Filed On 3/22/02 · SEC File 1-08052 · Accession Number 931763-2-748
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
3/22/02 Torchmark Corp 10-K 12/31/01 12:357 Donnelley R R & S..10/FA
Document/Exhibit Description Pages Size
1: 10-K Annual Report 96 468K
2: EX-3.II By-Laws of Torchmark Corporation 23 51K
3: EX-10.D 364 Day Credit Agreement 81 258K
4: EX-10.Q Five Year Credit Agreement 96 321K
5: EX-10.Y Amendment to Receivables Purchase Agr. 13 35K
6: EX-10.Z Retirement Life Insurance Benefit Agreement 3 12K
7: EX-10.AA Retirement Life Insurance Benefit Agreement 3 12K
8: EX-11 Statement Re Computation of Per Share Earnings 2± 12K
9: EX-20 Proxy Statement for Annual Meeting 26 115K
10: EX-21 Subsidiaries of the Registrant 1 9K
11: EX-23.A-H Independent Auditors' Consent 1 8K
12: EX-24 Power of Attorney 12 30K
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, 2001 1-8052
TORCHMARK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 63-0780404
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2001 Third Ave. South, 35233
Birmingham, AL
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
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
89102Q201 Exchange, London,
7 3/4% Trust Preferred 89102T205 England
Securities New York Stock Exchange
7 3/4% Trust Preferred
Securities New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Securities reported pursuant to Section 15(d) of the Act:
TITLE OF EACH CLASS: CUSIP NUMBER:
6 1/4% Senior Notes due 2006 891027 AL 8
8 1/4% Senior Debentures due 2009 891027 AE 4
7 7/8% Notes due 2023 891027 AF 1
7 3/8% Notes due 2013 891027 AG 9
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 $4,911,334,350
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCK, AS OF FEBRUARY 28, 2002: 122,202,895.
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 25, 2002,
PART III
INDEX OF EXHIBITS (PAGES 88 through 90)
TOTAL NUMBER OF PAGES INCLUDED ARE 97
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. (Waddell & Reed) 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 (Family Service) was
purchased in July, 1990, and American Income Life Insurance Company (American
Income) was purchased in November, 1994. Torchmark disposed of Family Service
and Waddell & Reed in 1998.
The following table presents Torchmark's business by primary distribution
method:
[Enlarge/Download Table]
Primary
Distribution Method Company Products Distribution
-----------------------------------------------------------------------------------------------------------------
Direct Response Globe Life And Individual life and supplemental health Direct response, mail,
Accident insurance including juvenile and television,magazine;
Insurance Company senior life coverage and Medicare nationwide.
Oklahoma City, OK Supplement.
-----------------------------------------------------------------------------------------------------------------
Liberty National Liberty National Life Individual life and 2,162 full-time sales repre-
Exclusive Agency Insurance Company supplemental health insurance. sentatives; 110 district
Birmingham, Alabama offices in the Southeastern
U.S.
-----------------------------------------------------------------------------------------------------------------
American Income American Income Life Individual life and supplemental health 1,768 agents in the U.S.,
Exclusive Agency Insurance Company insurance to union and credit Canada, and New Zealand.
Waco, Texas union members and other
associations.
-----------------------------------------------------------------------------------------------------------------
United Investors United Investors Life Individual life insurance Independent Agency.
Agency Insurance Company and annuities.
Birmingham, Alabama
-----------------------------------------------------------------------------------------------------------------
Military Liberty National Life Individual life insurance. Independent Agency
Insurance Company through career agents
Birmingham, Alabama nationwide.
Globe Life And Accident
Insurance Company
Oklahoma City, Oklahoma
-----------------------------------------------------------------------------------------------------------------
United American United American Senior life and supplemental health 39,038 independent agents
Independent Agency Insurance Company insurance including in the U.S., Puerto Rico and
and Branch Office McKinney, Texas Medicare Supplement Canada; 1,644 exclusive
Agency coverage and long-term care. producing agents in
84 branch offices.
Additional information concerning industry segments may be found in
Management's Discussion and Analysis and in Note 19--Business Segments in the
Notes to Consolidated Financial Statements beginning on page 78.
Insurance
Life Insurance
Torchmark's insurance subsidiaries write a variety of nonparticipating
ordinary life insurance products. These include traditional and interest
sensitive whole-life insurance, term life insurance, and other life insurance.
The following table presents selected information about Torchmark's life
products:
[Download Table]
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- --------------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- ---------- ---------- ----------
Whole life:
Traditional............ $147,889 $133,413 $119,799 $ 695,261 $ 652,195 $ 612,964
Interest-sensitive..... 9,330 13,907 18,348 154,743 160,865 168,805
Term.................... 133,869 139,990 115,592 387,695 368,045 330,533
Other................... 3,544 3,433 3,468 19,714 19,039 18,307
-------- -------- -------- ---------- ---------- ----------
$294,632 $290,743 $257,207 $1,257,413 $1,200,144 $1,130,609
======== ======== ======== ========== ========== ==========
1
The distribution methods for life insurance products include sales by direct
response, exclusive agents and independent agents. These methods are discussed
in more depth under the heading Marketing on page 6. The following table
presents life annualized premium issued by distribution method:
[Download Table]
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- --------------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- ---------- ---------- ----------
Direct response.... $112,041 $112,918 $ 96,091 $ 326,111 $ 306,162 $ 283,406
Exclusive Agents:
Liberty National.. 54,853 53,608 51,467 314,676 312,173 307,495
American Income... 66,421 56,560 54,045 265,912 245,433 231,490
United American... 4,913 4,730 5,315 21,158 21,362 21,800
Independent Agents:
United American... 24,453 25,708 13,319 54,143 53,269 43,394
Other............. 31,951 37,219 36,970 275,413 261,745 243,024
-------- -------- -------- ---------- ---------- ----------
$294,632 $290,743 $257,207 $1,257,413 $1,200,144 $1,130,609
======== ======== ======== ========== ========== ==========
Permanent insurance products sold by Torchmark insurance subsidiaries 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, 2001 was $267 million and the average
interest rate earned on these loans was 7.0% in 2001. Interest income earned
on policy loans was $18.2 million in 2001, $17.0 million in 2000 and $16.3
million in 1999.
