield during any such Calendar Period, then the Ten Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum Ten Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period) published during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If a weekly per annum Ten Year Average Yield shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Ten Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly per annum average yield to maturity, if only one such yield shall be published during the relevant Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities, other than Special Securities (as defined below), then having maturities of not less than eight nor more than twelve years, published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not be publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If the Corporation determines in good faith that for any reason the Corporation cannot determine the Ten Year Constant Maturity Rate for any dividend period as provided above in this paragraph, then the Ten Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eight or not more than twelve years from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Corporation by at least three recognized dealers in U.S. Government securities selected by the Corporation. Except as provided below in this paragraph, the "Twenty Year Constant Maturity Rate" for each dividend period shall be the arithmetic average of the two most recent weekly per annum Twenty Year Average Yields, as defined below (or the one weekly per annum Twenty Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period), published by the Federal Reserve Board during the Calendar Period immediately prior to the ten calendar days immediately preceding the February 1, May 1, August 1 or November 1, as the case may be, prior to the dividend period for which the dividend rate on the Preferred Stock is being determined. If the Federal Reserve Board does not publish such a weekly per annum Twenty Year 5 Average Yield during any such Calendar Period,then the Twenty Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum Twenty Year Average Yields (or the one weekly per annum Twenty Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period), published during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If a weekly per annum Twenty Year Average Yield shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Twenty Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly per annum average yield to maturity, if only one such yield shall be published during the relevant Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having maturities of not less than eighteen nor more than twenty-two years, published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If the Corporation determines in good faith that for any reason the Corporation cannot determine the Twenty Year Constant Maturity Rate for any dividend period as provided above in this paragraph, then the Twenty Year Constant Maturity Rate for such dividend period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eighteen nor more than twenty-two years from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations shall not be generally available) to the Corporation by at least three recognized dealers in U.S. Government securities selected by the Corporation. "Ten Year Average Yield" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years). "Twenty Year Average Yield" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of twenty years). In September 1983, the weekly per annum market discount rate for three month U.S. Treasury bills,the Ten Year Average Yield and the Twenty Year Average Yield were published weekly by the Federal Reserve Board in "Federal Reserve Statistical Release H. 15 (519)--Selected Interest Rates." "Calendar Period" means a period of fourteen calendar days; "Special Securities" means securities which can, at the option of 6 the holder, be surrendered at face value in payment of any Federal estate tax or which provide tax benefits to the holder and are priced to reflect such tax benefits or which were originally issued at a deep or substantial discount. The Applicable Rate with respect to each dividend period after February 1, 1984 will be calculated as promptly as practicable by the Corporation according to the appropriate method described herein. The Corporation will cause each Applicable Rate to be published in a newspaper of general circulation in New York City at least three days prior to the commencement of the new dividend period to which it applies and will cause notice of such Applicable Rate to be included with the dividend payment checks next mailed to the holders of the Preferred Stock. The Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Twenty Year Constant Maturity Rate shall each be rounded to the nearest five-hundredths of a percentage point. Section 3. Liquidation Preference. ----------------------- Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of all of the outstanding shares of Preferred Stock shall have preference and priority over the Common Stock, or any other class of stock of the Corporation ranking upon liquidation junior to the Preferred Stock, for payment out of the assets of the Corporation or proceeds thereof, of $100 per share plus an amount equal to all dividends accrued and unpaid thereon to the date of final distribution to such holders, and after such payment the holders of Preferred Stock shall be entitled to no other payments. If, in the case of any such liquidation, dissolution or winding up of the Corporation, the assets of the Corporation or proceeds thereof shall be insufficient to make the full liquidation payment of $100 per share plus an amount equal to all accrued and unpaid dividends on the Preferred Stock and the full liquidation payments on any other preferred stock ranking as to liquidation on a parity with the Preferred Stock, then such assets and proceeds shall be distributed among the holders of the Preferred Stock and any such other preferred stock ratably in accordance with the respective amounts which would be payable on such shares of Preferred Stock and any such other preferred stock if all amounts thereon were to be paid in full. A consolidation or merger with, or sale or lease of all or substantially all of the assets of the Corporation to, one or more corporations shall not be deemed to be a liquidation, dissolution or winding up of the Corporation. Section 4. Redemption. ----------- The Corporation may not redeem the Preferred Stock prior to January 1, 1989. The Corporation, at its option, may 7 redeem shares of Preferred Stock, as a whole or in part, on or after January 1, 1989 through December 31, 1993 at a price of $103.00 per share and on or after January 1, 1994 at a price of $100.00 per share plus in each case accrued and unpaid dividends to the date fixed for redemption, upon not less than 30 nor more than 60 days' notice. The Corporation may not redeem less than all the outstanding shares of Preferred Stock unless full cumulative dividends have been paid for all outstanding shares of Preferred Stock for all past dividend periods. In the event the Corporation shall redeem shares of Preferred Stock, notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder's address as the same appears on the stock register of the Corporation. Each such notice shall state: (1) the redemption date; (2) the number of shares of Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the redemption price; (4) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (5) that dividends on the shares to be redeemed will cease to accrue on such redemption date. Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Corporation in providing money for the payment of the redemption price) dividends on the shares of the Preferred Stock so called for redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as stockholders of the Corporation (except the right to receive from the Corporation the redemption price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the redemption price aforesaid. If less than all the outstanding shares of the Preferred Stock are to be redeemed, shares to be redeemed shall be selected by the Corporation from outstanding shares of Preferred Stock not previously called for redemption by lot or pro rata (as nearly as may be) or by any other method determined by the Corporation in its sole discretion to be equitable. A new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. Notwithstanding the foregoing provisions of this Section 4, if any dividends on the Preferred Stock are in arrears, no shares of the Preferred Stock shall be redeemed unless all outstanding shares of the Preferred Stock are simultaneously redeemed, and the Corporation shall not purchase or otherwise acquire any shares of such Series; provided, however, that the foregoing shall not prevent the purchase or 8 acquisition of shares of the Preferred Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of the Preferred Stock. All shares of the Preferred Stock redeemed by the Corporation shall be retired and cancelled and shall be restored to the status of authorized but unissued shares of preferred stock, without designation as to series, and may thereafter be issued. Notwithstanding the Corporation's right to redeem the Preferred Stock, the Corporation shall have no obligation to repurchase or retire the Preferred Stock by sinking fund or otherwise. Section 5. Conversion, Preemptive Rights, Exchange. ---------------------------------------- The holders of shares of the Preferred Stock shall not have any rights to convert such shares into or exchange such shares for shares of any other class or classes or of any other series of any class or classes of capital stock of the Corporation. The holders of the Preferred Stock shall not have any preemptive rights. Section 6. Voting Rights. -------------- Holders of the Preferred Stock will not have any voting rights except as set forth below or as otherwise from time to time required by law. If, on the date used to determine stockholders of record for any meeting of stockholders of the Corporation at which directors are to be elected, dividends on the Preferred Stock or any other series of preferred stock ranking on a parity with the Preferred Stock as to dividends shall be in arrears in an amount equal to at least six quarterly dividends (whether or not consecutive) the holders of the Preferred Stock (voting separately as a class with all other affected series of preferred stock ranking on a parity with the Preferred Stock as to dividends and upon which like voting rights have been conferred and are exercisable) will be entitled to vote and elect two directors of the Corporation. Such right to elect directors shall remain in effect until all dividends payable on the Preferred Stock have been declared and paid or set apart for payment. Until the default in payments of all dividends which permitted the election of said directors shall cease to exist, any director who shall have been so elected pursuant to the next preceding sentence may be removed at any time, either with or without cause, only by the affirmative vote of the holders of the shares at the time entitled to cast a majority of the votes entitled to be cast for the election of any such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled by the vote of such holders. The right of the holders of the Preferred Stock to 9 elect directors shall remain in effect until all dividends payable on the Preferred Stock have been declared and paid or set apart for payment. The term of office of all directors so elected shall terminate immediately upon the termination of the right to vote for directors of the holders of the Preferred Stock and of the holders of all other such series of preferred stock. Each holder of Preferred Stock will have one vote for each share held. Without the consent or affirmative vote of the holders of at least two- thirds of the outstanding shares of Preferred Stock, voting separately as a class with all other affected series of preferred stock ranking on a parity with the Preferred Stock either as to dividends or upon liquidation, the Corporation shall not authorize, create or issue, or increase the authorized amount of, any class or series of stock ranking prior to the Preferred Stock as to dividends or upon liquidation. The affirmative vote or consent of the holders of at least two-thirds of the outstanding shares of the Preferred Stock, voting separately as a class with all other shares of the same class, will be required for any amendment, alteration or repeal, whether by merger or consolidation or otherwise, of the Corporation's Certificate of Incorporation or any certificate supplemental thereto if the amendment, alteration or repeal adversely affects the preferences, rights, powers or privileges of the Preferred Stock and any other shares of the same class; provided, however, that in any case in which one or more, but not all, series of such class would be adversely affected as to the preferences, rights, powers or privileges thereof, the affirmative vote of the holders of shares entitled to cast at least two-thirds of the votes entitled to be cast by the holders of the shares of all series that would be adversely affected, voting as a class, shall be required, and the holders of shares of any series that would not be adversely affected shall not be entitled to vote thereon. The Corporation's Certificate of Incorporation may be amended to increase the number of authorized shares of common or preferred stock ranking on a parity with or junior to the Preferred Stock as to dividends or upon liquidation without the vote of the holders of outstanding shares of Preferred Stock. -10- IN WITNESS WHEREOF, said Torchmark Corporation has caused this Certificate of Designations, Preferences and Rights of Adjustable Rate Cumulative Preferred Stock, Series A to be duly executed by its Chairman of the Board and attested to by its Secretary and has caused its corporate seal to be affixed hereto, this 23rd day of February, 1990. TORCHMARK CORPORATION /s/ R. K. Richey ------------------------------- R. K. Richey Chairman of the Board (Corporate Seal) ATTEST: /s/ Samuel E. Upchurch, Jr. - ---------------------------- Samuel E. Upchurch, Jr. Secretary -11- STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE ------------------------------ I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF STOCK DESIGNATION OF "TORCHMARK CORPORATION" FILED IN THIS OFFICE ON THE SECOND DAY OF DECEMBER, A.D. 1993, AT 10 O'CLOCK A.