Prepared by R.R. Donnelley Financial -- Form 10-Q Amendment
 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q/A
 
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For Quarter Ended June 30, 2002 Commission File Number 1-8052
 
 
TORCHMARK CORPORATION
(Exact name of registrant as specified in its charter)
 
DELAWARE
   
63-0780404
(State or other jurisdiction of
incorporation or organization)
   
(I.R.S. Employer
Identification No.)
 
2001 3rd Avenue South, Birmingham, Alabama 35233
(Address of principal executive offices) (Zip Code)
 
Registrant’s telephone number, including area code (205) 325-4200
 
NONE
Former name, former address and former fiscal year, if changed since last report.
 
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 reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x     No ¨
 
Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the last practicable date.
 
CLASS
   
OUTSTANDING AT July 31, 2002
Common Stock,
   
119,178,913
$1.00 Par Value
     
 
Index of Exhibits (Page 36)
Total number of pages included are 37.
 

Part I—Financial Information
 
Item 1.    Financial Statements is amended to include in full the Company’s Consolidated Statement of Operations, portions of which were inadvertently omitted through a clerical error from the earlier EDGAR filing of the Form 10-Q for the Second Quarter 2002 which was filed on August 13, 2002. All other items in Form 10-Q for the Second Quarter of 2002 as filed August 13, 2002 are correct and thus remain unchanged.

 
PART I— FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
 
    
June 30, 2002
     
December 31, 2001
  
Assets
   
(Unaudited)
         
Investments:
                  
Fixed maturities, available for sale, at fair value (amortized cost: 2002—$6,679,081; 2001—$6,528,244)
   
$
6,742,143
 
   
$
6,526,429
 
Equity securities, at fair value (cost: 2002—$10,260; 2001—$666)
   
 
10,133
 
   
 
571
 
Mortgage loans, at cost (fair value: 2002—$118,198; 2001—$111,407)
   
 
117,254
 
   
 
112,135
 
Investment real estate, at depreciated cost
   
 
13,651
 
   
 
14,133
 
Policy loans
   
 
271,394
 
   
 
266,979
 
Other long-term investments, at fair value
   
 
57,527
 
   
 
49,971
 
Short-term investments
   
 
24,807
 
   
 
134,156
 
    
  
Total investments
   
 
7,236,909
 
   
 
7,104,374
 
Cash
   
 
3,068
 
   
 
3,714
 
Accrued investment income
   
 
127,681
 
   
 
125,210
 
Other receivables
   
 
74,975
 
   
 
67,549
 
Deferred acquisition costs
   
 
2,126,018
 
   
 
2,066,423
 
Value of insurance purchased
   
 
109,004
 
   
 
115,939
 
Property and equipment
   
 
34,309
 
   
 
36,137
 
Goodwill
   
 
378,436
 
   
 
378,436
 
Other assets
   
 
12,133
 
   
 
28,087
 
Separate account assets
   
 
1,988,871
 
   
 
2,502,284
 
    
  
Total assets
   
$
12,091,404
 
   
$
12,428,153
 
    
  
Liabilities and Shareholders' Equity
                  
Liabilities:
                  
Future policy benefits
   
$
5,499,416
 
   
$
5,348,929
 
Unearned and advance premiums
   
 
94,712
 
   
 
93,624
 
Policy claims and other benefits payable
   
 
250,087
 
   
 
248,333
 
Other policyholders' funds
   
 
81,918
 
   
 
80,929
 
    
  
Total policy liabilities
   
 
5,926,133
 
   
 
5,771,815
 
Accrued income taxes
   
 
613,348
 
   
 
580,287
 
Short-term debt
   
 
182,642
 
   
 
204,037
 
Long-term debt (fair value: 2002—$583,861; 2001—$543,275)
   
 
540,753
 
   
 
536,152
 
Other liabilities
   
 
130,784
 
   
 
191,894
 
Separate account liabilities
   
 
1,988,871
 
   
 
2,502,284
 
    
  
Total liabilities
   
 
9,382,531
 
   
 
9,786,469
 
Trust preferred securities (fair value: 2002—$153,100; 2001—$150,660)
   
 
144,417
 
   
 
144,557
 
Shareholders' equity:
                  
Preferred stock
   
 
0
 
   
 
0
 
Common stock
   
 
126,801
 
   
 
126,801
 
Additional paid-in capital
   
 
553,974
 
   
 
552,634
 
Accumulated other comprehensive income (loss)
   
 
32,178
 
   
 
(12,314
)
Retained earnings
   
 
2,116,857
 
   
 
1,978,903
 
Treasury stock, at cost
   
 
(265,354
)
   
 
(148,897
)
    
  
Total shareholders' equity
   
 
2,564,456
 
   
 
2,497,127
 
    
  
Total liabilities and shareholders' equity
   
$
12,091,404
 
   
$
12,428,153
 
    
  
 
See accompanying Notes to Consolidated Financial Statements.