The availability of cash values contributes to voluntary policy terminations
by policyholders through surrenders. 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. The ratio of aggregate face amount voluntary
terminations to the mean amount of life insurance in force was 19.8% in 2001,
17.8% in 2000, and 17.0% in 1999. The increase in the ratio for 2001 resulted
primarily from the higher than expected rate of voluntary lapses of a block of
relatively high face amount policies written by Direct Response, a plan that
is no longer being sold.
The following table presents an analysis of changes to the Torchmark
subsidiaries' life insurance business in force:
[Enlarge/Download Table]
(Amounts in thousands)
2001 2000 1999
---------------------- ---------------------- ----------------------
Number of Amount of Number of Amount of Number of Amount of
policies Insurance policies Insurance policies Insurance
--------- ------------ --------- ------------ --------- ------------
In force at January 1,.. 9,671 $108,318,990 9,654 $101,846,461 9,622 $ 96,339,059
New issues.............. 1,329 27,175,722 1,292 25,754,400 1,332 22,846,100
Other increases......... -0- 65,297 -0- 69,187 -0- 105,271
Death benefits.......... (107) (381,682) (114) (355,728) (105) (327,733)
Lapses.................. (1,019) (20,026,246) (994) (17,175,351) (1,023) (15,352,225)
Surrenders.............. (147) (1,897,490) (141) (1,568,313) (145) (1,505,248)
Other decreases......... (26) (199,572) (26) (251,666) (27) (258,763)
------ ------------ ----- ------------ ------ ------------
In force at December
31,.................... 9,701 $113,055,019 9,671 $108,318,990 9,654 $101,846,461
====== ============ ===== ============ ====== ============
Average policy size (in
dollar amounts):
Direct response--
Juvenile.............. $ 6,955 $ 6,766 $ 6,690
Other.................. 13,533 12,985 12,146
2
Health insurance
Torchmark insurance subsidiaries offer supplemental health insurance
products. These are generally classified as (1) Medicare Supplement, (2)
cancer and (3) other health 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 is an automatic
claim filing system for Medicare Part B benefits whereby policyholders do not
have to file most claims because they are paid from claim records sent
electronically directly to the Torchmark insurers by Medicare.
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. 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 policies include accident, long-term care and limited-benefit
hospital and surgical coverages. These policies are generally issued as
guaranteed-renewable and are offered on an individual basis through exclusive
and independent agents, and direct response. They 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 a stated maximum.
The following table presents supplemental health annualized premium for the
three years ended December 31, 2001 by marketing method:
[Download Table]
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- ------------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- ---------- ---------- --------
Direct response...... $ 3,295 $3,572 $ 4,323 $ 18,817 $16,167 $ 12,785
Exclusive agents:
Liberty National.... 10,747 10,081 9,859 162,724 163,387 149,447
American Income..... 10,019 8,615 8,039 49,260 47,659 46,691
United American..... 115,684 145,089 102,583 337,026 310,526 231,034
Independent agents:
United American..... 73,539 85,115 68,022 474,816 466,560 444,401
-------- -------- -------- ---------- ---------- --------
$213,284 $252,472 $192,826 $1,042,643 $1,004,299 $884,358
======== ======== ======== ========== ========== ========
The following table presents supplemental health annualized premium
information for the three years ended December 31, 2001 by product category:
[Download Table]
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- ------------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- ---------- ---------- --------
Medicare Supplement..... $158,621 $201,396 $152,518 $ 760,848 $ 728,918 $630,915
Cancer.................. 10,797 10,073 10,637 169,341 169,013 153,777
Other health related
policies............... 43,866 41,003 29,671 112,454 106,368 99,666
-------- -------- -------- ---------- ---------- --------
$213,284 $252,472 $192,826 $1,042,643 $1,004,299 $884,358
======== ======== ======== ========== ========== ========
The number of individual health policies in force were 1.59 million, 1.64
million, and 1.58 million at December 31, 2001, 2000 and 1999 respectively.
3
Annuities
Annuity products offered by Torchmark insurance subsidiaries include single-
premium deferred annuities, flexible-premium deferred annuities, and variable
annuities. Single-premium and flexible-premium products 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 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:
[Download Table]
(Amounts in thousands)
Collections (Amounts in millions)
For the year ended Deposit Balance
December 31, At December 31,
-------------------------- --------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- --------
Fixed annuities........... $ 33,461 $ 41,617 $ 71,696 $ 609.6 $ 661.6 $ 677.5
Variable annuities........ 111,768 608,251 392,769 2,355.7 3,583.6 3,274.9
-------- -------- -------- -------- -------- --------
$145,229 $649,868 $464,465 $2,965.3 $4,245.2 $3,952.4
======== ======== ======== ======== ======== ========
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. The investments of
Torchmark insurance subsidiaries consist predominantly of high-quality,
investment-grade securities. Fixed maturities represented 92% of total
investments at December 31, 2001. Approximately 4% 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. Most 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, agency securities or
collateralized mortgage obligations (CMO's) that are fully backed by GNMA's.
(See Note 3--Investments in the Notes to Consolidated Financial Statements on
page 54 and Management's Discussion and Analysis on page 29.)
The following table presents the market value of fixed maturity investments
at December 31, 2001 on the basis of ratings as determined primarily by
Standard & Poor's Corporation. The lower of Moody's Investors Services' or
Standard & Poor's bond ratings are used when the two differ. Ratings of BBB
and higher (or their equivalent) are considered investment grade by the rating
services.
[Download Table]
Amount
Rating (in thousands) %
------ -------------- -----
AAA................................................ $ 648,398 9.9%
AA................................................. 371,216 5.7
A.................................................. 2,815,139 43.2
BBB................................................ 2,184,299 33.5
BB................................................. 286,858 4.4
B.................................................. 104,688 1.6
Less than B........................................ 53,939 0.8
Not rated.......................................... 61,892 0.9
---------- -----
$6,526,429 100.0%
========== =====
4
The following table presents the market value of fixed maturity investments
of Torchmark's insurance subsidiaries at December 31, 2001 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.