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING. * * * * * * * * * * /s/ William T. Quillen ---------------------------------- William T. Quillen, Secretary of State AMENDMENT TO CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK, SERIES A OF TORCHMARK CORPORATION PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE "TORCHMARK CORPORATION, a Delaware corporation (the "Corporation"), certifies that pursuant to the authority set forth in ARTICLE FOURTH of its Restated Certificate of Incorporation, and in accordance with the provisions of Section 151(g) of the General Corporation Law of the state of Delaware, its Board of Directors duly adopted resolutions on July 22, 1993, increasing the number of shares of its Preferred Stock designated as Adjustable the Cumulative Preferred Stock, Series A as follows: RESOLVED, that the number of shares constituting the Corporation's Adjustable Rate Cumulative Preferred Stock, Series A shall be, and it hereby is, increased by 500,000 shares to 1,500,000 shares; and therefore, RESOLVED FURTHER, that Section 1 of the Certificate of Designations, Preferences and Rights of Adjustable Rate Cumulative Preferred Stock, Series A of Torchmark Corporation previously filed on February 26, 1990, shall be, and it hereby is, amended by increasing the number of shares constituting such series to 1,500,000; and RESOLVED FURTHER, that except for the increase in the number of shares constituting such series all other provisions of such certificate shall remain in full force and effect. IN WITNESS WHEREOF, said Torchmark Corporation has caused the Amendment to Certificate of Designations, Preferences and Rights of Adjustable Rate Cumulative Preferred Stock, Series A, to be duly executed by its Chairman of the Board and attested to by its Secretary and has caused its corporate seal to be affixed hereto as the act and deed of such corporation and the undersigned certify that the facts stated herein are true this 1st day of December, 1993. TORCHMARK CORPORATION /s/ R. K. Richey --------------------------------- R. K. Richey Chairman of the Board (Corporate Seal) ATTEST: /s/ Samuel E. Upchurch, Jr. - ----------------------------------- Samuel E. Upchurch, Jr. Secretary Page 1 State of Delaware Office of the Secretary of State -------------------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF DESIGNATION OF "TORCHMARK CORPORATION", FILED IN THIS OFFICE ON THE EIGHTEENTH DAY OF SEPTEMBER, A.D. 1995, AT 10 O'CLOCK A.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING. /s/ Edward J. Freel ----------------------------------- Edward J. Freel, Secretary of State CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF 7.375% CUMULATIVE PREFERRED STOCK, SERIES A OF TORCHMARK CORPORATION Pursuant to Section 151 of the General Corporation Law of the State of Delaware TORCHMARK CORPORATION, a Delaware corporation (the "Company"), certifies that pursuant to the authority contained in ARTICLE FOUR of its Certificate of Incorporation, as amended, and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, its Board of Directors duly adopted resolutions on July 27, 1995, creating a series of its Preferred Stock designated as 7.375% Cumulative Preferred Stock, Series A: RESOLVED, that a series of the class of authorized Preferred Stock of the Company is hereby created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. ---------------------- The shares of such series shall be designated as "7.375% Cumulative Preferred Stock, Series "A" (the "Preferred Stock") and shall have a face value of $100,000 per share. The number of shares constituting such series shall be 750. Section 2. Dividends and Distributions. --------------------------- Holders of Preferred Stock will be entitled to receive, when and as declared by the Board of Directors of the Company out of assets of the Company legally available for payment, cumulative cash dividends at the rate of 7.375% of the face value per share per annum from the date of issuance to and including November 15, 2004. Dividends on the Preferred Stock will accrue from the date of issuance and will be payable semi-annually on June 30 and December 31 of each year (or, if such day is not a business day, then the next preceding business day) to the holders of record on such respective dates, not exceeding 30 days preceding the payment date thereof, as may be determined by the Board of Directors. The first dividend will be payable December 31, 1995. The dividends payable on the Preferred Stock for the period from the date of issuance to and including December 31, 1995 and for any period less than a full semi-annual dividend period shall be computed on the basis of a 360-day year of twelve 30- day months and the actual number of days elapsed in the period for which the dividends are payable. The dividends payable for each full semi-annual period commencing after December 31, 1995 shall be computed by dividing 1 the annual dividend rate for such dividend period by four and applying the resulting rate against the face value per share of the Preferred Stock. No full dividends shall be declared or paid or set apart for payment on the preferred stock of any series ranking, as to dividends, on a parity with the Preferred Stock for any period unless full cumulative dividends have been, or contemporaneously are, declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Preferred Stock for all dividend payment periods terminating on or prior to the date of payment of such full cumulative dividends. When dividends are not paid in full upon the Preferred Stock and any other preferred stock ranking on a parity as to dividends with the Preferred Stock, all dividends declared and paid or set aside for payment upon shares of Preferred Stock and any other preferred stock ranking on a parity as to dividends shall be declared and paid or set aside for payment pro rata so that the amount of dividends declared and paid or set aside for payment per share on the Preferred Stock and such other preferred stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of Preferred Stock and such other preferred stock bear to each other. Except as provided in Section 3 hereof, in the event that full cumulative semi-annual dividends on the Preferred Stock have not been declared and paid or set apart for payment, the Company may not declare or pay any dividend on, or make any distribution on, or payment on account of the purchase, redemption or other retirement of, its Common Stock or any other stock of the Company ranking as to dividends junior to the Preferred Stock, except that dividends may be declared and paid, and distributions and payments may be made, in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock or other stock ranking as to dividends and upon distribution or assets junior to the Preferred Stock. No interest shall be payable in respect of any dividend payment which may be in arrears. Section 3. Liquidation Preference. ---------------------- Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of all of the outstanding shares of Preferred Stock shall have preference and priority over the Common Stock, or any other class of stock of the Company ranking upon liquidation junior to the Preferred Stock, for payment out of the assets of the Company or proceeds thereof, of $100,000 per share plus an amount equal to all dividends accrued and unpaid thereon to the date of final distribution to such holders, and after such payment the holders of Preferred Stock shall be entitled to no other payments. If, in the case of any such liquidation, dissolution or winding up of the Company, the assets of the Company or proceeds thereof shall be insufficient to make 2 the full liquidation payment of $100,000 per share plus an amount equal to all accrued and unpaid dividends on the Preferred Stock and the full liquidation payments on any other preferred stock ranking as to liquidation on a parity with the Preferred Stock, then such assets and proceeds shall be distributed among the holders of the Preferred Stock and any such other preferred stock ratably in accordance with the respective amounts which would be payable on such shares of Preferred Stock and any such other preferred stock if all amounts thereon were to be paid in full. A consolidation or merger with, or sale or lease of all or substantially all of the assets of the Company to, one or more corporations shall not be deemed to be a liquidation, dissolution or winding up of the Company. Section 4. Redemption. ---------- The Company, at its option, may redeem shares of Preferred Stock, as a whole or in part in multiples of $1,000,000 on or after the date of issuance at a price of $100,000 per share plus accrued and unpaid dividends to the date fixed for redemption, upon not less than 30 days' notice. The Company may not redeem less than all the outstanding shares of Preferred Stock unless full cumulative dividends have been paid for all outstanding shares of Preferred Stock for all past dividend periods. In the event the Company shall redeem shares of Preferred Stock, notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder's address as the same appears on the stock register of the Company. Each such notice shall state: (1) the redemption date; (2) the number of shares of Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the redemption price; (4) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (5) that dividends on the shares to be redeemed will cease to accrue on such redemption date. Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Company in providing money for the payment of the redemption price) dividends on the shares of the Preferred Stock so called for redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as stockholders of the Company (except the right to receive from the Company the redemption price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state), such shares shall be redeemed by the Company at the redemption price aforesaid. If less than all the outstanding shares of the Preferred Stock are to be redeemed, shares to be redeemed shall be selected by the Company 3 from outstanding shares of Preferred Stock not previously called for redemption by lot or pro rata (as nearly as may be) or by any other method determined by the Company in its sole discretion to be equitable. A new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. Notwithstanding the foregoing provisions of this Section 4, if any dividends on the Preferred Stock are in arrears, no shares of the Preferred Stock shall be redeemed unless all outstanding shares of the Preferred Stock are simultaneously redeemed, and the Company shall not purchase or otherwise acquire any shares of such Series; provided, however, that the foregoing shall not prevent the purchase or however, that the foregoing shall not prevent the purchase or acquisition of shares of the Preferred Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of the Preferred Stock. All shares of the Preferred Stock redeemed by the Company shall be retired and cancelled and shall be restored to the status of authorized but unissued shares of preferred stock, without designation as to series, and may thereafter be issued. Notwithstanding the Company's right to redeem the Preferred Stock, the Company shall have no obligation to repurchase to retire the Preferred Stock by sinking fund or otherwise. Section 5. Conversion, Preemptive Rights, Exchange. --------------------------------------- The holders of shares of the Preferred Stock shall not have any rights to convert such shares into or exchange such shares for shares of any other class or classes or of any other series of any class or classes of capital stock of the Company. The holders of the Preferred Stock shall not have any preemptive rights. Section 6. Voting Rights. ------------- Holders of the Preferred Stock will not have any voting rights except as set forth below or as otherwise from time to time required by law. If, on the date used to determine stockholders of record for any meeting of stockholders of the Company at which directors are to be elected, dividends on the Preferred Stock or any other series of preferred stock ranking on a parity with the Preferred Stock as to dividends shall be in arrears in an amount equal to at least three semi-annual dividends (whether or not consecutive) the holders of the Preferred Stock (voting separately as a class with all other affected series of preferred stock ranking on a parity with the Preferred Stock as to dividends and upon which like voting rights have been conferred and are exercisable) will be entitled to vote and elect two directors of the Company. Such right to elect directors shall remain in effect until all dividend payments on the Preferred Stock have been 4 declared and paid or set apart for payment. Until the default in payments of all dividends which permitted the election of said directors shall cease to exist, any director who shall have been so elected pursuant to the next preceding sentence may be removed at any time, either with or without cause, only by the affirmative vote of the holders of the shares at the time entitled to cast a majority of the votes entitled to be cast for the election of any such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled by the vote of such holders. The right of the holders of the Preferred Stock to elect directors shall remain in effect until all dividends payable on the Preferred Stock have been declared and paid or set apart for payment. The term of office of all directors so elected shall terminate immediately upon the termination of the right to vote for directors of the holders of the Preferred Stock and of the holders of all other such series of preferred stock. Each holder of Preferred Stock will have one vote for each share held. Without the consent or affirmative vote of the holders of at least two-thirds of the outstanding shares of Preferred Stock, voting separately as a class with all other affected series of preferred stock ranking on a parity with the Preferred Stock either as to dividends or upon liquidation, the Company shall not authorize, create or issue, or increase the authorized amount of, any class or series of stock ranking prior to the Preferred Stock as to dividends or upon liquidation. The affirmative vote or consent of the holders of at least two-thirds of the outstanding shares of the Preferred Stock, voting separately as a class with all other shares of the same class, will be required for any amendment, alteration or repeal, whether by merger or consolidation or otherwise, of the Company's Certificate of Incorporation or any certificate supplemental thereto if the amendment, alteration or repeal adversely affects the preferences, rights, powers or privileges of the Preferred Stock and any other shares of the same class; provided, however, that in any case in which one or more, but not all, series of such class would be adversely affected as to the preferences, rights, powers or privileges thereof, the affirmative vote of the holders of shares entitled to cast at least two-thirds of the votes entitled to be cast by the holders of the shares of all series that would be adversely affected, voting as a class, shall be required, and the holders of shares of any series that would not be adversely affected shall not be entitled to vote thereon. The Company's Certificate of Incorporation may be amended to increase the number of authorized shares of common or preferred stock ranking on a parity with or junior to the Preferred Stock as to dividends or upon liquidation without the vote of the holders of outstanding shares of Preferred Stock. 