2

 
TORCHMARK CORPORATION
 
CONSOLIDATED STATEMENT OF OPERATIONS
 
(Unaudited and in thousands except per share data)
 
    
Three Months Ended
June 30,
     
Six Months Ended
June 30,
  
    
2002
     
2001
     
2002
     
2001
  
Revenue:
                                    
Life premium
   
$
306,537
 
   
$
288,768
 
   
$
604,881
 
   
$
569,920
 
Health premium
   
 
254,568
 
   
 
253,656
 
   
 
517,075
 
   
 
506,518
 
Other premium
   
 
10,431
 
   
 
18,794
 
   
 
20,821
 
   
 
31,646
 
    
  
  
  
Total premium
   
 
571,536
 
   
 
561,218
 
   
 
1,142,777
 
   
 
1,108,084
 
Net investment income
   
 
128,075
 
   
 
122,864
 
   
 
256,278
 
   
 
243,551
 
Realized investment gains (losses)
   
 
(66,704
)
   
 
4,288
 
   
 
(76,953
)
   
 
10,832
 
Other income
   
 
573
 
   
 
660
 
   
 
1,052
 
   
 
1,329
 
    
  
  
  
Total revenue
   
 
633,480
 
   
 
689,030
 
   
 
1,323,154
 
   
 
1,363,796
 
Benefits and expenses:
                                    
Life policyholder benefits
   
 
206,500
 
   
 
192,081
 
   
 
406,345
 
   
 
377,642
 
Health policyholder benefits
   
 
167,652
 
   
 
165,363
 
   
 
340,490
 
   
 
329,404
 
Other policyholder benefits
   
 
7,938
 
   
 
9,363
 
   
 
16,134
 
   
 
18,640
 
    
  
  
  
Total policyholder benefits
   
 
382,090
 
   
 
366,807
 
   
 
762,969
 
   
 
725,686
 
Amortization of deferred acquisition costs
   
 
75,174
 
   
 
79,054
 
   
 
150,200
 
   
 
151,499
 
Commissions and premium taxes
   
 
41,716
 
   
 
40,477
 
   
 
84,223
 
   
 
80,670
 
Other operating expense
   
 
32,338
 
   
 
32,188
 
   
 
66,953
 
   
 
64,574
 
Amortization of goodwill
   
 
0
 
   
 
3,019
 
   
 
0
 
   
 
6,037
 
Interest expense
   
 
7,230
 
   
 
11,760
 
   
 
14,548
 
   
 
24,327
 
    
  
  
  
Total benefits and expenses
   
 
538,548
 
   
 
533,305
 
   
 
1,078,893
 
   
 
1,052,793
 
Income from continuing operations before income taxes, extraordinary item, and cumulative effect of change in accounting principle
   
 
94,932
 
   
 
155,725
 
   
 
244,261
 
   
 
311,003
 
Income taxes
   
 
(31,249
)
   
 
(53,426
)
   
 
(81,417
)
   
 
(106,620
)
Preferred securities dividends (net of tax)
   
 
(971
)
   
 
(1,461
)
   
 
(1,976
)
   
 
(3,842
)
    
  
  
  
Income from continuing operations before extraordinary item and cumulative effect of change in accounting principle
   
 
62,712
 
   
 
100,838
 
   
 
160,868
 
   
 
200,541
 
Loss from discontinued operations (net of applicable tax benefit of $1,766)
   
 
0
 
   
 
0
 
   
 
0
 
   
 
(3,280
)
    
  
  
  
Income before extraordinary item and cumulative effect of change in accounting principle
   
 
62,712
 
   
 
100,838
 
   
 
160,868
 
   
 
197,261
 
Loss on redemption of debt (net of applicable tax benefit of $0, $582, $1, and $595, respectively)
   
 
0
 
   
 
(1,080
)
   
 
(2
)
   
 
(1,105
)
    
  
  
  
Income before cumulative effect of change in accounting principle
   
 
62,712
 
   
 
99,758
 
   
 
160,866
 
   
 
196,156
 
Cumulative effect of change in accounting principle (net of applicable tax benefit of $14,315)
   