[Download Table]
Amount
Rating (in thousands) %
---------------------- -------------- -----
1. Highest quality*... $3,929,468 60.4%
2. High quality....... 2,111,818 32.5
3. Medium quality..... 277,074 4.3
4. Low quality........ 100,854 1.6
5. Lower quality...... 53,523 0.8
6. In or near default. 26,073 0.4
---------- -----
$6,498,810 100.0%
========== =====
* Includes $268 million of exempt securities or 4.1% of the portfolio. Exempt
securities are exempt for valuation reserve purposes, and consist of U.S.
Government guaranteed securities.
Securities are assigned ratings when acquired. All ratings are reviewed and
updated quarterly. 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 the experience of each insurance subsidiary,
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 each Torchmark insurance subsidiary are
established by management. Each company uses information from the application
and, in some cases, telephone interviews with applicants, 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.
For life insurance in excess of certain prescribed amounts, each insurance
company requires medical information or examinations of applicants. These are
graduated according to the age of the applicant and may vary with the kind of
insurance. Generally, the maximum amount of insurance issued without
additional medical information is $100,000 through age 50. In certain
circumstances, the maximum amount is raised to $250,000 through age 35.
Additional medical information is requested 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). The
insurance companies have 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 insurance subsidiaries
cede 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, the Torchmark insurance subsidiaries remain contingently
liable with respect to ceded insurance should any reinsurer be unable to meet
the obligations it assumes. (See Note 18--Commitments and Contingencies in the
Notes to Consolidated Financial Statements on page 73 and Schedule IV--
Reinsurance [Consolidated] on page 96.)
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 premiums to be received
in the future 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 7--Future Policy Benefit Reserves in the
Notes to Consolidated Financial Statements on page 59). 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 insurance subsidiaries are 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, independent and
exclusive agents. The number of independent and exclusive agents below are
presented as of December 31, 2001.
Direct Response. Various Torchmark insurance companies offer life insurance
products directly to consumers through direct mail, co-op mailings,
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.
Exclusive Agents. Liberty National's 2,162 agents sell life and health
insurance, primarily in the seven state area of Alabama, Florida, Georgia,
Tennessee, Mississippi, South Carolina, and North Carolina. These agents are
employees of Liberty and are primarily compensated by commissions based on
sales. During the past several years this operation has emphasized bank draft
and direct bill collection of premium rather than agent collection, because of
the resulting lower cost and improved persistency.
Through the American Income Agency, individual life and fixed-benefit
accident and health insurance are sold through approximately 1,768 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.
The United American Branch Office Agency specializes in the sale of Medicare
Supplement and other life and health products for the over-age 50 market
through 1,644 producing agents in 84 branch offices throughout the United
States.
Independent Agents. Torchmark insurance companies offer a variety of life
and health insurance policies through 39,038 independent agents, brokers, and
licensed sales representatives. Torchmark is
6
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.
Torchmark subsidiaries distribute life insurance through a nationwide
independent agency whose sales force is comprised of former commissioned and
noncommissioned military officers who sell exclusively to commissioned and
noncommissioned military officers and their families.
Ratings
The following list indicates the ratings currently held by Torchmark's five
largest insurance companies as rated by A.M. Best Company:
[Download Table]
A.M. Best
Company
---------------
Liberty National Life Insurance Company A+ (Superior)
Globe Life And Accident Insurance Company A+ (Superior)
United Investors Life Insurance Company A+ (Superior)
United American Insurance Company A+ (Superior)
American Income Life Insurance Company A (Excellent)
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 superior 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.
Liberty, Globe, United American, American Income, and UILIC have ratings of
AA by Standard & Poor's Corporation. This AA rating is assigned by Standard &
Poor's Corporation to those companies who offer excellent financial security
on an absolute and relative basis and whose capacity to meet policyholders
obligations is overwhelming under a variety of economic and underwriting
conditions.
Competition
The insurance industry is highly competitive. Torchmark competes with other
insurance carriers through policyholder service, price, product design, and
sales efforts. In addition to competition with other insurance companies,
Torchmark faces competition from other financial services organizations. While
there are insurance companies competing with Torchmark, no individual company
dominates 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 their peer companies, allowing Torchmark to have competitive rates
while maintaining underwriting margins. In the case of Medicare Supplement
business, having low expense levels is necessary in order to meet federally
mandated loss ratios and achieve the desired underwriting margins. Torchmark's
years of experience in the direct response business are a valuable asset in
implementing direct response marketing operations.
7
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: American Income, as of December 31, 2000; Globe,
as of December 31, 2000; Liberty, as of December 31, 1996; United American, as
of December 31, 2000; and UILIC, as of December 31, 2000.
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 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 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 2000 and 1999.
[Download Table]
Reported Usual Reported
Company Ratio Name Range Value
--------- ----------------------------------- ---------- --------
2000:
United Investors Net change in Capital and Surplus 50 to -10 -12
Gross change in Capital and Surplus 50 to -10 -12
Adequacy of Investment Income 900 to 125 117
Globe Change in Premium 50 to -10 -15
Liberty Change in Premium 50 to -10 -16
Change in Reserving Ratio 20 to -20 -22
American Income Net change in Capital and Surplus 50 to -10 -20
Gross change in Capital and Surplus 50 to -10 -20
United American Net change in Capital and Surplus 50 to -10 -27
Gross change in Capital and Surplus 50 to -10 -27
1999:
American Income Net change in Capital and Surplus 50 to -10 114
Gross change in Capital and Surplus 50 to -10 114
Explanation of Ratios:
Change in Capital and Surplus--These ratios, calculated on both a gross and
net basis, are a measure of improvement or deterioration in a company's
financial position during the year. The NAIC considers ratios less than or
equal to minus 10% and greater than or equal to 50% to be unusual. The
-27% in Capital and Surplus for United American in 2000 was due primarily to
the $25 million increase in agent's balances which increased non-admitted
assets. United Investors Life's rate of -12% in 2000 resulted from the one-
time cost of establishing a direct response distribution system and a dividend
which exceeded net income by $30 million. American Income's ratio of 114% in
1999 was caused by the sale in that year of its agents' balances to an
unaffiliated financial institution. This transaction did not affect American
Income's ability to conduct business and in fact increased liquidity and
surplus. American Income's ratio of -20% in 2000 was a result of having non-
admitted assets of $22 million in Torchmark Preferred Stock and non-admitted
assets of $4.8 million in the value of its subsidiaries. None of these
transactions affected the consolidated equity of Torchmark at December 31,
2000 or 1999.
