GLOBE LIFE INC. - Annual Report: 2015 (Form 10-K)
UNITED STATES
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 December 31, 2015
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-08052
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.) | |
3700 South Stonebridge Drive, McKinney, TX | 75070 | |
(Address of principal executive offices) | (Zip Code) | |
972-569-4000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | CUSIP | Name of each exchange on which registered | ||
Common Stock, $1.00 par value per share | 891027104 | New York Stock Exchange | ||
Common Stock, $1.00 par value per share | 891027104 | The International Stock Exchange, London, England | ||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ¨ No x
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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | þ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of June 30, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $7,291,560,829 based on the closing sale price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at February 19, 2016 | |
Common Stock, $1.00 par value per share | 121,264,589 shares | |
DOCUMENTS INCORPORATED BY REFERENCE
Document | Parts Into Which Incorporated | |
Proxy Statement for the Annual Meeting of Stockholders to be held May 12, 2016 (Proxy Statement) | Part III | |
TORCHMARK CORPORATION
INDEX
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Item 1B. | |||
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Item 5. | |||
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Item 7. | |||
Item 7A. | |||
Item 8. | |||
Item 9. | |||
Item 9A. | |||
Item 9B. | |||
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Item 12. | |||
Item 13. | |||
Item 14. | |||
Item 15. | |||
PART I
Item 1. Business
Torchmark Corporation (Torchmark) is an insurance holding company incorporated in Delaware in 1979. Its primary subsidiaries are American Income Life Insurance Company (American Income), Liberty National Life Insurance Company (Liberty National), Globe Life And Accident Insurance Company (Globe), United American Insurance Company (United American), and Family Heritage Life Insurance Company of America (Family Heritage).
Torchmark’s website is: www.torchmarkcorp.com. Torchmark makes available free of charge through its website, its annual report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after they have been electronically filed with or furnished to the Securities and Exchange Commission.
The following table presents Torchmark’s business by primary marketing distribution method.
Primary Distribution Method | Company | Products and Target Markets | Distribution | ||||
 | American Income Exclusive Agency | American Income Life Insurance Company Waco, Texas | Individual life and supplemental health insurance marketed to working families. | 6,552 producing agents in the U.S., Canada, and New Zealand. | |||
 | Globe Life Direct Response | Globe Life And Accident Insurance Company Oklahoma City, Oklahoma | Individual life and supplemental health insurance including juvenile and senior life coverage and Medicare Supplement to middle-income Americans. | Direct mail, internet, television, magazine; nationwide. | |||
 | Family Heritage Exclusive Agency | Family Heritage Life Insurance Company of America Cleveland, Ohio | Supplemental limited-benefit health insurance to middle-income families. | 911 captive agents in the U.S. | |||
 | Liberty National Exclusive Agency | Liberty National Life Insurance Company McKinney, Texas | Individual life and supplemental health insurance marketed to middle-income families. | 1,478 producing agents in the U.S. | |||
 | United American Independent Agency | United American Insurance Company McKinney, Texas | Medicare Supplement coverage to Medicare beneficiaries and, to a lesser extent, supplemental limited-benefit health coverage to people under age 65. | 3,893 independent producing agents in the U.S. | |||
Additional information concerning industry segments may be found in Management’s Discussion and Analysis and in Note 14—Business Segments in the Notes to the Consolidated Financial Statements.
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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.
Annualized Premium in Force (Amounts in thousands) | |||||||||||
2015 | 2014 | 2013 | |||||||||
Whole life: | |||||||||||
Traditional | $ | 1,378,290 | $ | 1,296,403 | $ | 1,235,904 | |||||
Interest-sensitive | 50,808 | 54,490 | 58,549 | ||||||||
Term | 642,599 | 619,782 | 591,628 | ||||||||
Other | 78,801 | 73,870 | 69,320 | ||||||||
$ | 2,150,498 | $ | 2,044,545 | $ | 1,955,401 | ||||||
The distribution methods for life insurance products include sales by direct response, exclusive agents and independent agents. These methods are described in more depth in the Distribution Method chart earlier in this report. The following table presents life annualized premium in force by distribution method.