5 IN WITNESS WHEREOF, said Torchmark Corporation has caused this Certificate of Designations, Preferences and Rights of 7.375% Cumulative Preferred Stock, Series A, to be duly executed by its Vice President and Associate General Counsel and attested to by its Secretary and has caused its corporate seal to be affixed hereto, this 15th day of September, 1995. TORCHMARK CORPORATION By: /s/ Stephen W. Still --------------------------- Vice President and Associate General Counsel [CORPORATE SEAL APPEARS HERE] ATTEST: By: /s/ Carol A. McCoy -------------------------- Secretary 6 EX-10.F 3 RESTATED STOCK INCENTIVE PLAN RESTATED TORCHMARK CORPORATION 1987 STOCK INCENTIVE PLAN (AMENDED AND RESTATED AS OF FEBRUARY 27, 1995) SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS. The name of this plan is the Torchmark Corporation 1987 Stock Incentive Plan (the "Plan"). The purpose of the Plan is to enable Torchmark Corporation (the "Company") and its Subsidiaries to attract and retain employees and directors who contribute to the Company's success by their ability, ingenuity and industry, and to enable such employees and directors to participate in the long-term success and growth of the Company through an equity interest in the Company. For purposes of the Plan, the following terms shall be defined as set forth below: a. "Affiliate" means any corporation (other than a Subsidiary), partnership, joint venture or any other entity in which the Company owns, directly or indirectly, at least a 10 percent beneficial ownership interest. b. "Board" means the Board of Directors of the Company. c. "Cause" means a participant's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company or any Subsidiary or Affiliate. d. "Code" means the Internal Revenue Code of 1986, as amended, or any successor thereto. e. "Committee" means the Compensation Committee of the Board. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board. f. "Commission" means the Securities and Exchange Commission. g. "Company" means Torchmark Corporation, a corporation organized under the laws of the State of Delaware (or any successor corporation). h. "Deferred Stock" means an award made pursuant to Section 9 below of the right to receive Stock at the end of a specified deferral period. i. "Director Stock Option" means any option to purchase shares of Stock granted pursuant to Section 6. j. "Disability" means total and permanent disability as determined under the Company's long term disability program. With respect to Director Stock Options, "Disability" shall be determined as if the Director was covered under the Company's long term disability program. k. "Disinterested Person" shall have the meaning set forth in the applicable provision of Rule 16b-3 as promulgated by the Commission under the Exchange Act, or any successor definition adopted by the Commission. l. "Early Retirement" means retirement from active employment with the Company, any Subsidiary, and any Affiliate pursuant to the early retirement provisions of the applicable company pension plan. m. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and any successor thereto. A-1 n. "Fair Market Value" means, as of any given date, the closing price of the Stock on such date on the New York Stock Exchange Composite Tape. o. "Incentive Stock Option" means any Stock Option intended to be and designated as an "incentive stock option" within the meaning of Section 422 of the Code. p. "Immediate Family" means the children, grandchildren or spouse of any optionee. q. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. r. "Normal Retirement" means retirement from active employment with the Company, any Subsidiary, and any Affiliate on or after the normal retirement date specified in the applicable company pension plan. s. "Plan" means this 1987 Stock Incentive Plan. t. "Restricted Stock" means an award of shares of Stock that are subject to restrictions under Section 8. u. "Retirement" means Normal or Early Retirement. v. "Stock" means the Common Stock of the Company. w. "Stock Appreciation Right" means a right granted under Section 7 below to surrender to the Company all or a portion of a Stock Option in exchange for an amount equal to the difference between (i) the Fair Market Value, as of the date such Stock Option or such portion thereof is surrendered, of the shares of Stock covered by such Stock Option or such portion thereof, and (ii) the aggregate exercise price of such Stock Option or such portion thereof. x. "Stock Option" means any option to purchase shares of Stock granted to employees pursuant to Section 5. y. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 2. ADMINISTRATION. The Plan shall be administered by the Committee which shall at all times consist solely of not less than three Disinterested Persons. Commencing on the date of the 1995 annual meeting of stockholders of the Company, all members of the Committee shall also be "outside directors" within the meaning of Section 162(m) of the Code. The Committee shall have the power and authority to grant to eligible employees, pursuant to the terms of the Plan: (i) Stock Options; (ii) Stock Appreciation Rights; (iii) Restricted Stock or (iv) Deferred Stock. In particular, the Committee shall have the authority: (i) to select the officers and other key employees of the Company, its Subsidiaries, and its Affiliates to whom Stock Options, Stock Appreciation Rights, Restricted Stock or Deferred Stock awards or a combination of the foregoing from time to time will be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock or Deferred Stock, or a combination of the foregoing, are to be granted hereunder; (iii) to determine the number of shares of Stock to be covered by each such award granted hereunder; A-2 (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (other than Director Stock Options), including, but not limited to, any restriction on any Stock Option or other award and/or the shares of Stock relating thereto based on performance and/or such other factors as the Committee may determine, in its sole discretion, and any vesting acceleration features based on performance and/or such other factors as the Committee may determine, in its sole discretion; (v) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of a participant, including providing for and determining the amount (if any) of deemed earnings on any deferred amount during any deferral period. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. SECTION 3. STOCK SUBJECT TO PLAN. The total number of shares of Stock reserved and available for distribution under the Plan shall be 11,300,000 comprised of: (i) 9,300,000 shares (plus such number of shares subject to options granted under the 1984 Torchmark Corporation Stock Option Plan which expire unexercised), which may consist, in whole or in part, of authorized and unissued shares or treasury shares, and (ii) 2,000,000 additional shares, which may consist, in whole or in part, of authorized and unissued shares or treasury shares. If any shares of Stock that have been optioned cease to be subject to option, or if any shares subject to any Restricted Stock or Deferred Stock award granted hereunder are forfeited or such award otherwise terminates, such shares shall again be available for distribution in connection with future awards under the Plan unless the forfeiting participant received any benefits of ownership such as dividends from the forfeited award. In the event of any merger, reorganization, consolidation, recapitalization, Stock dividend, or other change in corporate structure affecting the Stock, a substitution or adjustment shall be made in (i) the aggregate number of shares reserved for issuance under the Plan, (ii) the number and option price of shares subject to outstanding Stock Options and Director Stock Options granted under the Plan, (iii) the number of shares subject to Restricted Stock or Deferred Stock awards granted under the Plan, (iv) the aggregate number of shares available for issuance to any employee pursuant to Section 4(a), and (v) the number of Director Stock Options to be granted each year pursuant to Section 6, as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number, and further provided that no such adjustment shall increase the aggregate value of any outstanding award. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 4. ELIGIBILITY. (a) Officers and other key employees of the Company, its Subsidiaries or its Affiliates (but excluding members of the Committee and any person who serves only as a director) who are responsible for or contribute to the management, growth and/or profitability of the business of the A-3 Company, its Subsidiaries, or its Affiliates are eligible to be granted Stock Options, Stock Appreciation Rights, Restricted Stock or Deferred Stock awards. Except as provided in Section 6, the optionees and participants under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of shares covered by each award or grant; provided, however, that no employee shall be granted Stock Options on more than 200,000 shares in any calendar year. (b) Directors of the Company (other than directors who are also officers or employees of the Company, its Subsidiaries or its Affiliates) are eligible to receive Director Stock Options pursuant to Section 6 of the Plan. SECTION 5. STOCK OPTIONS FOR EMPLOYEES. Stock Options may be granted either alone or in addition to other awards granted under the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve, and the provisions of Stock Option awards need not be the same with respect to each optionee. The Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. The Committee shall have the authority to grant any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights) except that Incentive Stock Options shall not be granted to employees of an Affiliate. To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. Except as provided in Section 5(1), no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code. Notwithstanding the foregoing, in the event an optionee voluntarily disqualifies an option as an Incentive Stock Option within the meaning of Section 422 of the Code, the Committee may, but shall not be obligated to, make such additional grants, awards or bonuses as the Committee shall deem appropriate, to reflect the tax savings to the Company which results from such disqualification. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant but shall be not less than 100% of the Fair Market Value of the Stock on the date of the grant of the Stock Option. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date such Incentive Stock Option is granted and no Non- Qualified Stock Option shall be exercisable more than ten years and two days after the date such Non-Qualified Stock Option is granted. (c) Exercisability. Subject to paragraph (l) of this Section 5 with respect to Incentive Stock Options, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee, provided, however, that, except as provided in Section 5(f), 5(g), 5(h) or 13, no Stock Option shall be exercisable prior to six months from the A-4 date of the granting of the option. Notwithstanding the limitations set forth in the preceding sentence, the Committee may accelerate the exercisability of any Stock Option, at any time in whole or in part, based on performance and/or such other factors as the Committee may determine in its sole discretion. (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price, in cash, by check or such other instrument as may be acceptable to the Committee (including instruments providing for "cashless exercise"). As determined by the Committee, in its sole discretion, at or after grant, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee or, in the case of the exercise of a Non-Qualified Stock Option, Restricted Stock or Deferred Stock subject to an award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee). If payment of the option exercise price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock or Deferred Stock, the shares received upon the exercise of such Stock Option shall be restricted or deferred, as the case may be, in accordance with the original term of the Restricted Stock award or Deferred Stock award in question, except that the Committee may direct that such restrictions or deferral provisions shall apply to only the number of such shares equal to the number of shares of Restricted Stock or Deferred Stock surrendered upon the exercise of such option. No shares of unrestricted Stock shall be issued until full payment therefor has been made. An optionee shall have the rights to dividends or other rights of a stockholder with respect to shares subject to the option when the optionee has given written notice of exercise and has paid in full for such shares. (e) Transferability of Options. A Stock Option agreement may permit an optionee to transfer the Stock Option to members of his or her Immediate Family, to one or more trusts for the benefit of such Immediate Family members, or to one or more partnerships where such Immediate Family members are the only partners if (i) the agreement setting forth such Stock Option expressly provides that the Stock Option may be transferred only with the express written consent of the Committee, and (ii) the optionee does not receive any consideration in any form whatsoever for said transfer. Any Stock Option so transferred shall continue to be subject to the same terms and conditions in the hands of the transferee as were applicable to said Stock Option immediately prior to the transfer thereof. Stock Options granted prior to December 1, 1993 may be amended to provide for their transferability, subject to the foregoing conditions. Any Stock Option not (i) granted pursuant to any agreement expressly allowing the transfer of said Stock Option or (ii) amended expressly to permit its transfer shall not be transferable by the optionee otherwise than by will or by the laws of descent and distribution and such Stock Option thus shall be exercisable during the optionee's lifetime only by the optionee. (f) Termination by Death. Unless otherwise determined by the Committee, if an optionee's employment with the Company, any Subsidiary, and any Affiliate terminates by reason of death (or if an optionee dies following termination of employment by reason of disability or Normal Retirement), any Stock Option shall become immediately exercisable and may thereafter be exercised by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, during the period ending on the expiration of the stated term of such Stock Option or the first anniversary of the optionee's death, whichever is later. (g) Termination by Reason of Disability. Unless otherwise determined by the Committee, if an optionee's employment with the Company, any Subsidiary and any Affiliate terminates by reason of Disability, any Stock Option held by such optionee shall be immediately exercisable and may thereafter be exercised during the period ending on the expiration of the stated term of such Stock Option. In the event of termination of employment by reason of Disability, if an Incentive Stock A-5 Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (h) Termination by Reason of Retirement. Unless otherwise determined by the Committee, if an optionee's employment with the Company, any Subsidiary and any Affiliate terminates by reason of Normal Retirement, any Stock Option held by such optionee shall become immediately exercisable. A Stock Option held by an optionee whose employment has terminated by reason of Normal Retirement shall expire at the end of the stated term of such Stock Option, unless otherwise determined by the Committee. If an optionee's employment with the Company, any Subsidiary and any Affiliate terminates by reason of Early Retirement, any Stock Option shall terminate three years from the date of such Early Retirement or upon the expiration of the stated term of the Stock Option, whichever is shorter, unless otherwise determined by the Committee. In the event of Early Retirement, there shall be no acceleration of vesting of the Stock Option unless otherwise determined by the Committee at or after grant, and said Stock Option may only be exercised to the extent it is or has become exercisable prior to termination of the Stock Option. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (i) Termination for Cause. If the optionee's employment with the Company, any Subsidiary and any Affiliate is terminated for Cause, the Stock Option shall immediately be forfeited to the Company upon the giving of notice of termination of employment. (j) Other Termination. If the optionee's employment with the Company, any Subsidiary and any Affiliate is involuntarily terminated by the optionee's employer without Cause, the Stock Option shall terminate three months from the date of termination of employment or upon the expiration of the stated term of the Stock Option, whichever is shorter, unless otherwise determined by the Committee. If an optionee's employment with the Company, any Subsidiary and any Affiliate is voluntarily terminated for any reason, the Stock Option shall terminate one month from the date of termination of employment or upon the expiration of the stated term of the Stock Option, whichever is shorter. In the event of involuntary termination without Cause or voluntary termination for any reason, there shall be no acceleration of vesting of the Stock Option unless otherwise determined by the Committee and said Stock Option may only be exercised to the extent it is or has become exercisable prior to termination of the Stock Option. (k) Termination upon Change of Control. Notwithstanding the provisions of Section 5(j) or the stated term of the Stock Option, if the optionee's employment with the Company, any Subsidiary and any Affiliate is involuntarily terminated by the optionee's employer without Cause by reason of or within three months after a merger or other business combination resulting in a "Change of Control" as defined in Section 13 of this Plan, the Stock Option shall terminate upon the later of six months and one day after such merger or business combination or ten business days following the expiration of the period during which publication of financial results covering at least thirty days of post-merger combined operations has occurred. (l) Limit on Value of Incentive Stock Option First Exercisable Annually. The aggregate Fair Market Value (determined at the time of grant) of the Stock for which "incentive stock options" within the meaning of Section 422 of the Code are exercisable for the first time by an optionee during any calendar year under the Plan (and/or any other stock option plans of the Company, any Subsidiary and any Affiliate) shall not exceed $100,000. Notwithstanding the preceding sentence, the exercisability of such Stock Options may be accelerated by the Committee and shall be A-6 accelerated as provided in Sections 5(f), 5(g), 5(h), and 13, in which case Stock Options which exceed such $100,000 limit shall be treated as Non- Qualified Stock Options. SECTION 6. DIRECTOR STOCK OPTIONS. Director Stock Options granted under the Plan shall be options which are not intended to be "incentive stock options" within the meaning of Section 422 of the Code. For each calendar year after 1995, 3,000 Director Stock Options shall be granted automatically on the first day of each calendar year on which Stock is publicly traded on the New York Stock Exchange to each member of the Board on that date who is not an employee of the Company, its Subsidiaries or Affiliates ("Outside Director"). Director Stock Options granted under the Plan shall be evidenced by a written agreement in such form as the Committee shall from time to time approve, which agreements shall comply with and be subject to the following terms and conditions: (a) Option Price. The option price per share of Stock purchasable under a Director Stock Option shall be 100% of the Fair Market Value of the Stock on the date of the grant of the Director Stock Option. (b) Option Term. Each Director Stock Option shall be exercisable for a term of ten years and two days from the date such Director Stock Option is granted (subject to later termination as hereinafter provided). (c) Exercisability. Except as provided in Section 13, Director Stock Options granted for calendar years beginning with 1994 shall become exercisable in full six months from the date of grant of the option. (d) Method of Exercise. Director Stock Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price, in cash, by check or such other instrument as may be acceptable to the Committee (including instruments providing for "cashless exercise"). Payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee (based on the Fair Market Value of the Stock on the date the option is exercised). No shares of unrestricted Stock shall be issued until full payment therefor has been made. An optionee shall have the rights to dividends or other rights of a stockholder with respect to shares subject to the option when the optionee has given written notice of exercise and has paid in full for such shares. (e) Non-transferability of Options. No Director Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, and all Director Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (f) Termination of Service. Upon an optionee's termination of status as an Outside Director with the Company for any reason, any Director Stock Options held by such optionee shall become immediately exercisable and may thereafter be exercised until the expiration of the stated term of such Director Stock Options or the first anniversary of the optionee's death, whichever is later. Not withstanding the foregoing sentence, if the optionee's status as an Outside Director terminates by reason of or within three months after a merger or other business combination resulting in a "Change of Control" as defined in Section 13 of this Plan, the Director Stock Option shall terminate A-7 upon the latest of (i) six months and one day after the merger or business combination, (ii) ten business days following the expiration of the period during which publication of financial results covering at least thirty days of post-merger combined operations has occurred, and (iii) the expiration of the stated term of such Director Stock Option. SECTION 7. STOCK APPRECIATION RIGHTS. (a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Non-Qualified Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Incentive Stock Option. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, except that, unless otherwise provided by the Committee at the time of grant, a Stock Appreciation Right granted with respect to less than the full number of shares covered by a related Stock Option shall only be reduced if and to the extent that the number of shares covered by the exercise or termination of the related Stock Option exceeds the number of shares not covered by the Stock Appreciation Right. A Stock Appreciation Right may be exercised by an optionee, in accordance with paragraph (b) of this Section 7, by surrendering the applicable portion of the related Stock Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in paragraph (b) of this Section 7. Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. (b) Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 7 of the Plan; provided, however, that any Stock Appreciation Right granted subsequent to the grant of the related Stock Option shall not be exercisable during the first six months of the term of the Stock Appreciation Right, except that this additional limitation shall not apply in the event of death or Disability of the optionee prior to the expiration of the six-month period. (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive up to, but not more than, an amount in cash or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under paragraph (e) of Section 5 of the Plan. (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Stock to be issued under the Plan. (v) A Stock Appreciation Right granted in connection with an Incentive Stock Option may be exercised only if and when the market price of the Stock subject to the Incentive Stock Option exceeds the exercise price of such Stock Option. A-8 (vi) In its sole discretion, the Committee may provide, at the time of grant of a Stock Appreciation Right under this Section 7, that such Stock Appreciation Right can be exercised only in the event of a "Change of Control" and/or a "Potential Change of Control" (as defined in Section 13 below). (vii) The Committee, in its sole discretion, may also provide that in the event of a "Change of Control" and/or a "Potential Change of Control" (as defined in Section 13 below) the amount to be paid upon the exercise of a Stock Appreciation Right shall be based on the "Change of Control Price" (as defined in Section 13 below). SECTION 8. RESTRICTED STOCK. (a) Administration. Shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company and its Subsidiaries and Affiliates to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price, if any, to be paid by the recipient of Restricted Stock (subject to Section 8(b) hereof), the time or times within which such awards may be subject to forfeiture, and all other conditions of the awards. The Committee may also condition the grant and/or vesting of Restricted Stock upon the attainment of specified performance goals, or such other criteria as the Committee may determine, in its sole discretion. The provisions of Restricted Stock awards need not be the same with respect to each recipient. (b) Awards and Certificates. The prospective recipient of an award of shares of Restricted Stock shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award (a "Restricted Stock Award Agreement"), has delivered a fully executed copy thereof to the Company, and has otherwise complied with the then applicable terms and conditions. Awards of Restricted Stock must be accepted within a period of 60 days (or such shorter period as the Committee may specify) after the award date by executing a Restricted Stock Award Agreement and paying the price specified in the Restricted Stock Award Agreement. Such price shall not exceed the amount necessary to assure compliance with state law, and shall in no event exceed 10% of the Fair Market Value of the Stock. Each participant who is awarded Restricted Stock shall be issued a stock certificate registered in the name of the participant in respect of such shares of Restricted Stock. The Committee shall specify that the certificate shall bear a legend, as provided in clause (i) below, and/or be held in custody by the Company, as provided in clause (ii) below. (i) The certificate shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Torchmark Corporation 1987 Stock Incentive Plan and a Restricted Stock Award Agreement entered into between the registered owner and Torchmark Corporation. Copies of such Plan and Agreement are on file in the offices of Torchmark Corporation, 2001 Third Avenue South, Birmingham, Alabama 35233." (ii) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to this Section 8 shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the Restricted Stock Award Agreements, during such period as may be set by the Committee commencing on the grant date (the A-9 "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. The Committee may, in its sole discretion, provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part, before or after the participant's termination of employment, based on performance and/or such other factors as the Committee may determine, in its sole discretion. (ii) Except as provided in paragraph (c)(i) of this Section 8, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company, including the right to receive any dividends. Dividends paid in stock of the Company or stock received in connection with a stock split with respect to Restricted Stock shall be subject to the same restrictions as on such Restricted Stock. Certificates for shares of unrestricted Stock shall be delivered to the participant promptly after, and only after, the period of forfeiture shall expire without forfeiture in respect of such shares of Restricted Stock. (iii) Subject to the provisions of the Restricted Stock Award Agreement and this Section 8, upon termination of employment for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the participant, and the participant shall only receive the amount, if any, paid by the participant for such forfeited Restricted Stock. SECTION 9. DEFERRED STOCK AWARDS. (a) Administration. Deferred Stock may be awarded either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company, its Subsidiaries and Affiliates to whom, and the time or times at which, Deferred Stock shall be awarded, the number of shares of Deferred Stock to be awarded to any participant, the duration of the period (the "Deferral Period") during which, and the conditions under which, receipt of the Stock will be deferred, and the terms and conditions of the award in addition to those set forth in paragraph (b) of this Section 9. The Committee may also condition the grant and/or vesting of Deferred Stock upon the attainment of specified performance goals, or such other criteria as the Committee shall determine, in its sole discretion. The provisions of Deferred Stock awards need not be the same with respect to each recipient. (b) Terms and Conditions. The shares of Deferred Stock awarded pursuant to this Section 9 shall be subject to the following terms and conditions: (i) Subject to the provisions of this Plan and the award agreement, Deferred Stock awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. At the expiration of the Deferral Period (or Elective Deferral Period, (as defined below) where applicable), share certificates shall be delivered to the participant, or his legal representative, in a number equal to the shares covered by the Deferred Stock award. (ii) At the time of the award, the Committee may, in its sole discretion, determine that amounts equal to any dividends declared during the Deferral Period (or Elective Deferral Period) with respect to the number of shares covered by a Deferred Stock award will be: (a) paid to the participant currently; (b) deferred and deemed to be reinvested; or (c) that such participant has no rights with respect thereto. (iii) Subject to the provisions of the award agreement and this Section 9, upon termination of employment for any reason during the Deferral Period for a given award, the Deferred Stock in question shall be forfeited by the participant. A-10 (iv) Based on performance and/or such other criteria as the Committee may determine, the Committee may, at or after grant (including after the participant's termination of employment), accelerate the vesting of all or any part of any Deferred Stock award and/or waive the deferral limitations for all or any part of such award. (v) A participant may elect to defer further receipt of the award for a specified period or until a specified event (the "Elective Deferral Period"), subject in each case to the Committee's approval and to such terms as are determined by the Committee, all in its sole discretion. Subject to any exceptions adopted by the Committee, such election must generally be made at least six months prior to completion of the Deferral Period for a Deferred Stock award (or for an installment of such an award). (vi) Each award shall be confirmed by, and subject to the terms of, a Deferred Stock award agreement executed by the Company and the participant. SECTION 10. LOAN PROVISIONS. With the consent of the Committee, the Company may make, or arrange for, a loan or loans to an employee with respect to the exercise of any Stock Option granted under the Plan and/or with respect to the payment of the purchase price, if any, of any Restricted Stock awarded hereunder. The Committee shall have full authority to decide whether to make a loan or loans hereunder and to determine the amount, term and provisions of any such loan or loans, including the interest rate to be charged in respect of any such loan or loans, whether the loan or loans are to be with or without recourse against the borrower, the terms on which the loan is to be repaid and the conditions, if any, under which the loan or loans may be forgiven. SECTION 11. AMENDMENTS AND TERMINATION. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made which would impair the right of an optionee or participant under a Stock Option, Director Stock Option, Stock Appreciation Right, Restricted Stock or Deferred Stock award theretofore granted, without the optionee's or participant's consent. The provisions of Section 6 regarding Director Stock Options shall not be amended more than once every six months, except to comply with changes in the Code, the Employee Retirement Income Security Act or the rules thereunder. Amendments may be made without stockholder approval except as required to satisfy Rule 16b-3 under the Exchange Act, Section 162(m) of the Code, or other regulatory requirements. The Committee may amend the terms of any award or option (other than Director Stock Options) theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any holder without his consent. The Committee may also substitute new Stock Options for previously granted Stock Options including options granted under other plans applicable to the participant and previously granted Stock Options having higher option prices. SECTION 12. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing set forth herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. A-11 SECTION 13. CHANGE OF CONTROL. The following acceleration and valuation provisions shall apply in the event of a "Change of Control" or "Potential Change of Control," as defined in this Section 13: (a) In the event of a "Change of Control" as defined in paragraph (b) of this Section 13, unless otherwise determined by the Committee in writing at or after grant, but prior to the occurrence of such Change of Control, or, if and to the extent so determined by the Committee in writing at or after grant (subject to any right of approval expressly reserved by the Committee at the time of such determination) in the event of a "Potential Change of Control," as defined in paragraph (c) of this Section 13: (i) any Stock Appreciation Rights and any Stock Options awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested; (ii) the restrictions and deferral limitations applicable to any Restricted Stock and Deferred Stock awards under the Plan shall lapse and such shares and awards shall be deemed fully vested; and (iii) the value of all outstanding Stock Options, Director Stock Options, Stock Appreciation Rights, Restricted Stock and Deferred Stock Awards, shall, to the extent determined by the Committee at or after grant, be settled on the basis of the "Change of Control Price" (as defined in paragraph (d) of this Section 13) as of the date the Change of Control occurs or Potential Change of Control is determined to have occurred, or such other date as the Committee may determine prior to the Change of Control or Potential Change of Control. In the sole discretion of the Committee, such settlements may be made in cash or in stock, as shall be necessary to effect the desired accounting treatment for the transaction resulting in the Change of Control. In addition, any Stock Option, Director Stock Option, and Stock Appreciation Right which has been outstanding for less than six months shall be settled solely in stock. (b) For purposes of paragraph (a) of this Section 13, a "Change of Control" means the happening of any of the following: (i) when any "person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company or a Subsidiary or any Company employee benefit plan), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities; (ii) the occurrence of any transaction or event relating to the Company required to be described pursuant to the requirements of 6(e) of Schedule 14A of Regulation 14A of the Commission under the Exchange Act; (iii) when, during any period of two consecutive years during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board cease, for any reason other than death, to constitute at least a majority thereof, unless each director who was not a director at the beginning of such period was elected by, or on the recommendation of, at least two-thirds of the directors at the beginning of such period; or (iv) the occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a Subsidiary through purchase of assets, or by merger, or otherwise. (c) For purposes of paragraph (a) of this Section 13, a "Potential Change of Control" means the happening of any of the following: (i) the entering into an agreement by the Company, the consummation of which would result in a Change of Control of the Company as defined in paragraph (b) of this Section 13; or A-12 (ii) the acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company or a Subsidiary or any Company employee benefit plan) of securities of the Company representing 5 percent or more of the combined voting power of the Company's outstanding securities and the adoption by the Board of Directors of a resolution to the effect that a Potential Change of Control of the Company has occurred for purposes of this Plan. (d) For purposes of this Section 13, "Change of Control Price" means the highest price per share paid in any transaction reported on the New York Stock Exchange Composite Tape, or paid or offered in any transaction related to a potential or actual Change of Control of the Company at any time during the preceding sixty day period as determined by the Committee, except that (i) in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the Committee decides to cashout such options, and (ii) in the case of Director Stock Options, the sixty day period shall be the period immediately prior to the Change of Control. SECTION 14. GENERAL PROVISIONS. (a) All certificates for shares of Stock delivered under the Plan shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing set forth in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee or director of the Company, any Subsidiary or any Affiliate, any right to continued employment (or, in the case of a director, continued retention as a director) with the Company, a Subsidiary or an Affiliate, as the case may be, nor shall it interfere in any way with the right of the Company, a Subsidiary or an Affiliate to terminate the employment of any of its employees at any time. (c) Each participant shall, no later than the date as of which the value of an award first becomes includible in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee, in its sole discretion, regarding payment of, any Federal, FICA, state, or local taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements. Participants subject to the requirements of Section 16 of the Exchange Act shall satisfy their Federal, and where applicable, FICA, state and local tax withholding obligations with respect to all awards other than Director Stock Options by the reduction, in an amount necessary to pay all said withholding tax obligations, of the number of shares of Stock otherwise issuable (or, in the case of an award payable in cash, the amount of cash otherwise payable) to said participants in respect of the award. All participants other than persons subject to the requirements of Section 16 of the Exchange Act may elect, subject to the approval of the Committee, to satisfy their Federal, and where applicable, FICA, state and local tax withholding obligations with respect to all awards other than Stock Options which have related Stock Appreciation Rights by the reduction, in an amount necessary to pay all said withholding tax obligations, of the number of shares of Stock or amount of A-13 cash otherwise issuable or payable to said participants in respect of an award. The Company and, where applicable, its Subsidiaries and Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes owed hereunder by a participant who is not subject to Section 16 of the Exchange Act from any payment of any kind otherwise due to said participant. (d) At the time of grant or purchase, the Committee may provide in connection with any grant or purchase made under this Plan that the shares of Stock received as a result of such grant or purchase shall be subject to a right of first refusal, pursuant to which the participant shall be required to offer to the Company any shares that the participant wishes to sell, with the price being the then Fair Market Value of the Stock, subject to the provisions of Section 13 hereof and to such other terms and conditions as the Committee may specify at the time of grant. (e) No member of the Board or the Committee, nor any officer or employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation. SECTION 15. EFFECTIVE DATE OF PLAN. The Plan shall be effective on the date it is approved by a majority vote of the Company's stockholders. The Plan, as amended and restated as of February 27, 1995, shall be effective on the date it is approved by the Company's stockholders at the 1995 annual meeting of stockholders. SECTION 16. TERM OF PLAN. No Stock Option, Director Stock Option, Stock Appreciation Right, Restricted Stock award or Deferred Stock award shall be granted pursuant to the Plan on or after April 28, 2004, but awards theretofore granted may extend beyond that date. A-14 EX-10.U 4 COINSURANCE AND SERVICING AGREEMENT COINSURANCE AND SERVICING AGREEMENT between SECURITY BENEFIT LIFE INSURANCE COMPANY Topeka, Kansas (hereinafter referred to as "Company") and LIBERTY NATIONAL LIFE INSURANCE COMPANY Birmingham, Alabama (hereinafter referred to as the "Reinsurer") RECITALS -------- Company is a life, accident and health insurer domiciled in the State of Kansas which has a block of individual whole life and term insurance policies in force, commonly known as the USPA & IRA business, more particularly described in EXHIBIT "A" hereto, hereinafter referred to as the "Policies". Reinsurer is a - ----------- life, accident and health insurer domiciled in the state of Alabama and licensed to transact such business in all states except New York. Reinsurer desires to purchase, by way of 100% quota share coinsurance, all of Company's rights in the Policies and to service and administer the Policies on the terms set forth in this agreement ("Agreement"). In consideration of these recitals and the mutual covenants herein set forth, the parties agree as follows: INDEX RECITALS ....................................................... (1) ARTICLE I - REINSURANCE......................................... (2) Liability Reinsured; Effective Date ........................ (2) Future Issues .............................................. (2) Claims ..................................................... (3) ARTICLE II - COMPUTATION AND PAYMENT OF REINSURANCE CONSIDERATION ............................................ (3) Payable to Reinsurer ....................................... (3) Payable to Company ......................................... (4) Settlement ................................................. (5) ARTICLE III - CALCULATION OF RESERVES .......................... (6) Methods .................................................... (6) ARTICLE IV - REPRESENTATIONS, WARRANTIES AND COVENANTS OF REINSURER AND COMPANY .................................... (7) Inducement ................................................. (7) Binding Agreement .......................................... (7) Issuance of Policies ....................................... (7) Solicitation ............................................... (8) Financial Information ...................................... (8) Agent's Compensation ....................................... (8) ARTICLE V - EXTRA CONTRACTUAL LIABILITY ........................ (9) Definition ................................................. (9) Liability of Company ....................................... (9) Liability of Reinsurer ..................................... (9) ARTICLE VI - OVERSIGHTS ........................................ (10) Restoration ................................................ (10) ARTICLE VII - POLICY CHANGES ................................... (10) No Changes ................................................. (10) ARTICLE VIII - RECORDS ......................................... (10) Records .................................................... (10) Accounting Data ............................................ (10) ARTICLE IX - INSPECTION OF RECORDS ............................. (11) Rights of Reinsurer ........................................ (11) Annual Statements .......................................... (11) ARTICLE X - ADMINISTRATIVE AND SERVICING ....................... (12) Obligation of Reinsurer .................................... (12) Administrative Office ...................................... (13) Payment of Claims and Agents' Compensation ................. (13) Claim Checks ............................................... (13) Reinsurer Expenses ......................................... (13) Bank Accounts ............................................... (14) Books and Records ........................................... (14) Litigation .................................................. (14) Regulatory Inquiries and Complaints ......................... (15) Policyholder Complaints ..................................... (15) Commencement ................................................ (16) Assignment/Subcontract ...................................... (16) Obligations of Company ...................................... (16) Tax Reporting ............................................... (17) ARTICLE XI - ARBITRATION ......................................... (17) Condition Precedent ......................................... (17) Timing ...................................................... (18) Expenses .................................................... (18) Location .................................................... (18) ARTICLE XII - INSOLVENCY OF COMPANY; ADVERSE CHANGE IN REINSURER ....................................... (19) Reinsurer Remains Liable .................................... (19) Notice ...................................................... (19) ARTICLE XIII - PARTIES TO AGREEMENT ............................. (20) No Third Party Beneficiary .................................. (20) ARTICLE XIV - COVENANT OF COMPANY................................ (20) No Solicitation.............................................. (20) ARTICLE XV - OTHER PROVISIONS ................................... (20) Offset ...................................................... (20) Amendment ................................................... (21) Waiver of Breach ........................................... (21) Notice ...................................................... (21) Further Assurances........................................... (22) Successors and Assigns ...................................... (22) Headings .................................................... (22) Assignment .................................................. (22) Duration..................................................... (23) Confidentiality ............................................. (23) Reinstatements .............................................. (23) Existing Reinsurance Coverage ............................... (23) Integration ................................................. (24) Counterparts ................................................ (24) Severability ................................................ (24) DAC Tax ..................................................... (24) ARTICLE XVI - TRUST AGREEMENT ................................... (25) Trust Agreement ............................................. (25) SIGNATURES ...................................................... (26) EXHIBIT A - POLICIES REINSURED .................................. (27) EXHIBIT B - AGENT COMMISSIONS ................................... (28) COINSURANCE AND SERVICING AGREEMENT between SECURITY BENEFIT LIFE INSURANCE COMPANY Topeka, Kansas (hereinafter referred to as "Company") and LIBERTY NATIONAL LIFE INSURANCE COMPANY Birmingham, Alabama (hereinafter referred to as the "Reinsurer") RECITALS -------- Company is a life, accident and health insurer domiciled in the State of Kansas which has a block of individual whole life and term insurance policies in force, commonly known as the USPA & IRA business, more particularly described in EXHIBIT "A" hereto, hereinafter referred to as the "Policies". Reinsurer is a ----------- life, accident and health insurer domiciled in the state of Alabama and licensed to transact such business in all states except New York. Reinsurer desires to purchase, by way of 100% quota share coinsurance, all of Company's rights in the Policies and to service and administer the Policies on the terms set forth in this agreement ("Agreement"). In consideration of these recitals and the mutual covenants herein set forth, the parties agree as follows: ARTICLE I - REINSURANCE ----------------------- 1.1 Liability Reinsured; Effective Date. The Company hereby cedes and the ------------------------------------ Reinsurer hereby reinsures on a 100% coinsurance basis, 100% of the Company's liability on the Policies, which are in force or within the grace period, on the Effective Date of this Agreement. Within five (5) business days after the Effective Date, Company shall make available a listing of the Policies, showing each insured's name, age, policy number, annual premium, valuation basis and amount of reserves as of the Effective Date. The liability of the Reinsurer shall commence at 11:59 P.M. on December 31, 1995 (the "Effective Date"). 1.2 Future Issues. The reinsurance effected hereby shall cover and include -------------- future issues that result from term conversions and/or the exercise of options to purchase additional insurance, and any reinstatement of previously lapsed policies written on the same form as the Policies. Reinsurer shall have the right to issue such of Company's policy forms as are necessary to comply with the requirements of the Policies and any riders thereto concerning any such future issues which, when issued, shall be part of the Policies reinsured hereby. In the event Company does not have an approved form of the same type as those used for the Policies on which a conversion or additional insurance can be issued, Company will have no liability to Reinsurer. However, in any case where Company issues a conversion or additional insurance on a policy form not of the 2 same type as those used for the Policies, this reinsurance shall not cover such policy. 1.3 Claims. Company shall remain liable for all claims where the death or ------ other event giving rise to that claim occurs before the Effective Date. Reinsurer shall be liable for all claims where the death or other event giving rise to that claim occurs on or after the Effective Date. For any claim arising before the Effective Date but not reported until after the Effective Date. Reinsurer will transfer back to the Company the Net Statutory Liability, less Ceding Commission applicable to such policy. ARTICLE II - COMPUTATION AND PAYMENT OF --------------------------------------- REINSURANCE CONSIDERATION ------------------------- 2.1 Payable to Reinsurer. The Company shall credit the Reinsurer as the -------------------- reinsurance consideration, the following: (a) An initial premium equal to the Net Statutory Liability on the Policies as of the Effective Date. The term "Net Statutory Liability" shall mean the reserves on the Policies, computed as set forth in Article III, plus (i) ---- gross advance premiums, (ii) the liability for cost of collection in excess of loading, and (iii) the liability for unearned policy loan interest; less (x) ---- the net due and deferred premium asset, (y) policy loans, and (z) the asset for agents' balances. (b) Company shall thereafter pay to Reinsurer 100% of the premium on the Policies paid on or after the Effective Date for so long as the Policies stay in force. However, Reinsurer shall be liable to Company for agents' compensation and premium 3 taxes (with respect to premiums paid after the Effective Date) out of such premiums received by it. Agents' compensation shall be paid by Reinsurer in the name of Company in accordance with Reinsurer's normal procedure for paying agents' compensation as provided in Section 10.3. Within thirty (30) days after the end of each calendar quarter, Reinsurer shall pay Company a sum equal to 2% of the premiums received on the Policies for the quarter just ended, which shall serve as an estimated payment of such premium tax liability on the Policies. Within 60 days after the end of each calendar year, Company will calculate the premium taxes actually owed by Company for premiums received on the Policies for the year then ended, and the parties will settle accounts within sixty (60) days thereafter. During that period the Reinsurer shall have the right to audit Companies' premium tax calculation and to verify the premium tax owed by the Company. If the estimated premium taxes paid by Reinsurer are less than the actual amount due the several states, Reinsurer shall pay Company the deficiency. If the estimated amount paid is in excess of the actual amount, Company will pay the amount of such excess to Reinsurer. 2.2 Payable to Company. Reinsurer will credit Company a ceding commission ------------------ ("Ceding Commission") equal to 2.076 times the annual premium in force on the Policies on the Effective Date. "Annual premium in force" means gross premium for the annual mode for in force premium paying Policies. In force premium paying policies shall not include policies which are being 4 continued in force as a result of the exercise of a nonforfeiture option, premium waiver, automatic premium loan, or policies which are in the course of death claim settlement. 2.3 Settlement. The parties recognize that calculation of the Net ---------- Statutory Liability and the Ceding Commission cannot be completed until after the Effective Date. Therefore, it is agreed as follows: (a) The Net Statutory Liability and Ceding Commission as of the Effective Date will be estimated by using the amounts reflected on Company's financial statement as of November 30, 1995, and adjusting such figures based on one-tenth of the change in the Net Statutory Liability from January through October. Company shall make such calculation within seven (7) business days after the date of execution of this Agreement and deliver same to Reinsurer for review and approval. In the event Company and Reinsurer are unable to agree on the estimated amount of the Net Statutory Liability and the Ceding Commission by December 28, 1995, this Agreement will be terminated and the parties will be relieved from further liability hereunder. However, if the parties agree on such amounts by December 28, 1995, this Agreement shall be binding and enforceable in accordance with its terms, and Company shall transfer to the Trustee under that certain Trust and Security Agreement of even date herewith among Company, Reinsurer and the Trustee therein, the amount by which the Net Statutory Liability exceeds the Ceding Commission (as so estimated) no later than 2:00 p.m., 5 C.S.T. on December 29, 1995. Receipt by the Trustee shall be deemed Receipt by the Reinsurer. (b) As soon as practical after the Effective Date, Reinsurer shall calculate the true amount of Net Statutory Liability and Ceding Commission and shall notify Company of the results of that calculation. The parties shall make final settlement within ten (10) days after the date of that notification provided they agree on said amount. Final settlement shall be by wire transfer of funds. (c) In the event that at any time either party discovers an error in the calculation of either Net Statutory Liability or the Ceding Commission utilized in arriving at the final settlement pursuant to (b), just above, the other party shall be notified in writing and the party owing money shall pay the other party within ten (10) days after the parties have agreed in writing on the nature and amount of any such error, or if they are unable to agree, such sum, if any, will be paid within ten (10) days of completion of arbitration. ARTICLE III - CALCULATION OF RESERVES ------------------------------------- 3.1 Methods. The valuation bases and methods of determining reserves -------- shall be as provided in the Policy forms (if so provided) and said bases and methods shall conform to the terms of the insurance laws in the states of domicile of the company and the Reinsurer. 6 ARTICLE IV - REPRESENTATIONS, WARRANTIES AND COVENANTS ------------------------------------------------------ OF REINSURER AND COMPANY ------------------------ 4.1. Inducement. As an inducement to Reinsurer and Company to enter into ----------- this Agreement, Company and Reinsurer make the representations and warranties contained in this Article IV, all of which shall survive the Effective Date, notwithstanding any investigation by Reinsurer and Company. 4.2 Binding Agreement. The execution and delivery of this Agreement have ------------------ been duly approved by the boards of directors of Company and Reinsurer, and each party has furnished to the other a certified copy of a resolution of its board of directors approving this Agreement. This Agreement constitutes the binding and enforceable obligation of the parties in accordance with its terms. The execution, delivery and performance of this Agreement does not violate or conflict with any agreement to which Company or Reinsurer is a party or any rule, judgment, writ or order of any court or other tribunal applicable to either party. 4.3 Issuance of Policies. All of the Policies were issued on forms approved --------------------- by the insurance regulatory authority of the state where issued in accordance with the laws and regulations of said states, by agents who were duly licensed and appointed by Company, in accordance with Company's underwriting standards for the Policies, and at the premium rates filed by Company, or if not filed, at the premium rates reflected by Company's books and records. Company shall bear the risk of, and shall indemnify and hold Reinsurer harmless from any loss or liability 7 resulting from errors, conflicts or inconsistencies in the Policy forms, riders, applications or any other printed material utilized in the solicitation, underwriting or issuance of the Policies by Company prior to the Effective Date, including those known to Reinsurer on or before the Effective Date. 4.4 Solicitation. Company is not aware of any breach or violation of ------------- statutory or common law by its agents in the solicitation of the Policies. However, notwithstanding such lack of knowledge Company assumes the risk of any improper acts of Company or its agents in the solicitation or sale of the Policies, and shall indemnify and hold Reinsurer harmless from any claim, loss or liability arising from any act or omission of its agents that occurred on or before the Effective Date in the solicitation of the Policies. 4.5 Financial Information. Company's statutory statements, books and --------------------- records (including the electronic data on the Policies furnished to Reinsurer), completely and accurately reflect all relevant information concerning the Policies, including without limitation, premiums, reserves, amount of insurance in force, endorsements, options, and agents' compensation, in all material respects. 4.6 Agent's Compensation. The agent's compensation with respect to the --------------------- Policies is as set forth in Exhibit "B". Company shall not change such ----------- compensation or otherwise alter its agreement with the agents concerning the Policies. Company 8 shall be liable for any bonuses or other agent's compensation accrued on premiums received before the Effective Date. ARTICLE V - EXTRA CONTRACTUAL LIABILITY --------------------------------------- 5.1 Definition. The term "Extra Contractual Liability" shall include ---------- liability (a) for exemplary, punitive or other enhanced damages, (b) under any consumer protection or other enhanced damages, (b) under any consumer protection or deceptive trade practice law, (c) for violation of the duty of good faith and fair dealing, or (d) any other liability not expressed in the Policy contract. 