Adequacy of Investment Income--This ratio is used to determine whether an
insurer's investment income is adequate to meet the interest requirements of
its reserves. The adequacy of investment income in meeting an insurer's
interest obligations is a key element in a company's profitability. The NAIC
considers a ratio less than 125% to be unusual. United Investors' rate of 117%
in 2000 was caused by
8
the exclusion of interest on a block of reinsurance with another Torchmark
affiliate. Inclusion of interest on this block would have been within the
"usual" range.
Change in Premium--This ratio measures the percentage change in premium from
the prior to the current year. A ratio lower than -10% is considered to be
unusual. Liberty and Globe's rate of -16% and -15% in 2000, respectively, was
due to the companies ceding an increased amount of premium through new
reinsurance agreements.
Change in reserving ratio--The change in reserving ratio represents the
number of percentage points of difference between the reserving ratio for
current and prior years. For each of these years, the reserving ratio is equal
to the aggregate increase in reserves for individual life insurance taken as a
percentage of renewal and single premiums for individual life insurance. A
ratio higher than 20% or lower than -20% is considered unusual. Liberty's
ratio of -22% in 2000 is due to a one-time increase in statutory surplus of
approximately $85 million caused by a block of reinsurance ceded.
Risk Based Capital. The NAIC requires a risk based capital formula be
applied to all life and health insurers. 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.
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.
Personnel
At the end of 2001, Torchmark had 1,959 employees and 2,668 licensed
employees under sales contracts. Additionally, approximately 49,000
independent and exclusive 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. Approximately 160,000 square
feet of this building is available for lease to unrelated tenants by Liberty.
Liberty also operates from 55 company-owned district offices used for agency
sales personnel.
United American owns and is the sole occupant of a 140,000 square foot
facility, located in the Stonebridge Ranch development in McKinney, Texas (a
north Dallas suburb).
Globe owns a 300,000 square foot office building at 204 N. Robinson,
Oklahoma City, of which Globe occupies 56,000 square feet as its home office
and the remaining space is either leased or available for lease. Globe also
owns an 80,000 square foot office building at 120 Robert S. Kerr Avenue,
Oklahoma City, which is available for lease. Further, Globe owns a 112,000
square foot facility located at 133 NW 122 Street in Oklahoma City which
houses the Direct Response operation.
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
9
usable floor space. American Income also owns a 43,000 square foot facility
located at 1001 Jewell Drive in Waco, which houses a direct response
operation.
Liberty and Globe also lease district office space for their agency sales
personnel.
During 1999, Torchmark sold the majority of its investment real estate
holdings for total consideration of $123 million. These sold investments
included its TMK Income Properties limited partnership and its joint venture
investment in Liberty Park, a planned community in Birmingham, Alabama. As of
December 31, 2001, Torchmark retained $14 million of investment real estate,
which included $7 million of properties that were partially occupied by
Torchmark subsidiaries and $6 million of undeveloped land in Liberty Park.
Information Technology Computing Equipment
Torchmark and its primary subsidiaries have significant information
technology capabilities at their disposal. The corporation uses centralized
mainframe computer systems, a corporate wide-area network, company-specific
local-area networks, workstations, and personal computers to meet its ongoing
information processing requirements. Torchmark and its primary subsidiaries
also use data communications hardware and software to support their remote
data communications networks, intranets, and internet-related
telecommunications capabilities.
Torchmark's computer hardware, data communications equipment, and associated
software programs are managed by the corporation's information technology
staff. All of the corporation's computer hardware and software support,
information processing schedules, and computer-readable data-management
requirements are met through company-specific policies and procedures. These
company-specific policies and procedures also provide for the off-site storage
and retention of backup computer software, financial, and business data files.
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.
In 1999, Alabama enacted legislation limiting punitive damages in non-physical
injury cases to the greater of $500,000 or three times compensatory damages.
Since this legislation has not undergone scrutiny by appellate courts
regarding its constitutionality and a jury's discretion regarding the amount
of compensatory damages (including mental anguish) awarded in any given case
is not precisely defined, the effect of this legislation on Torchmark's
litigation remains unclear. The likelihood or extent of a punitive damage
award in any given case is currently impossible to predict. As of December 31,
2001, Liberty was a party to approximately 86 active lawsuits (including 9
employment related cases and excluding interpleaders and stayed cases), 62 of
which were Alabama proceedings and 7 of which were Mississippi proceedings in
which punitive damages were sought. Liberty faces trial settings in these
cases on an on-going basis.
Based upon information presently available, and in light of legal and other
factual defenses available to Torchmark and its subsidiaries, contingent
liabilities arising from threatened and pending litigation are not presently
considered by management to be material. It should be noted, however, that
large punitive damage awards bearing little or no relation to actual damages
awarded by juries in jurisdictions in which Torchmark has substantial
business, particularly Alabama and Mississippi, continue to occur, creating
the potential for unpredictable material adverse judgments in any given
punitive damage suit.
Previous reports have disclosed that in July 1998, a jury in the U.S.
District Court in the Middle District of Florida recommended an aggregate
total verdict amounting to $21.6 million against Liberty in Hipp v. Liberty
National Life Insurance Company (Case No. 95-1332-CIV-17A). This case,
originally filed in 1995 in the Florida court system, is a collective action
under the Fair Labor Standards Act, alleging age discrimination by Liberty in
violation of the Age Discrimination in Employment Act and the Florida Civil
Rights Act. The plaintiffs, ten present or former Liberty district managers,
sought damages for lost wages,
10
loss of future earnings, lost health and retirement benefits and lost raises
and expenses. Three of these plaintiffs, Florida residents, also sought
compensatory and punitive damages allowable under Florida law. On November 20,
1998, the District Court remitted the $10 million punitive damage portion of
the jury verdict to $0, thus reducing the total verdict to $11 million
(including an advisory verdict of $3.2 million in front pay awards).