 
0
 
   
 
(26,584
)
   
 
0
 
   
 
(26,584
)
    
  
  
  
Net income
   
$
62,712
 
   
$
73,174
 
   
$
160,866
 
   
$
169,572
 
    
  
  
  
 
(Continued on following page)

3

 
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited and in thousands except per share data)
(Continued)
 
    
Three Months Ended June 30,
     
Six Months Ended June 30,
  
    
2002
   
2001
     
2002
   
2001
  
Basic earnings per share:
                                
Income from continuing operations before extraordinary item and cumulative effect of change in accounting principle
   
$
0.52
   
$
0.81
 
   
$
1.32
   
$
1.60
 
Loss from discontinued operations (net of applicable tax benefit)
   
 
0.00
   
 
0.00
 
   
 
0.00
   
 
(0.03
)
    
  
  
  
Income before extraordinary item and cumulative effect of change in accounting principle
   
 
0.52
   
 
0.81
 
   
 
1.32
   
 
1.57
 
Loss on redemption of debt (net of applicable tax benefit)
   
 
0.00
   
 
(0.01
)
   
 
0.00
   
 
(0.01
)
    
  
  
  
Income before cumulative effect of change in accounting principle
   
 
0.52
   
 
0.80
 
   
 
1.32
   
 
1.56
 
Cumulative effect of change in accounting principle (net of applicable tax benefit)
   
 
0.00
   
 
(0.22
)
   
 
0.00
   
 
(0.21
)
    
  
  
  
Net income
   
$
0.52
   
$
0.58
 
   
$
1.32
   
$
1.35
 
    
  
  
  
Diluted earnings per share:
                                
Income from continuing operations before extraordinary item and cumulative effect of change in accounting principle
   
$
0.52
   
$
0.80
 
   
$
1.32
   
$
1.59
 
Loss from discontinued operations (net of applicable tax benefit)
   
 
0.00
   
 
0.00
 
   
 
0.00
   
 
(0.03
)
    
  
  
  
Income before extraordinary item and cumulative effect of change in accounting principle
   
 
0.52
   
 
0.80
 
   
 
1.32
   
 
1.56
 
Loss on redemption of debt (net of applicable tax benefit)
   
 
0.00
   
 
(0.01
)
   
 
0.00
   
 
(0.01
)
    
  
  
  
Income before cumulative effect of change in accounting principle
   
 
0.52
   
 
0.79
 
   
 
1.32
   
 
1.55
 
Cumulative effect of change in accounting principle (net of applicable tax benefit)
   
 
0.00
   
 
(0.21
)
   
 
0.00
   
 
(0.21
)
    
  
  
  
Net income
   
$
0.52
   
$
0.58
 
   
$
1.32
   
$
1.34
 
    
  
  
  
 
See accompanying Notes to Consolidated Financial Statements.

4

 
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited and in thousands)
 
    
Three Months Ended
June 30,
     
Six Months Ended
June 30,
  
    
2002
     
2001
     
2002
     
2001
  
Net income
   
$
62,712
 
   
$
73,174
 
   
$
160,866
 
   
$
169,572
 
Other comprehensive income (loss):
                                    
Unrealized gains (losses) on securities:
                                    
Unrealized holding gains (losses) arising during period
   
 
107,484
 
   
 
(62,629
)
   
 
(8,002
)
   
 
95,846
 
Less: reclassification adjustment for gains (losses) on securities included in net income
   
 
76,941
 
   
 
(6,169
)
   
 
78,669
 
   
 
(9,642
)
Less: reclassification adjustment for change in accounting principle
   
 
0
 
   
 
40,899
 
   
 
0
 
   
 
40,899
 
Less: reclassification adjustment for amortization of discount and premium
   
 
(1,212
)
   
 
(2,068
)
   
 
(2,702
)
   
 
(3,103
)
Less: foreign exchange adjustment on securities marked to market
   
 
(2,308
)
   
 
(1,636
)
   
 
(2,792
)
   
 
352
 
    
  
  
  
Unrealized gains (losses) on securities
   
 
180,905
 
   
 
(31,603
)
   
 
65,173
 
   
 
124,352
 
Unrealized gains (losses) on other investments
   
 
534
 
   
 
(640
)
   
 
1,160
 
   
 
(451
)
Unrealized gains (losses) on deferred acquisition costs
   
 
(13,173
)
   
 
2,618
 
   
 
(4,295
)
   
 
(13,502
)
Foreign exchange translation adjustments
   
 
3,806
 
   
 