5.2 Liability of Company. Company shall be responsible for and shall -------------------- indemnify and hold Reinsurer harmless from Extra Contractual Liability based on acts or omissions of Company, its officers, employees, agents, (except any agent of Company that acts at the direction of Reinsurer) or other representatives, including, without limitation, liability arising from the advertising, solicitation, sale or underwriting of the Policies. 5.3 Liability of Reinsurer. Reinsurer shall be responsible for and shall ---------------------- indemnify and hold Company harmless from Extra Contractual Liability based on acts or omissions of Reinsurer, its officers, employees, agents or other representatives, including without limitation liability arising from the settlement of claims by Reinsurer pursuant to this Agreement. 9 ARTICLE VI - OVERSIGHTS ----------------------- 6.1 Restoration. If failure to comply with any terms of this Agreement is ----------- shown to be unintentional and the result of unintentional oversight on the part of either the Company or the Reinsurer, both the Company and the Reinsurer shall be restored to the positions they would have occupied had no such unintentional oversight occurred. ARTICLE VII - POLICY CHANGES ---------------------------- 7.1 No Changes. Company shall make no changes, other than as permitted by ---------- the Policies or as required by state or federal law, in the Policies, without Reinsurer's express, written consent. Company shall cooperate with Reinsurer in making any filings deemed necessary by the Reinsurer. Reinsurer shall bear the costs incurred or associated with all such filings. ARTICLE VIII - RECORDS ---------------------- 8.1 Records. Concurrent with the commencement of Reinsurer's servicing of ------- policies, Company shall deliver to Reinsurer all files and records pertaining to the Policies, including, without limitation, all applications and underwriting information. The Reinsurer understands and agrees that with the exception of some claim files, all such records shall be on microfiche or in a form set forth in Section 4.5 herein. 8.2 Accounting Data. Concurrent with the commencement of Reinsurer's --------------- servicing of policies, Company shall deliver to Reinsurer all financial and accounting records pertaining to the Policies, in machine readable format, to include all information 10 which Reinsurer will need to prepare and file all GAAP and statutory statements, to calculate Net Statutory Liability and Ceding Commission, and to administer the Policies. Company represents and warrants that all such information will be accurate and complete in all material respects. ARTICLE IX - INSPECTION OF RECORDS ----------------------------------- 9.1 Right of Reinsurer. The Reinsurer or its representatives shall have ------------------ the right at any reasonable time to inspect, at the office of the Company, all books, records and documents relating to the Policies, either before or after the Effective Date. If Reinsurer discovers that any of Company's representations and warranties are incomplete or inaccurate in any material respect, Reinsurer may terminate this Agreement by giving notice to Company no later than December 28, 1995. The Company shall have the same rights to inspect Reinsurer's books, records, and documents relating to the Policies at Reinsurer's office, so long as any of the Policies remain coinsured. 9.2 Annual Statements. Within ten (10) business days after it is filed, ----------------- the parties shall furnish annually to each other a copy of the Convention Blank (annual statement) filed with the commissioner of insurance in their respective states of domicile, or an audited accounting from a certified public accountant, including a balance sheet and operating statement for the year. 11 ARTICLE X - ADMINISTRATION AND SERVICING ---------------------------------------- 10.1 Obligations of Reinsurer. Reinsurer shall be responsible for the ------------------------ administration and servicing of the Policies, including the payment of claims, but all such administration and servicing shall be done in the name of and on behalf of Company. The Reinsurer shall provide the Company Quarterly Accounting Reports, providing Exhibit 8 by reserve basis, a summary of Due and Deferred Premiums, Premiums received by state, commissions paid to producers, commissions payable to producers, aggregate claims paid and claims outstanding. The Reinsurer shall provide the Company Annual Accounting Reports providing, Exhibit 8 by reserve basis, a summary of Due and Deferred premiums, Premiums received by state, commissions paid to producers, commissions payable to producers, claims paid by state for the entire year, claims outstanding by state, Page 7 Analysis of Increase in Reserves, Exhibit of Life Insurance, Policy Exhibits by State and Schedule T of the NAIC Convention Blank for the Policies reinsured hereunder. Upon the Company's request, the Reinsurer shall provide sufficient documentation with regard to paying claims, commissions and renewals. Tax information reporting pertaining to policy benefits and commissions will be the responsibility of the party legally obligated to file such tax information reports. Reinsurer shall furnish such data and information within 30 days after the end of each calendar quarter and within 30 days after the end of each calendar year. 12 10.2 Administrative Office. Reinsurer shall establish a Company ---------------------- Administrative Office with separate post office boxes and phone in the name of Company; all renewal premiums and Claims will be mailed to those addresses and all forms and correspondence delivered to the policyholders of the Policies will contain those addresses. 10.3 Payment of Claims and Agents' Compensation. Reinsurer shall process ------------------------------------------- and pay claims on the Policies on behalf of and in the name of Company, using the same procedures and standards as it uses with respect to its direct written business. Before Reinsurer shall deny a claim or seek to rescind a Policy, it shall give written notice of such fact to Company. If Company does not object in writing within seven (7) days from receipt of Reinsurer's notice, Reinsurer shall be free to take such action in the name of Company. If Company gives written notice to Reinsurer that it objects to Reinsurer's proposed denial or rescission action, within such period, Company shall pay the claim out of its own funds, but Reinsurer shall pay Company the reserve less Ceding Commission for the Policy that is the subject of such claim. Reinsurer shall pay all agents' compensation with respect to the Policies in the name of Company. 10.4 Claim Checks. All checks in payment of Claims and premium refunds will ------------- be in the name of Company. 10.5 Reinsurer Expenses. All expenses incurred by Reinsurer in the ------------------- performance of its duties under this Article X will be paid by Reinsurer. 13 10.6 Bank Accounts. Reinsurer will establish bank accounts in the name of -------------- Company. Any cash excess or shortage in the bank accounts daily will be transferred to or from a Reinsurer cash account. Reinsurer will be responsible for payment of banking fees for these accounts and for reconciling the accounts on a timely basis. Any loss of funds with respect to such accounts shall be the responsibility of Reinsurer. 10.7 Books and Records. Reinsurer will keep and maintain full and complete ------------------ books and records, including, but not limited to, premiums and claims, and other activities using the same standards and procedures as it uses with respect to such books and records on its direct written business. 10.8 Litigation. Reinsurer will have full and complete control of all ----------- lawsuits or threats of lawsuits concerning the Policies and may defend and manage same in the name of and on behalf of Company provided that for all such matters that involve events transpiring before the Effective Date, Company shall be kept advised and the parties will cooperate concerning any settlement of such claims. In any case in which plaintiff is seeking extra contractual damages pursuant to allegations which may impose liability therefore on Company pursuant to the provisions of Section 5.2, Company may engage counsel at its expense to represent its interests in such litigation. Company and Reinsurer will deliver within five (5) business days copies of all citations,complaints, demand letters or other notices or 14 threats of litigation which either receives relative to the Policies. 10.9 Regulatory Inquiries and Complaints. Reinsurer and Company each shall ------------------------------------ keep the other informed on a timely basis of any inquiries and complaints received from any Federal or State governmental agency with respect to the Policies, the servicing of the Policies, and the reinsurance provided in this Agreement. It shall be Reinsurer's primary responsibility to respond to such inquiries and complaints on Company's account, but to the extent either party feels it is necessary or desirable that Company participate in such response Company shall do so. 10.10 Policyholder Complaints. Reinsurer shall provide Company on a ------------------------ quarterly basis with a listing of the complaints received from policyholders, their representatives or any regulatory authority which list shall show disposition of each complaint. 10.11 Commencement. Reinsurer's obligation to service the Policies shall ------------- commence as soon as commercially reasonable after the Effective Date but no later than April 30, 1996, and Company shall provide all administration and servicing prior to that date. Company shall be compensated by Reinsurer at a rate of $65,000.00 per month for January and February for its services under this Subsection payable by Reinsurer within ten (10) business days after billing by the Company at the end of each month. In the event the transfer is not completed by February 29, 1996, Reinsurer shall pay an additional $20,000.00 for 15 services performed by Company from March 1, 1996 to April 30, 1996. During the interim period, Company shall cooperate with Reinsurer in order to provide for a smooth transition of the servicing of the Policies without interruption or impairment of service to the insureds, owners, and agents. 10.12 Assignment/Subcontract. Reinsurer may assign its obligations under ----------------------- this Article X to, or subcontract with, any of its affiliates provided any such assignee is rated no less than "A" by A.M. Best Company. No other assignment will be made without Company's prior written consent which shall not be unreasonably withheld or delayed. However, no such assignment or subcontracting shall relieve Reinsurer from its obligations to Company. 10.13 Obligations of Company. The parties acknowledge that it is impossible ----------------------- to detail each and every action which will be required over the course of the years in servicing and administering the Policies. Therefore, Company agrees to provide reasonable cooperation to Reinsurer as may be necessary to permit Reinsurer to service and administer the Policies, including without limitation, the forwarding of premium payments and correspondence received by Company relating to the Policies no later than seven (7) business days after, and to maintain approved policy forms of the same type reinsured necessary to comply with the exercise of options to purchase additional insurance or other future issues described in Section 1.2. 16 10.14 Tax Reporting. For calendar years subsequent to 1995, Reinsurer shall -------------- perform the calculations necessary to make the information filings with the Internal Revenue Service for holders of Policies who surrender Policies. By January 10 in each year, commencing in 1997, Reinsurer shall perform the calculations associated with this function and transmit same to Company. The information shall include name, address, social security number and amounts to be included in the various reporting forms. Reinsurer will also withhold any amounts which are required to be withheld and transfer such withholding amounts to Company, along with the information necessary to identify each account, in accordance with the following schedule: withholdings from Monday through Wednesday shall be wired to permit Company's deposit by Friday, and withholdings from Thursday through Sunday shall be wired to permit Company's deposit on Wednesday. Reinsurer shall indemnify and hold Company harmless from all costs incurred or penalties assessed that are directly caused by erroneous information provided Company by Reinsurer. ARTICLE XI - ARBITRATION ------------------------ 11.1 Condition Precedent. As a condition precedent to any right of action -------------------- hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Agreement, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the company, the other by the 17 Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies. In the event that either party should fail to choose an Arbiter within thirty (30) days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail upon the selection of an Umpire within thirty (30) days following their appointment, each Arbiter shall name three nominees, of whom the other shall decline two, and the decision shall be made by drawing lots. 11.2 Timing. Each party shall present its case to the Arbiters within ------ thirty (30) days following the date of appointment of the Umpire. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call upon the Umpire and the decision of the majority shall be final and binding upon both parties. 11.3 Expenses. Each party shall bear the expense of its own Arbiter, and -------- shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. 11.4 Location. Any arbitration proceedings shall take place at Dallas, -------- Texas. 18 ARTICLE XII - INSOLVENCY OF COMPANY ----------------------------------- 12.1 Reinsurer Remains Liable. In the event of the insolvency of the ------------------------ Company, the liability of the Reinsurer shall continue to be determined by all of the terms, conditions, and limitations under this Agreement, but the Reinsurer will make settlement of claims: (a) Directly to the liquidator, receiver or statutory successor of said Company; and (b) Without diminution because of the insolvency of the Company. 12.2 Notice. In the event of the insolvency of the Company, the ------ liquidator, receiver or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company in respect of the business coinsured under this Agreement within a reasonable time after such claim is filed. The Reinsurer may investigate such claim and interpose at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator, receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the Company as part of the expense of liquidation to the extent of a proportionate share of the benefits which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. 