Additional revised front pay submissions were made by the plaintiffs to the
District Court in December 1998 and Liberty responded thereto in January 1999.
On March 11, 1999, the District Court reduced the Hipp verdict to $7 million
by denying the plaintiffs front pay damages and remitting the punitive damages
awarded to the Florida resident plaintiffs to the $100,000 limit allowable
under Florida law. Final judgment was entered by the District Court and
Liberty filed its appeal with the Circuit Court of Appeals for the Eleventh
Circuit on September 27, 1999. Oral arguments in this appeal were presented
before the Eleventh Circuit on September 18, 2000. On May 29, 2001, the
Eleventh Circuit reversed and rendered the Hipp decision. Plaintiffs
subsequently filed a petition for an en banc rehearing with the Eleventh
Circuit, which was denied August 14, 2001. On February 19, 2002, the United
States Supreme Court denied plaintiffs' motion for a writ of certiorari.
As previously reported, on March 15, 1999, Torchmark was named as a
defendant in consolidated derivative securities class action litigation
involving Vesta Insurance Group, Inc. filed in the U.S. District Court for the
Northern District of Alabama (In re Vesta Insurance Group, Inc. Securities
Litigation. Master File No. 98-AR-1407-S). The amended consolidated complaint
in this litigation alleges violations of Section 10(b) of the Securities
Exchange Act of 1934 by the defendants Vesta, certain present and former Vesta
officers and directors, Vesta's former independent public accountants and
Torchmark and of Section 20(a) of the Exchange Act by certain former Vesta
officers and directors and Torchmark acting as "controlling persons" of Vesta
in connection with certain accounting irregularities in Vesta's reported
financial results and filed financial statements. Unspecified damages and
equitable relief are sought on behalf of a purported class of purchasers of
Vesta equity securities between June 2, 1995 and June 29, 1998. A class was
certified in this litigation on October 25, 1999. In September, 2001,
Torchmark filed a motion for summary judgment, which was denied by the
District Court on January 10, 2002.
As previously reported, Liberty was served on October 28, 1999 with a
subpoena from the Florida Department of Insurance in connection with that
Department's investigation into Liberty's sales practices and disclosures in
the State of Florida regarding industrial life insurance and low coverage life
insurance policies. Liberty has also received similar subpoenas from the
Alabama, Georgia, Kentucky, Texas, South Carolina and Minnesota Insurance
Departments regarding its industrial life insurance and other low face-amount
life insurance policies sold in those states. Specific inquiry is made into
the historical use of race-based mortality, a practice discontinued by Liberty
many years ago. In 1988, Liberty endeavored to convert to paid-up status those
purely race-based policies that then remained in premium-paying status.
Liberty has been and continues responding to these subpoenas in a timely
fashion. In July 2000, the Florida and Georgia Insurance Departments issued
cease and desist orders to all companies reporting premium income from
industrial life insurance, including Liberty, stating that, to the extent that
any company is currently collecting any race-based insurance premiums from
Florida and Georgia residents, respectively, it immediately cease and desist
from collecting any premium differential based on the race of the
policyholders. Upon receiving the Georgia order, Liberty informed the Georgia
Insurance Department that Liberty did not interpret the Georgia Department's
directive as a cease and desist order since it did not afford Liberty the
opportunity for a mandatory or voluntarily requested hearing thereunder. On
August 22, 2000, the Florida District Court of Appeals issued an order staying
the Florida Insurance Department's immediate final cease and desist order,
pending appeals to the Florida Supreme Court. The Florida Supreme Court
subsequently reversed and rendered the District Court of Appeals' order, and
thus declared the cease and desist order null and void. Liberty, as an Alabama
domestic company, was examined by representatives of the Alabama Department of
Insurance with regard to issues parallel to those raised by the State of
Florida. By order dated January 28, 2002, the Alabama Department finalized a
report of its examination of LIberty. The report has now been turned over to
the Alabama Department's Legal Division for further consideration.
On December 8, 1999, purported class action litigation was filed against
Liberty in the United States District Court for the Northern District of
Alabama (Moore v. Liberty National Life Insurance Company, Case No. CV-99-BU-
3262-S), on behalf of all African-Americans who have or have had at the time
of policy termination an ownership interest in certain life insurance policies
($25,000 face amount or less) marketed by Liberty and certain of its former
subsidiaries. The alleged class period covers virtually the entire twentieth
century. Plaintiffs allege racial discrimination in Liberty's premium rates in
violation of 42 U.S.C. (S) 1981, breach of fiduciary duty in sales and
administrative practices, receipt of excessive and
11
unreasonable premium payments by Liberty, improper hiring, supervision,
retention and failure to monitor actions of officers, agents and employees,
breach of contract in dismantling the debit premium collection system,
fraudulent inducement and negligent misrepresentation. Unspecified
compensatory and punitive damages are sought together with a declaratory
judgment and equitable and/or injunctive relief, including establishment of a
constructive trust for the benefit of class members. Defendants filed a motion
for judgment on the pleadings or in the alternative for summary judgment on
January 27, 2000. On April 7, 2000, the District Court entered an order
granting Liberty's motion for judgment on the pleadings and dismissing
plaintiffs' claims under 42 U.S.C. (S) 1981 with prejudice as time-barred and
dismissing their state law claims without prejudice to re-file in state court
if desired. Plaintiffs subsequently filed motions with the District Court to
reconsider its April 17, 2000 order and for permission to file an amended
complaint adding similar claims under 24 U.S.C. (S) 1982. Liberty opposed this
motion. On June 22, 2000, purported class action litigation with allegations
comparable to those in the Moore case was filed against Liberty in the Circuit
Court of Jefferson County, Alabama (Baldwin v. Liberty National Life Insurance
Company, Case No. CV 00-684). The Baldwin case is currently stayed pending
disposition of the Moore case.