Annualized Premium in Force (Amounts in thousands) | |||||||||||
2015 | 2014 | 2013 | |||||||||
Globe Life Direct Response | $ | 757,518 | $ | 721,261 | $ | 688,866 | |||||
Exclusive agents: | |||||||||||
American Income | 880,021 | 807,935 | 749,165 | ||||||||
Liberty National | 284,597 | 285,201 | 287,079 | ||||||||
Independent agents: | |||||||||||
United American | 14,488 | 15,831 | 17,846 | ||||||||
Other | 213,874 | 214,317 | 212,445 | ||||||||
$ | 2,150,498 | $ | 2,044,545 | $ | 1,955,401 | ||||||
Health Insurance
Torchmark offers limited-benefit supplemental health insurance products that include primarily critical illness and accident plans. These policies are designed to supplement health coverage that applicants already own. Medicare Supplements are also offered to enrollees in the traditional fee-for-service Medicare program. Medicare Supplement plans are standardized by federal regulation and are designed to pay deductibles and co-payments not paid by Medicare.
On February 4, 2016, Torchmark announced that management has committed to a plan to sell its Medicare Part D business during the calendar year 2016. Torchmark no longer wishes to emphasize its Medicare Part D business due to declining margins, increased risks, higher drug costs, and increased administrative and compliance costs. Management believes this sale will allow the Company to better focus on its core protection life and health insurance businesses. As the historical results for the Medicare Part D business are accounted for as discontinued operations, all business results and relevant forward looking statements of the Company are reported as continuing operations. For further discussion of the disposition of the Medicare Part D business, see Note 6—Discontinued Operations in the Notes to the Consolidated Financial Statements.
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The following table presents supplemental health annualized premium in force information for the three years ended December 31, 2015 by product category.
Annualized Premium in Force (Amounts in thousands) | |||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||
Medicare Supplement | $ | 498,696 | 51 | $ | 488,142 | 52 | $ | 435,788 | 49 | ||||||||
Limited-benefit plans | 474,346 | 49 | 459,181 | 48 | 451,656 | 51 | |||||||||||
$ | 973,042 | 100 | $ | 947,323 | 100 | $ | 887,444 | 100 | |||||||||
The following table presents supplemental health annualized premium in force for the three years ended December 31, 2015 by marketing (distribution) method.
Annualized Premium in Force (Amounts in thousands) | |||||||||||
2015 | 2014 | 2013 | |||||||||
Globe Life Direct Response | $ | 72,423 | $ | 72,659 | $ | 55,270 | |||||
Exclusive agents: | |||||||||||
Liberty National | 216,139 | 226,599 | 240,581 | ||||||||
American Income | 74,058 | 71,942 | 71,354 | ||||||||
Family Heritage | 234,120 | 217,742 | 201,054 | ||||||||
Independent agents: | |||||||||||
United American | 376,302 | 358,381 | 319,185 | ||||||||
$ | 973,042 | $ | 947,323 | $ | 887,444 | ||||||
Annuities
Annuity products include single-premium and flexible-premium deferred annuities. Annuities in each of the three years ended December 31, 2015 comprised less than 1% of premium.
Pricing
Premium rates for life and health insurance products are established using assumptions as to future mortality, morbidity, persistency, and expenses. These assumptions are based on Company experience and 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 annuity products and certain individual life products. Profitability is affected to the extent actual experience deviates from the assumptions made in pricing and to the extent investment income varies from 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 policyholder accounts.
Underwriting
The underwriting standards of each Torchmark insurance subsidiary are established by management. Each subsidiary uses information from the application and, in some cases, telephone interviews with applicants, inspection reports, pharmacy data, 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.
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Reserves
The life insurance policy reserves reflected in Torchmark’s financial statements as future policy benefits are calculated based on generally accepted accounting principles (GAAP). 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. The assumptions used in the calculation of Torchmark’s reserves are reported in Note 1—Significant Accounting Policies in the Notes to the Consolidated Financial Statements. Reserves for annuity products and certain life products consist of the policyholders’ account values and are increased by policyholder deposits and interest credited and are decreased by policy charges and benefit payments.
Investments
The nature, quality, and percentage mix of insurance company investments are regulated by state laws. The investments of Torchmark insurance subsidiaries consist predominantly of high-quality, investment-grade securities. Fixed maturities represented 96% of total investments at fair value at December 31, 2015. (See Note 4—Investments in the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis.)
Competition
Torchmark competes with other insurance carriers through policyholder service, price, product design, and sales efforts. 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.