1,130
 
   
 
4,165
 
   
 
(572
)
    
  
  
  
Other comprehensive income (loss), before tax
   
 
172,072
 
   
 
(28,495
)
   
 
66,203
 
   
 
109,827
 
Income tax benefit (expense) related to other comprehensive income (loss)
   
 
(58,891
)
   
 
10,314
 
   
 
(21,711
)
   
 
(38,636
)
    
  
  
  
Other comprehensive income (loss)
   
 
113,181
 
   
 
(18,181
)
   
 
44,492
 
   
 
71,191
 
    
  
  
  
Comprehensive income
   
$
175,893
 
   
$
54,993
 
   
$
205,358
 
   
$
240,763
 
    
  
  
  
 
See accompanying Notes to Consolidated Financial Statements.

5

 
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited and in thousands)
 
    
Six Months Ended June 30,
  
    
2002
     
2001
  
Cash provided from operations
   
$
290,914
 
   
$
243,836
 
Cash provided from (used for) investment activities:
                  
Investments sold or matured:
                  
Fixed maturities available for sale—sold
   
 
258,344
 
   
 
601,159
 
Fixed maturities available for sale—matured, called, and repaid
   
 
132,127
 
   
 
134,608
 
Other long-term investments
   
 
3,759
 
   
 
3,339
 
    
  
Total investments sold or matured
   
 
394,230
 
   
 
739,106
 
Investments acquired:
                  
Fixed maturities
   
 
(614,950
)
   
 
(845,354
)
Other long-term investments
   
 
(21,767
)
   
 
(5,001
)
    
  
Total investments acquired
   
 
(636,717
)
   
 
(850,355
)
Net decrease in short-term investments
   
 
109,349
 
   
 
13,166
 
Disposition of properties
   
 
24
 
   
 
551
 
Additions to properties
   
 
(1,085
)
   
 
(1,976
)
    
  
Cash used for investment activities
   
 
(134,199
)
   
 
(99,508
)
Cash provided from (used for) financing activities:
                  
Issuance of common stock
   
 
3,500
 
   
 
3,338
 
Repayments of debt
   
 
(21,470
)
   
 
(31,279
)
Redemption of MIPS
   
 
0
 
   
 
(50,000
)
Acquisition of treasury stock
   
 
(121,077
)
   
 
(54,481
)
Cash dividends paid to shareholders
   
 
(22,056
)
   
 
(23,080
)
Net receipts (withdrawals) from deposit product operations
   
 
3,742
 
   
 
(18,845
)
    
  
Cash used for financing activities
   
 
(157,361
)
   
 
(174,347
)
Net decrease in cash
   
 
(646
)
   
 
(30,019
)
Cash at beginning of year
   
 
3,714
 
   
 
35,089
 
    
  
Cash at end of period
   
$
3,068
 
   
$
5,070
 
    
  
 
See accompanying Notes to Consolidated Financial Statements.

6

TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note A—Accounting Policies
 
The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America. However, in the opinion of management, these statements include all adjustments, consisting of normal recurring accruals, which are necessary for a fair presentation of the consolidated financial position at June 30, 2002 and the consolidated results of operations, comprehensive income and cash flow for the periods ended June 30, 2002 and 2001.
 
Note B—New Accounting Standards
 
Effective January 1, 2002, Torchmark adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS No. 142 changed the accounting for goodwill from an amortization method to an impairment method. Accordingly, Torchmark no longer amortizes its goodwill after January 1, 2002, but carries it at the December 31, 2001 balance of $378 million. Restatement of prior year results to exclude the amortization of goodwill is not permitted. Goodwill is subject to impairment testing upon implementation and annually thereafter based on the procedures outlined in SFAS 142.
 
In accordance with SFAS No.142, Torchmark has tested its goodwill as of December 31, 2001 for impairment. The test involved dividing the Company’s operations into “reporting units” as defined by the statement. For Torchmark, these reporting units are subdivisions of Torchmark’s operating segments. Assets and liabilities were then assigned to these units. Each of these units was then valued under the procedures outlined in the Statement. The resulting “fair market values” for each unit were then compared with the underlying carrying values of the net assets assigned to that unit (including goodwill). Because the fair value of each unit exceeded the carrying values assigned to each of those units, there was no goodwill impairment.
 