On July 3, 2000, the District Court issued an order in the Moore case
granting in part and denying in part the plaintiffs' motions. The District
Court ordered the Moore plaintiffs to file an amended complaint setting forth
their claims under 28 U.S.C. (S)(S) 1981 and 1982 and, if such claims are
timely, any state law claims for breach of contract related to the
discontinuance of debit collections, and dismissed with prejudice all
remaining state law claims of the plaintiffs as time-barred by the common law
rule of repose. On July 14, 2000, plaintiffs filed their amended complaint
with the District Court and Liberty filed a motion to alter or amend the
District Court's July order or, in the alternative, requested that the
District Court certify for purposes of appeal the issue whether the state law
doctrine of repose should be applied to and bar plaintiffs' actions under
(S)(S) 1981 and 1982. The District Court entered such an order on July 21,
2000 and stayed proceedings in Moore pending resolution of Liberty's petition
to the U.S. Circuit Court of Appeals for the Eleventh Circuit. Liberty filed a
petition on July 30, 2000 with the Eleventh Circuit seeking that Court's
permission to appeal the portions of the District Court's July order in Moore
granting the plaintiffs the right to file the amended complaint. The Eleventh
Circuit Court granted Liberty's motion and agreed to consider Liberty's
arguments regarding the applicability of the state law of repose to actions
under (S)(S)1981 and 1982. Oral arguments were heard by the Eleventh Circuit
Court on July 20, 2001. On September 28, 2001, the Eleventh Circuit Court
ruled that the rule of repose was not a bar to the Moore claims in federal
court and that there is no reverse pre-emption under the McCarrin Ferguson
Act. Liberty has filed a petition seeking an en banc rehearing in the Eleventh
Circuit Court, which was subsequently denied. Liberty filed a petition for a
writ of certiorari with the U.S. Supreme Court on February 21, 2002. The
District Court has scheduled the filing of motions for class certification in
Moore for November 21, 2002.
Four individual cases with similar allegations to those in the Moore case
which were filed against Liberty in various state Circuit Courts in Alabama
remain pending and have been removed and/or transferred to the U.S. District
Courts for either the Middle or Northern Districts of Alabama. The Moore case
and those cases transferred to the Northern District of Alabama have been
assigned to Judge U.W. Clemon, a noted former civil rights attorney. In the
earliest filed of the individual state court actions, Walter Moore v. Liberty
National Life Insurance Company (Circuit Court of Dallas County, CV 00-306)
the Court entered an order granting summary judgment in favor of Liberty based
upon the doctrine of repose and has subsequently denied a motion to reconsider
its dismissal of this case.
Hudson v. Liberty National Life Insurance Company, one of the four
individual cases referenced above, was filed in the Circuit Court of Bullock
County, Alabama on February 28, 2001 (Case No. CV 2001-25) and contains
similar allegations to those in Moore. After denials by the Bullock Circuit
Court of Liberty's motion to dismiss and request that certain questions
arising in the litigation be certified to the Alabama Supreme Court, Liberty
sought a writ of mandamus on the certified questions issue from the Alabama
Supreme Court. The Alabama Supreme Court agreed to hear Liberty's petition for
writ of mandamus seeking to have the Supreme Court direct the trial court to
grant Liberty's motion to dismiss or for a summary judgment or to certify for
interlocutory appeal the Circuit Court's denial of such motion. On January 18,
2002, the Alabama Supreme Court denied Liberty's request for the writ of
mandamus but noted that Liberty's motion for summary judgment based on the
rule of repose remains pending in the trial court and is ripe for
adjudication. Upon remand, plaintiff amended his complaint to add causes of
action under Federal law and Liberty is seeking to remove this case to Federal
court as discussed above.
In the fifth individual state court action, (Edwards v. Liberty National
Life Insurance Company, Case No. CV 0005872), the trial court denied Liberty's
motion seeking a summary judgment based upon the
12
rule of repose but indicated that it would reconsider that motion after
discovery. Liberty filed a motion to alter or amend the trial court's order,
or in the alternative, for an interlocutory appeal. In September 2001, the
trial court in that case vacated its earlier order and stayed the litigation
pending resolution of the Hudson case, which is discussed above. On February
22, 2002, the trial court held a hearing regarding the stay in Edwards.
On March 15, 2001, purported class action litigation was filed against
Liberty in the United States District Court for the District of South Carolina
(Hinton v. Liberty National Life Insurance Company, Civil Action No. 3-01-
68078 19), containing allegations largely similar to the Moore case filed in
the Federal District Court for the Northern District of Alabama. Liberty was
described in the suit as successor in interest of New South Life Insurance
Company (New South), an insurer acquired out of receivership by an entity
which was subsequently acquired by Peninsular Life Insurance Company
(Peninsular). In 1985, Liberty reinsured a block of insurance business from
Peninsular, including business formerly written by New South. Liberty has
requested indemnification in the Hinton litigation from Peninsular and its
successors in interest. Liberty sought a writ of mandamus in Hinton from the
Fourth Circuit Court of Appeals as well as a change of venue to consolidate
the Hinton case with the Moore case currently pending in Federal District
Court in Alabama. Both the change in venue and the writ of mandamus were
denied. However, the South Carolina District Court issued an order inviting
the parties to resubmit a motion for change of venue. Liberty National filed
such a motion to transfer the case to the U.S. District Court for the Northern
District of Alabama, which was granted by the South Carolina District Court on
February 12, 2002.
Another action with similar allegations to Moore, which also includes claims
for race discrimination under 24 U.S.C. (S)(S)1981 and 1982, was filed against
Liberty in U.S. District Court for the Northern District of Alabama on January
28, 2002 (Hull v. Liberty National Life Insurance Company, Civil Action No.:
CV-02-C-0219-W).