Management believes Torchmark companies operate at lower policy acquisition and administrative expense levels than peer companies. This allows Torchmark to have competitive rates while maintaining higher underwriting margins.
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. 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 National Association of Insurance Commissioners (NAIC), insurance companies are examined periodically by one or more of the supervisory agencies.
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 Torchmark insurance subsidiaries are more than adequately capitalized under the risk based capital formula.
Guaranty Assessments. State guaranty laws provide for assessments from insurance companies to be placed 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 is based on its proportional share of the premium in each state. 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 Indiana, Nebraska, Ohio, and New York.
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Insurance holding company system statutes and regulations impose various limitations on investments in subsidiaries, and may require prior regulatory approval for material transactions between insurers and affiliates and for the payment of certain dividends and other distributions.
Personnel
At the end of 2015, Torchmark had 3,115 employees.
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Item 1A. Risk Factors
Risks Related to Our Business
Product Marketplace and Operational Risks:
The insurance industry is a regulated industry, populated by many firms. We operate in the life and health insurance sectors of the insurance industry, each with its own set of risks.
The development and maintenance of our various distribution systems are critical to growth in product sales and profits. As our life and health insurance sales are primarily made to individuals, rather than groups, and the face amounts sold are lower than that of policies sold in the higher income market, the development, maintenance, and retention of adequate numbers of producing agents and Globe Life Direct Response systems to support growth of sales in this market are critical. Adequate compensation that is competitive with other career opportunities and that also motivates producing agents to increase sales is critical. In Globe Life Direct Response, continuous development of new offerings and cost efficiency are key. Less than optimum execution of these strategies may result in reduced sales and profits.
Economic conditions may materially adversely affect our business and results of operations. We serve primarily the middle-income market for individual protection life and health insurance and, as a result, we compete directly with alternative uses of a customer’s disposable income. If disposable income within this demographic group declines or the use of disposable income becomes more limited, as a result of a significant, sustained economic downturn or otherwise, then new sales of our insurance products could become more challenging, and our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Economic conditions could also impact our investment portfolio as discussed under Investment Risks below.
Variations in expected to actual rates of mortality, morbidity, and persistency could materially negatively affect our results of operations and financial condition. We establish a liability for our policy reserves to pay future policyholder benefits and claims. These reserves do not represent an exact calculation of liability, but rather are actuarial estimates based on models that include many assumptions and projections which are inherently uncertain. The reserve computations involve the exercise of significant judgment with respect to levels of mortality, morbidity, and persistency as well as the timing of premium and benefit payments. Even though our actuaries continually test expected-to-actual results, actual levels that occur may differ significantly from the levels assumed when premium rates were first set. Accordingly, we cannot determine with precision the ultimate amounts of claims or benefits that we will pay or the timing of such payments. Significant variations from the levels assumed when policy reserves are first set could require policy obligations to be increased and negatively affect our profit margins and income.
A ratings downgrade or other negative action by a rating agency could materially affect our business, financial condition and results of operations. Various rating agencies review the financial performance and condition of insurers, including our insurance subsidiaries, and publish their financial strength ratings as indicators of an insurer’s ability to meet policyholder and contract holder obligations. These ratings are important to maintaining public confidence in our insurance products. A downgrade or other negative action by a rating agency with respect to the financial strength ratings of our insurance subsidiaries could negatively affect us in many ways, including the following: limiting or restricting the ability of our insurance subsidiaries to pay dividends to us and adversely affecting our ability to sell insurance products through our independent agencies.
Rating agencies also publish credit ratings for us. Credit ratings are indicators of a debt issuer’s ability to meet the terms of debt obligations in a timely manner. These ratings are important to our overall ability to access certain types of liquidity. Actual or anticipated downgrades in our credit ratings, or an announcement that our ratings are under further review for a downgrade, could potentially have a negative effect on our operations, by limiting our access to capital markets, increasing the cost of debt, impairing our ability to raise capital to refinance maturing debt obligations, limiting our capacity to support growth at our insurance subsidiaries, or making it more difficult to maintain or improve the current financial strength ratings of our insurance subsidiaries.