Note C—Business Segments
 
Torchmark’s segments are based on the insurance product lines it markets and administers: life insurance, health insurance, and annuities. There is also an investment segment, which manages the Company’s investment portfolio, debt, and cash flow. The

7

TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(UNAUDITED)
 
measure of profitability for insurance segments is underwriting income before other income and administrative expenses. It represents the gross profit margin on insurance products before administrative expenses, and is calculated by deducting net policy obligations and acquisition expenses from premium revenue. The measure of profitability for the investment segment is excess investment income, which is the income earned on the investment portfolio in excess of net policy requirements and financing costs associated with Torchmark’s debt and preferred securities. The tables below set forth revenue (excluding realized investment gains and losses) and measures of profitability by segment, as well as provide reconciliations from the total measures of profitability to income before income taxes for the six-month periods ended June 30, 2002 and June 30, 2001, respectively.

8

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(UNAUDITED)
 
Selected Segment Information
(Amounts in thousands)
 
    
Six months ended June 30, 2002
    
Life
   
Health
   
Annuity
   
Investment
   
Other
   
Adjustments
     
Consolidated
Revenue:
                                                   
Premium
   
$
604,881
   
$
517,075
   
$
20,821
                          
$
1,142,777
Net investment income
                        
$
258,194
          
$
(1,916
)
   
 
256,278
Other income
                               
$
1,909
   
 
(857
)
   
 
1,052
    
  
  
  
  
  
  
Total revenue*
   
$
604,881
   
$
517,075
   
$
20,821
   
$
258,194
   
$
1,909
   
$
(2,773
)
   
$
1,400,107
    
  
  
  
  
  
  
Measure of profitability:
                                                   
Underwriting income before other income and administrative expense
   
$
144,772
   
$
86,220
   
$
8,635
                          
$
239,627
Excess investment income
                        
$
145,507
                   
 
145,507
    
  
  
  
  
  
  
Total measure of profitability
   
$
144,772
   
$
86,220
   
$
8,635
   
$
145,507
   
$
0
   
$
0
 
   
$
385,134
    
  
  
  
  
  
  
 
 
    
Six months ended June 30, 2001
    
Life
   
Health
   
Annuity
   
Investment
   
Other
   
Adjustments
     
Consolidated
Revenue:
                                                   
Premium
   
$
569,920
   
$
506,518
   
$
31,646
                          
$
1,108,084
Net investment income
                        
$
245,930
          
$
(2,379
)
   
 
243,551
Other income
                               
$
2,300
   
 
(971
)
   
 
1,329
    
  
  
  
  
  
  
Total revenue*
   
$
569,920
   
$
506,518
   
$
31,646
   
$
245,930
   
$
2,300
   
$
(3,350
)
   
$
1,352,964
    
  
  
  
  
  
  
Measure of profitability:
                                                   
Underwriting income before other income and administrative expense
   
$
139,349
   
$
89,897
   
$
13,684
                          
$
242,930
Excess investment income
                        
$
122,020
                   
 
122,020
    
  
  
  
  
  
  
Total measure of profitability
   
$
139,349
   
$
89,897
   
$
13,684
   
$
122,020
   
$
0
   
$
0
 
   
$
364,950
    
  
  
  
  
  
  
 
*Excludes realized investment gains (losses)

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(UNAUDITED)
 
Reconciliation of Measure of Profitability to Income Before Income Taxes
(Amounts in thousands)
 
    
For the six months ended June 30,
  
    
2002
     
2001
  
Total measure of profitability
   
$
385,134
 
   
$
364,950
 
Other income
   
 
1,909
 
   
 
2,300
 
Insurance administrative expense
   
 
(61,496
)
   
 
(59,466
)
Parent expense
   
 
(5,457
)
   
 
(5,108
)
Tax equivalent adjustment
   
 
(1,916
)
   
 
(2,379
)
Goodwill amortization
   
 
0
 
   
 
(6,037
)
Realized investment gains/(losses)
   
 
(76,953
)
   
 
10,832
 
Pretax cost of Trust Preferred/MIPS dividends
   
 
3,040
 
   
 
5,911
 
    
  
Operating income before taxes**
   
$
244,261
 
   
$
311,003
 
    
  
 
**Income from continuing operations before income taxes, extraordinary item, and cumulative effect of change in accounting principle

10

 
SIGNATURES
 
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
           
TORCHMARK CORPORATION
Date:    August 14, 2002
          
/s/     C. B. HUDSON                    
               
C. B. Hudson, Chairman of the
Board and Chief Executive Officer
             
Date:    August 14, 2002
          
/s/     GARY L. COLEMAN                    
               
Gary L. Coleman, Executive Vice
President and Chief Financial Officer
(Chief Accounting Officer)

11