19 ARTICLE XIII - PARTIES TO AGREEMENT ----------------------------------- 13.1 No Third Party Beneficiary. This is an Agreement for reinsurance -------------------------- solely between the Company and the Reinsurer. The acceptance of reinsurance hereunder shall not create any right or legal relation whatever between the Reinsurer and the insured or the beneficiary under any policy reinsured hereunder. ARTICLE XIV - COVENANT OF COMPANY --------------------------------- 14.1 No Solicitation. Company acknowledges that the Ceding Commission to be --------------- paid by Reinsurer is a good and valuable consideration for its rights in the Policies, including the right of Reinsurer to benefit from renewal premium on the Policies, and other "good will" associated with the Policies. Therefore, Company agrees that it will take no action which would interfere with such right. Without limiting the generality of the foregoing, Company shall not (a) solicit or attempt to solicit the owners of the Policies in any manner for the purpose of replacing or causing the lapse or non-renewal of the Policies, nor will it permit its agents to engage in any such activity, or (b) furnish to any third party (other than as required by law) information concerning the Policies, including without limitation, any information which could be used by such third party to solicit the owners of the Policies. ARTICLE XV - OTHER PROVISIONS ----------------------------- 15.1 Offset. Company or Reinsurer may offset any balances, whether on ------ account or premiums, commissions, claims, losses, 20 benefits or any other amounts, due from one party to the other under this Agreement. 15.2 Amendment. This Agreement may only be amended or modified by written --------- agreement signed by both parties hereto. 15.3 Waiver of Breach. The failure to exercise or the waiver of any term, ---------------- covenant or condition of this Agreement shall not be deemed a waiver of any subsequent breach of the same or any other term, covenant or condition herein contained. No covenant, term or condition of this Agreement shall be deemed to have been waived unless such waiver be in writing, signed by the party charged therewith. 15.4 Notice. Any notice, request, instruction or other communication at ------ any time hereunder required or permitted to be given or furnished by either party hereto to the other shall be deemed sufficiently given or furnished if in writing and actually delivered to the party to be notified or deposited in the United States mail in first-class, registered or certified mail, with return receipt requested, postage prepaid, and addressed to the party to be notified, as follows: Company: Security Benefit Life Insurance Company 700 Harrison Street Topeka, KS 66336-0001 Attn: President 21 Reinsurer: Liberty National Life Insurance Company 2001 Third Avenue South Birmingham, AL 35233 Attn: President With Copy To: Larry M. Hutchison General Counsel United American Insurance Company 2909 North Buckner Blvd. Dallas, TX 75228 or to such other address as shall be furnished in writing by either party to the other, and shall be deemed to have been given as of the date so delivered or deposited in the United States mail, as the case may be. 15.5 Further Assurances. Each of the parties hereto shall make, do or ------------------ cause to be done such further acts and execute, acknowledge and deliver such instruments and documents as the other party may reasonably request or require to effectuate fully the purposes and intent of this Agreement. 15.6 Successors and Assigns. This Agreement, and the terms, conditions ---------------------- and covenants contained herein, shall be binding upon, and inure to the benefit of, the parties, their respective successors and assigns. 15.7 Headings. The headings of the several paragraphs contained herein -------- are for convenience only and do not define, limit or construe the contents of such paragraphs. 15.8 Assignment. Reinsurer may assign any or all of the Policies to an ---------- affiliate of the Reinsurer without Company's consent as long as such affiliate is in existence on the 22 Effective Date and is rated not less than "A" by A. M. Best Company. However, as between Company and Reinsurer, Reinsurer shall not be relieved of its liability hereunder. No other assignment of the policies or rights under this agreement may be made by either party without prior written consent of the other, which consent will not be unreasonably withheld or delayed. 15.9 Duration. This agreement shall survive until the last benefit of the -------- last policyholder has been settled under the terms of the Policies. 15.10 Confidentiality. Each of the parties shall maintain confidentiality --------------- of all information related to the policies and all other information denominated a confidential by the other party provided to it in connection with this agreement and shall not disclose such information to any third parties without prior written consent of the other party, except as may be required by law or regulatory authorities. 15.11 Reinstatements. If a policy reinsured hereunder that was reduced, -------------- terminated, or lapsed, is reinstated pursuant to a contractual right of the policyholder, the Reinsurance for such policy under this agreement shall be reinstated automatically to the amount that would have been in force if the policy had not been reduced, terminated or lapsed. 15.12 Existing Reinsurance Coverage. Company hereby represents that as to ----------------------------- the Effective Date, there is no reinsurance coverage in effect on any of the Policies. 23 15.13 Integration. This Agreement supercedes all prior discussion and ----------- agreements between the parties with respect to the subject matter of this Agreement, and this Agreement, including the Exhibits attached hereto and any other written agreements between the parties, contains the sole and entire Agreement between the parties with respect to the subject matter hereof. 15.14 Counterparts. This Agreement may be executed simultaneously in any ------------ number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 15.15 Severability. In the event that any provision or term of this ------------ Agreement shall be held by any court to be illegal or unenforceable, all of the other terms and provisions shall remain in full force and effect. 15.16 DAC Tax. Pursuant to IRC Section 848 as added by the Revenue ------- Reconciliation Act of 1990, Insurance companies are required to capitalize and amortize specified policy acquisition expenses. The amount capitalized is determined by proxy based on a percentage of net premiums. Treasury Regulation Sec. 1.848-2 (g)(8) allows the parties to a reinsurance agreement to elect to compute the capitalization of specified policy acquisition expenses without regard to the general deductions limitation. The parties hereto do so elect that the party with net positive consideration for this Agreement for each taxable year will capitalize specified policy acquisition expenses with 24 respect to this Agreement without regard to the general deductions limitation of Section 848 (c)(1) and the parties will exchange information pertaining to the amount of net consideration with respect to the reinsurance provided under this Agreement, beginning with tax year 1995 and, each tax year thereafter to ensure consistency. ARTICLE XVI - TRUST AGREEMENT ----------------------------- 16.1 Trust Agreement. The Reinsurer and the Company agree that prior to --------------- any payments being made by either party that are otherwise required by this Agreement, that a Trust and Security Agreement will be entered into by and among the Reinsurer, the Company, and a trustee acceptable to both the Reinsurer and the Company, it being understood and agreed that the Net Statutory Liability maintained on the Effective Date by the Company for the Policies, without reduction for any Ceding Commission owed to the Company by the Reinsurer, must be paid to the Trustee so as to fund said Trust pursuant to the terms of this Agreement and of said Trust and Security Agreement. In the event said Trust and Security Agreement is not entered into and so funded as set forth in this Section 16.1, this Agreement shall become null and void. 25 IN WITNESS WHEREOF, the COMPANY and the Reinsurer have by their respective officers executed and delivered these presents, in duplicate, as of the effective date. SIGNATURES: SECURITY BENEFIT LIFE INSURANCE COMPANY ATTEST: /s/ J. Craig Anderson By: /s/ Howard R. Fricke - ------------------------------ --------------------------------- J. Craig Anderson (name) Howard R. Fricke (name) - ------------------------- ---------------------------- Assistant Secretary (title) President & Chief Executive (title) - ------------------------- Officer ---------------------------- LIBERTY NATIONAL LIFE INSURANCE COMPANY ATTEST: /s/ William C. Barclift By: /s/ Anthony L. McWhorter - --------------------------------- --------------------------------- William C. Barclift (name) Anthony L. McWhorter (name) - -------------------------- ----------------------------- Exec. V.P., Gen. Counsel & (title) President (title) Secretary ----------------------------- - -------------------------- 26 EXHIBIT "A" - POLICIES REINSURED The "Policies" include policies solicited by the USPA & IRA Agency and issued on the policy forms listed below. The "Policies" are issued on individual plans of insurance commonly referred to as "Traditional" Nonparticipating Insurance and specifically exclude any Participating, Excess Interest, Universal Life or other similar policies which might have been issued to the customers of the USPA & IRA Agency. Plan Description Policy Form (1) - ---------------- --------------- Whole Life Insurance Policy 4565 (5-87) Decreasing Term Insurance Policy 4566 (5-87) Decreasing Term Insurance Policy 4567 (6-87) Miscellaneous Riders and Supplemental Benefits Issued in Conjunction with the Policies Various (1) All plans include State Variations with separate Policy Form Numbers. 27 EXHIBIT "B" 28 EX-23.A 5 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Torchmark Corporation: We consent to incorporation by reference in the Registration Statements (Nos. 2-76378, 2-76912, 33-23580, 2-93760, 33-1032, and 33-65507) on Forms S-8 of our report dated January 31, 1996, except for Note 16 which is as of February 26, 1996, relating to the consolidated balance sheet of Torchmark Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations shareholders' equity, and cash flows and related schedules for each of the years in the three-year period ended December 31, 1995, which report appears in the December 31, 1995 Annual Report on Form 10-K of Torchmark Corporation. Our report refers to changes in accounting principles to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 106 Employers' Accounting for Postretirement Benefits Other Than Pensions, --------------------------------------------------------------------- SFAS No. 109 Accounting for Income Taxes, SFAS No. 121 Accounting for the --------------------------- ------------------ Certain Investments in Debt and Equity Securities and SFAS No. 121 Accounting - ------------------------------------------------- ---------- for the Impairment of Long Lived Assets and for Long Lived Assets to Be - ----------------------------------------------------------------------- Disposed Of. - ----------- KPMG PEAT MARWICK LLP Birmingham, Alabama March 26, 1996 EX-24 6 POWER OF ATTYS POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1995. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ J. P. Bryan ----------------------------------- J. P. Bryan, Director Date: March 8, 1996 ------------------------------ POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1995. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Joseph M. Farley ----------------------------------- Joseph M. Farley, Director Date: March 6, 1996 ------------------------------ POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1995. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Louis T. Hagopian ----------------------------------- Louis T. Hagopian, Director Date: March 6, 1996 ------------------------------ POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1995. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ C. B. Hudson ----------------------------------- C. B. Hudson, Director Date: March 8, 1996 ------------------------------ POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1995. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Joseph L. Lanier, Jr. ----------------------------------- Joseph L. Lanier, Jr., Director Date: March 6, 1996 ------------------------------ POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1995. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Harold T. McCormick ----------------------------------- Harold T. McCormick, Director Date: March 3, 1996 ------------------------------ POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1995. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Joseph W. Morris ----------------------------------- Joseph W. Morris, Director Date: March 5, 1996 ------------------------------ POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1995. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ George J. Records ----------------------------------- George J. Records, Director Date: March 8, 1996 ------------------------------ POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Officer and Director of Torchmark Corporation does hereby constitute and appoint Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1995. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ R.K. Richey ----------------------------------- R. K. Richey, Director, Chairman and Chief Executive Officer Date: March 6, 1996 ------------------------------ POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1995. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Yetta G. Samford, Jr. ----------------------------------- Yetta G. Samford, Jr., Director Date: March 6, 1996 ------------------------------ POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Officer and Director of Torchmark Corporation does hereby constitute and appoint R. K. Richey, William C. Barclift, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1995. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Keith A. Tucker ----------------------------------- Keith A. Tucker, Vice Chairman and Director (Principal Financial Officer) Date: March 6, 1996 ------------------------------ POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Officer of Torchmark Corporation does hereby constitute and appoint R. K. Richey, Keith A. Tucker, William C. Barclift and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 1995. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name. /s/ Gary L. Coleman ------------------------------- Gary L. Coleman, Vice President & Chief Accounting Officer Date: March 3, 1996 ------------------------- EX-27 7 FINANCIAL DATA SCHEDULE
7 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 5,210,224 0 0 10,551 52,274 143,356 5,778,873 13,158 0 1,398,622 9,364,104 4,566,850 83,473 209,773 77,039 981,360 193,096 0 73,784 1,515,168 9,364,104 1,546,283 381,865 (14,323) 153,657 1,009,336 204,067 425,904 428,175 157,539 271,945 (128,710) 0 0 143,235 2.00 0 0 0 0 0 0 0 0
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