Ratings reflect only the rating agency’s views and are not recommendations to buy, sell or hold our securities. Rating agencies assign ratings based upon several factors. While most of the factors relate to the rated company, some of the factors relate to the views of the rating agency, general economic conditions and circumstances outside the rated company’s control. In addition, rating agencies use various models and formulas to assess the strength of a rated
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company, and from time to time rating agencies have, in their discretion, altered the models. Changes to the models could impact the rating agencies’ judgment of the rating to be assigned to the rated company. There can be no assurance that current credit ratings will remain in effect for any given period of time or that such ratings will not be lowered, suspended or withdrawn entirely by the rating agencies, if in each rating agency’s judgment, circumstances so warrant. We cannot predict what actions the rating agencies may take, or what actions we may take in response to the actions of the rating agencies, which could negatively affect our business, financial condition and results of operations.
Reputational Risk:
Damage to the reputation of Torchmark or its subsidiaries could affect our ability to conduct business. Negative publicity through traditional media, internet, social media, and other public forums could damage our reputation and adversely impact our agent recruiting efforts, the ability to market our products, and the persistency of our block of inforce policies.
Life Insurance Marketplace Risk:
Our life products are sold in selected niche markets. We are at risk should any of these markets diminish. We have two life distribution channels that focus on distinct market niches: labor union members and sales via Globe Life Direct Response solicitation. Deterioration of our relationships with organized labor or adverse changes in the public’s receptivity to unsolicited Globe Life Direct Response marketing could negatively affect this business.
Health Insurance Marketplace Risks:
The health insurance market is subject to substantial legislative scrutiny. Legislative changes could impact our Medicare Supplement and other supplemental health businesses. The nature and timing of any such changes cannot be predicted and could have a material adverse effect on that business.
Competition in the health market can be significant. Sales of our health insurance products are subject to competition from other health insurance companies and alternative healthcare providers, such as those that provide alternatives to traditional Medicare to seniors. In addition, some insurers may be willing to significantly reduce their profit margins or under price new sales in order to gain market share. We choose not to compete for market share based on these terms. Accordingly, changes in the competitive landscape, including the pricing strategies employed by our competitors, could negatively impact the future sales of our health insurance products.
An inability to obtain timely and appropriate premium rate increases for the health insurance policies we sell due to regulatory delay could adversely affect our results of operations and financial condition. A significant percentage of the health insurance premiums that our insurance subsidiaries earn is from Medicare Supplement insurance. Medicare Supplement insurance and the terms under which the premiums for such policies may be increased are highly regulated at both the state and federal level. As a result, it is characterized by lower profit margins than life insurance and requires strict administrative discipline and economies of scale for success. Because Medicare Supplement policies are coordinated with the federal Medicare program, which experiences health care inflation every year, annual premium rate increases for the Medicare Supplement policies are necessary. Obtaining timely rate increases is of critical importance to our success in this market. Accordingly, the inability of our insurance subsidiaries to obtain approval of premium rate increases in a timely manner from state insurance regulatory authorities in the future could adversely impact their profitability.
Investment Risks:
Our investments are subject to market and credit risks. Our invested assets are subject to the customary risks of defaults, downgrades, and changes in market values. Substantially all of our investment portfolio consists of fixed-maturity and short-term investments. A significant portion of our fixed-maturity investments is comprised of corporate bonds, exposing us to the risk that individual corporate issuers will not have the ability to make required interest or principal payments on the investment. Factors that may affect both market and credit risks include interest rate levels, financial market performance, disruptions in credit markets, general economic conditions, legislative changes, particular circumstances affecting the businesses or industries of each issuer, and other factors beyond our control. Additionally, because the majority of our investments are longer-term fixed maturities that we typically hold until maturity, significant increases in interest rates, widening of credit spreads, or inactive markets associated with market downturns could cause a material temporary decline in the fair value of our fixed investment portfolio, even with regard to performing assets. These declines could cause a material increase in unrealized losses in our investment portfolio. Significant
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unrealized losses can substantially reduce our capital position and shareholders’ equity. It is possible that our investment in certain of these securities with unrealized losses may experience a default event and that a portion or all of that unrealized loss may not be recoverable. In that case, the unrealized loss will be realized, at which point we would take an impairment charge, reducing our net income.