On July 26, 2001, litigation was filed against Torchmark and three current
members of Torchmark's Board of Directors in the United States District Court
for the District of Kansas (Waddell & Reed Financial, Inc. v. Torchmark
Corporation, Civil Action No. 01-2372-KHV). Plaintiffs assert that defendants
engaged in a scheme to control and injure Waddell & Reed Financial after it
was spun-off by Torchmark in November 1998, to interfere with the business
relationship between a Waddell & Reed Financial subsidiary, Waddell & Reed,
Inc. (W&R) and a Torchmark subsidiary, United Investors Life Insurance Company
(UILIC), and to injure W&R Financial as well as asserting that one of the
individual defendants sought to interfere with W&R Financial's relationship
with the United Group of Mutual Funds. The litigation alleges RICO violations,
breaches of fiduciary duty by the three individual defendants, knowing
participation in such breaches of fiduciary duty by Torchmark and intentional
interference with prospective business relations in connection with the
relationship between W&R and UILIC. Plaintiffs seek actual, punitive and
treble damages, interest, fees and costs under RICO of $29 million, $13.4
million plus punitive damages, interest and costs on the intentional
interference allegations and a total of $58 million on the remaining two
counts.
Defendants filed a motion to abstain or, in the alternative, to dismiss the
Kansas District Court litigation on August 22, 2001, citing pending litigation
filed in Alabama state circuit court by Torchmark and its subsidiary, UILIC
against W&R Financial and W&R involving an alleged agreement dealing with
existing in-force UILIC variable annuity business marketed by W&R as well as
the prior dismissal by the Kansas District Court of litigation originally
filed by W&R against UILIC in Kansas state court involving such variable
annuity business. Defendant's motion was denied but the Kansas District Court
ruled that a judgment in the prior Alabama litigation would likely be res
judicata as to the claims against Torchmark and one of the individual
defendants in the current Kansas litigation. Trial of the Alabama state court
litigation began February 19, 2002.
On September 28, 2001, a shareholder derivative action was filed in the
Circuit Court of Jefferson County, Alabama against Torchmark, two unaffiliated
limited liability companies, and three individual defendants (Bomar v.
Torchmark Corporation, Case No. CV 0105981). The derivative action arises from
an October 1, 1999 transaction in which the three individual defendants (one
of whom is a director and former Chairman of Torchmark and a second of whom is
a former officer of a former real estate subsidiary of Torchmark) acting
through two unaffiliated limited liability companies acquired the majority of
the investment real estate of Torchmark together with other properties.
Plaintiff alleges that, despite review and approval of the transaction by all
independent and disinterested members of the Torchmark
13
Board of Directors, the transaction was procedurally and substantively unfair
to Torchmark and resulted from the breach of fiduciary duties of loyalty owed
to Torchmark by two of the above described individual defendants and the
knowing participation of the third individual defendant in the alleged breach
of fiduciary duty. Establishment of a constructive trust for such assets for
the benefit of Torchmark and its shareholders, an accounting for profits and
unspecified compensatory and punitive damages are sought.
On October 16, 2001, defendant Torchmark filed a motion to dismiss and to
stay discovery in the Bomar action, asserting plaintiff's lack of standing,
failure to make a legally-required demand on the Board of Directors of
Torchmark and failure to comply with certain Alabama Rules of Civil Procedure.
On October 17, 2001, the Board of Directors created a special litigation
committee comprised of two
independent, disinterested directors to review and make determinations and a
report with regard to the transactions involved in such suit. Defendant
Torchmark's motion was amended on October 19, 2001 to include as further
grounds for dismissal and stay the creation of that special litigation
committee and the delegation of complete authority to said committee to review
the transaction and determine whether prosecution of the Bomar action is in
the interests of Torchmark and its shareholders and what action Torchmark
should take with regard to the Bomar action. The committee, through its
separately retained counsel, advised the Court that it concurred in
Torchmark's motions. The plaintiff subsequently amended her complaint to
delete the request for establishment of a constructive trust. A hearing on
Torchmark's amended motion to dismiss and stay discovery was held November 13,
2001 and on November 26, 2001, the Circuit Court issued an order staying all
proceedings in Bomar for 150 days during which the special litigation
committee was charged with investigating, reviewing and analyzing the asserted
claims, completing its written report and filing the same with the Circuit
Court. The special litigation committee has obtained from Torchmark the
documentary evidence it requested from the company and in February, 2002
commenced its witness interview process.
On January 22, 2002, purported class action litigation was filed against
Liberty and Torchmark in the Circuit Court of Choctaw County, Alabama on
behalf of all persons who currently or in the past were insured under Liberty
cancer policies which are no longer marketed regardless of whether such
policies remain in force or have lapsed (Roberts v. Liberty National Life
Insurance Company, Case No. CV-2002-009-B). Plaintiffs in this action
purchased guaranteed renewable cancer policies wherein Liberty reserved the
right to change premium rates. They allege that Liberty ceased marketing
certain cancer policies-- "closed" the block of business, capping the
potential pool of insureds and leading to increased premiums to the remaining
insureds. They further allege that in instituting premium increases on cancer
policies after the Robertson v. Liberty National Life Insurance Company class
action settlement, Liberty misrepresented the reasons for such premium
increases. This action asserts claims for breach of contract in implementing
premium rate increases on a basis other than that set out in the policies,
misrepresentation regarding the premium increases, fraud and suppression
concerning the closed block of business and unjust enrichment. Unspecified
compensatory and punitive damages, attorneys fees, costs and interest are
sought by plaintiffs on behalf of the class.
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 2001.
14
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 5,749 shareholders of record on December 31,
2001, 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 16--
Shareholders' Equity in the Notes to Consolidated Financial Statements on page
69. The market prices and cash dividends paid by calendar quarter for the past
two years are as follows:
[Download Table]
2001
Market Price
------------
Dividends
Quarter High Low Per Share
------- -------- -------- ---------
1 $38.8300 $33.2500 $ .0900
2 40.2100 36.5700 .0900
3 43.0500 35.6000 .0900
4 39.9500 37.0300 .0900
Year-end closing
price.................$39.3300
[Download Table]
2000
Market Price
------------
Dividends
Quarter High Low Per Share
------- -------- -------- ---------
1 $28.9375 $18.7500 $ .0900
2 28.7500 21.6250 .0900
3 29.5625 24.0625 .0900
4 41.1875 27.0625 .0900
Year-end closing
price.................$38.4375
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)
[Enlarge/Download Table]
2001 2000 1999 1998 1997
Year ended December 31, ----------- ----------- ----------- ----------- -----------
Premium revenue:
Life................... $ 1,144,499 $ 1,082,125 $ 1,018,301 $ 959,766 $ 909,992
Health................. 1,010,753 911,156 824,816 759,910 739,485
Other ................. 59,917 52,929 40,969 33,954 28,527
Total................. 2,215,169 2,046,210 1,884,086 1,753,630 1,678,004
Net investment income... 491,830 472,426 447,337 459,558 429,116
Realized investment
gains (losses)......... (2,432) (5,322) (110,971) (57,637) (36,979)
Total revenue........... 2,707,042 2,515,894 2,226,895 2,157,876 2,071,103
Net operating income(1). 392,510 365,292 341,167 324,315 273,730
Net income from
continuing operations.. 390,930 361,833 258,930 255,776 260,429
Net income.............. 356,513 362,035 273,956 244,441 337,743
Annualized premium
issued:
Life................... 294,632 290,743 257,207 244,467 230,379
Health................. 213,284 252,472 192,826 138,899 106,853
Total................. 507,916 543,215 450,033 383,366 337,232
Per common share:
Basic earnings:
Net operating
income(1)............ 3.14 2.85 2.56 2.32 1.97
Net income from
continuing
operations........... 3.12 2.83 1.95 1.83 1.87
Net income............ 2.85 2.83 2.06 1.75 2.43
Diluted earnings:
Net operating
income(1)............ 3.12 2.85 2.55 2.29 1.94
Net income from
continuing
operations........... 3.11 2.82 1.93 1.81 1.84
Net income............ 2.83 2.82 2.04 1.73 2.39
Cash dividends paid.... 0.36 0.36 0.36 0.58 0.59
Return on average common
equity, excluding
effect of SFAS 115,
Vesta earnings,
discontinued
operations, and
nonrecurring charge(3). 16.1% 16.3% 16.2% 15.1% 18.2%
Basic average shares
outstanding............ 125,135 128,089 133,197 139,999 139,202
Diluted average shares
outstanding............ 125,861 128,353 133,986 141,352 141,431
--------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
As of December 31, ----------- ----------- ----------- ----------- -----------
Cash and invested
assets................. $ 7,108,088 $ 6,506,292 $ 6,202,251 $ 6,417,511 $ 6,473,096
Total assets............ 12,428,153 12,962,558 12,131,664 11,249,028 11,127,648
Short-term debt......... 204,037 329,148 418,394 355,392 347,152
Long-term debt.......... 536,152 365,989 371,555 383,422 564,298
Shareholders' equity.... 2,497,127 2,202,360 1,993,337 2,259,528 1,932,736
Per common share ...... 20.32 17.43 15.10 16.51 13.80
Per common share
excluding effect of
SFAS 115.............. 20.32 18.53 16.32 15.43 12.90
Annualized premium in
force:
Life................... 1,257,413 1,200,144 1,130,609 1,062,647(2) 1,007,379
Health................. 1,042,643 1,004,299 884,358 796,863 762,052
Total................. 2,300,056 2,204,443 2,014,967 1,859,510(2) 1,769,431
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(1) Net income from continuing operations, excluding realized investment gains
(losses), the related adjustment to deferred acquisition costs, equity in
Vesta earnings for periods prior to 1999, a one-time gain on the sale of
equipment, and the nonrecurring charge.(3)
(2) Annualized life premium in force excludes $5.3 million representing the
Family Service business sold in 1998.
(3) The nonrecurring charge relates to a marketing agreement discussed more
fully on page 24 of this report.
16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary Statements. Torchmark cautions readers regarding certain forward-
looking statements contained in the following discussion and elsewhere in this
document, and in any other statements made by, or on behalf of Torchmark
whether or not in future filings with the Securities and Exchange Commission.
Any statement that is not a historical fact, or that might otherwise be
considered an opinion or projection concerning Torchmark or its business,
whether express or implied, is meant as and should be considered a forward-
looking statement. Such statements represent management's opinions concerning
future operations, strategies, financial results or other developments.
Forward-looking statements are based upon estimates and assumptions that are
subject to significant business, economic and competitive uncertainties, many
of which are beyond Torchmark's control. If these estimates or assumptions
prove to be incorrect, the actual results of Torchmark may differ materially
from the forward-looking statements made on the basis of such estimates or
assumptions. Whether or not actual results differ materially from forward-
looking statements may depend on numerous foreseeable and unforeseeable events
or developments, which may be national in scope, related to the insurance
industry generally, or applicable to Torchmark specifically. Such events or
developments could include, but are not necessarily limited to:
1) Changing general economic conditions leading to unexpected changes in
lapse rates and/or sales of Torchmark's policies;
2) Regulatory developments, including changes in governmental regulations
(particularly those impacting taxes and changes to the federal Medicare
program that would affect Medicare Supplement insurance) and regulatory
inquiries regarding industrial life insurance;
3) Market trends in the senior-aged health care industry that provide
alternatives to traditional Medicare, such as Health Maintenance
Organizations and other managed care or private plans, and that could
affect the sales of traditional Medicare Supplemental insurance;
4) Interest rate changes that adversely affect product sales and/or
investment portfolio yield;
5) Changes in pricing competition;
6) Litigation results;
7) The inability of Torchmark to achieve the anticipated levels of
administrative and operational efficiencies;
8) Levels of mortality, morbidity, and utilization of healthcare services
that differ from Torchmark's assumptions;
9) The inability of Torchmark to obtain timely and appropriate premium
rate increases for health insurance;
10) The customer response to new products and marketing initiatives;
11) Financial markets trends that affect sales of Torchmark's market-
sensitive products; and
12) Reported amounts in the financial statements which are based on
management's estimates and judgements which may differ from the actual
amounts ultimately realized.
Readers are also directed to consider other risks and uncertainties described
in other documents filed by Torchmark with the Securities and Exchange
Commission.
The following discussion should be read in conjunction with the Selected
Financial Data and Torchmark's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this report.
17
RESULTS OF OPERATIONS
Summary of Operating Results. Torchmark's management computes a
classification of income called "net operating income" and uses it to evaluate
the operating performance of the company. It differs from net income as
reported in the financial statements in that 