Difficulties in the business of particular issuers or in industries in which we hold investments could cause significant downgrades, delinquencies and defaults in our investment portfolio, potentially resulting in lower net investment income and increased realized and unrealized investment losses. A default by an issuer could result in a significant other-than-temporary impairment of that investment, causing us to write the investment down and take a charge against net income. The risk of default is higher for bonds with longer-term maturities, which we acquire in order to match our long-term insurance obligations. We attempt to reduce this risk by purchasing only investment grade securities and by carefully evaluating an issuer before entering into an investment. We cannot be assured that any particular issuer, regardless of industry, will be able to make required interest and principal payments, on a timely basis or at all. Significant downgrades of issuers could negatively impact our risk-based capital ratios, leading to potential downgrades by our rating agencies, potential reduction in future dividend capacity, and/or higher financing costs at the holding company should additional statutory capital be required. Material other-than-temporary impairments could reduce our statutory surplus, leading to lower risk-based capital ratios, potential downgrades of our ratings by rating agencies and a potential reduction of future dividend capacity from our insurance subsidiaries. While we intend to hold our investments until maturity, a severe increase in defaults could cause us to suffer a significant decrease in investment income or principal repayments, resulting in substantial realized losses from the write downs of impaired investments. Current net income would be negatively impacted by the write downs, and prospective net income would be adversely impacted by the loss of future interest income.
Declines in interest rates could negatively affect income. Declines in interest rates expose insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the discount rates used to calculate the net policy liabilities. While we attempt to manage our investments to preserve the excess investment income spread, we provide no assurance that a significant and persistent decline in interest rates will not materially affect such spreads. Significant decreases in interest rates could result in calls by issuers of investments, where such features are available to issuers. These calls could result in a decline in our investment income, as reinvestment of the proceeds would likely be at lower rates.
Liquidity Risks:
Our liquidity to fund operations is substantially dependent on funds available, primarily dividends, from our insurance subsidiaries. As a holding company with no direct operations, our principal asset is the capital stock of our insurance subsidiaries, which periodically declare and distribute dividends on their capital stock. Moreover, our liquidity, including our ability to pay our operating expenses and to make principal and interest payments on debt securities or other indebtedness owed by us, as well as our ability to pay dividends on our common stock or any preferred stock, depends significantly upon the surplus and earnings of our insurance subsidiaries and the ability of these subsidiaries to pay dividends or to advance or repay funds to us. Other sources of liquidity also include a variety of short-term and long-term instruments, including our credit facility, commercial paper, long-term debt, intercompany financing, and reinsurance.
The principal sources of our insurance subsidiaries’ liquidity are insurance premiums, as well as investment income, maturities, repayments, and other cash flow from our investment portfolio. Our insurance subsidiaries are subject to various state statutory and regulatory restrictions applicable to insurance companies that limit the amount of cash dividends, loans, and advances that those subsidiaries may pay to us, including laws establishing minimum solvency and liquidity thresholds. For example, in the states where our companies are domiciled, an insurance company generally may pay dividends only out of its unassigned surplus as reflected in its statutory financial statements filed in that state. Additionally, dividends paid by insurance subsidiaries are generally limited to the greater of prior year statutory net income, excluding capital gains, on an annual noncumulative basis or 10% of prior year statutory surplus without regulatory approval. Accordingly, impairments in invested assets or a disruption in our insurance subsidiaries’ operations that reduces their capital or cash flow could limit or disallow payment of dividends to us, a principal source of our cash flow.
We can give no assurance that more stringent restrictions will not be adopted from time to time by states in which our insurance subsidiaries are domiciled, which could, under certain circumstances, significantly reduce dividends or other amounts paid to us by our subsidiaries. Although we do not anticipate changes, changes in these laws could constrain
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the ability of our subsidiaries to pay dividends or to advance or repay funds to us in sufficient amounts and at times necessary to meet our debt obligations and corporate expenses. Additionally, the inability of our insurance subsidiaries to obtain approval of premium rate increases in a timely manner from state insurance regulatory authorities could adversely impact their profitability, and thus their ability to declare and distribute dividends to us. Limitations on the flow of dividends from our subsidiaries could limit our ability to service and repay debt or to pay dividends on our capital stock.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs or access capital, as well as affect our cost of capital. Should credit spreads widen in the future, the interest rate on any new debt obligation we may issue could increase, and our net income could be reduced. If the credit and capital markets were to experience significant disruption, uncertainty, and instability, these conditions could adversely affect our access to capital. Such market conditions may limit our ability to replace maturing liabilities (in a timely manner or at all) and/or access the capital necessary to grow our business.
In the unlikely event that current resources do not satisfy our needs, we may have to seek additional financing or raise capital. The availability of additional financing or capital will depend on a variety of factors such as market conditions, the general availability of credit or capital, the volume of trading activities, the overall availability of credit to the insurance industry, and our credit ratings and credit capacity. Additionally, customers, lenders, or investors could develop a negative perception of our long- or short-term financial prospects if we incur large investment losses or if the level of our business activity decreases due to a market downturn. Our access to funds may also be impaired if regulatory authorities or rating agencies take negative actions against us. Our internal sources of liquidity may prove to be insufficient, and, in such case, we may not be able to successfully obtain additional financing on favorable terms, or at all. As such, we may be forced to delay raising capital, issue shorter term securities than we prefer, or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility. Therefore, as a result, our results of operations, financial condition, and cash flows could be materially negatively affected by disruptions in the financial markets.
Regulatory Risks:
Our businesses are heavily regulated, and changes in regulation may reduce our profitability and growth. Insurance companies, including our insurance subsidiaries, are subject to extensive supervision and regulation in the states in which we do business. The primary purpose of this supervision and regulation is the protection of our policyholders, not our investors. State agencies have broad administrative power over numerous aspects of our business, including premium rates and other terms and conditions that we can include in the insurance policies offered by our insurance subsidiaries, marketing practices, advertising, licensing agents, policy forms, capital adequacy, solvency, reserves, and permitted investments. Also, regulatory authorities have relatively broad discretion to grant, renew, or initiate procedures to revoke licenses or approvals. The insurance laws, regulations and policies currently affecting Torchmark and its insurance subsidiaries may change at any time, possibly having an adverse effect on our business. Should these changes to our business occur, we may be unable to maintain all required licenses and approvals, and our business may not fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations, which may change from time to time. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or impose substantial fines.
We cannot predict the timing or substance of any future regulatory initiatives. In recent years, there has been increased scrutiny of insurance companies, including our insurance subsidiaries, by insurance regulatory authorities, which has included more extensive examinations and more detailed review of disclosure documents. These regulatory authorities may bring regulatory or other legal actions against us if, in their view, our practices, or those of our agents or employees, are improper. These actions can result in substantial fines, penalties, or prohibitions or restrictions on our business activities and could have a material adverse effect on our business, results of operations, or financial condition. Additionally, changes in the overall legal or regulatory environment may, even absent any particular regulatory authority’s interpretation of an issue changing, cause us to change our views regarding the actions that we need to take from a legal or regulatory risk management perspective, thus necessitating changes to our practices that may, in some cases, limit our ability to grow, impact regulatory capital requirements, or otherwise negatively impact the profitability of our business.
Currently, the U.S. federal government does not directly regulate the business of insurance. However, the Dodd-Frank Wall Street Record and Consumer Protection Act of 2010 has established a Federal Insurance Office (FIO) within the
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Department of the Treasury, and the Affordable Care Act and a Financial Stability Oversight Council (FSOC) created the Center for Consumer Information and Insurance Oversight (CCIIO), originally established under the Department of Health and Human Services and subsequently transferred to the Centers for Medicare and Medicaid Services (CMS). The creation of these insurance regulatory offices may indicate that the federal government intends to play a larger role in the direct oversight or regulation of the insurance industry. We cannot predict what impact, if any, the FIO, FSOC and CCIIO, as well as any other proposals for federal oversight or regulation of insurance could have on our business, results of operations, or financial condition.
Changes in U.S. federal income tax law could increase our tax costs. Changes to the Internal Revenue Code, administrative rulings, or court decisions affecting the insurance industry, including the products it offers, could increase our effective tax rate and lower our net income, or negatively affect our ability to sell some of our products.
Changes in accounting standards issued by accounting standard-setting bodies may affect our financial statements, reduce our reported profitability, and change the timing of profit recognition. Our financial statements are subject to the application of generally accepted accounting principles in the United States of America (GAAP), which principles are periodically revised and/or expanded. Accordingly, from time to time, we are required to adopt new or revised accounting standards or guidance issued by recognized authoritative bodies. It is possible that future accounting standards that we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse effect on our financial condition and results of operations. Further, standard setters have a full agenda of unissued topics under review at any given time, any of which have the potential to negatively impact our profitability.
If we fail to comply with restrictions on patient privacy and information security, including taking steps to ensure that our business associates who obtain access to sensitive patient information maintain its confidentiality, our reputation and business operations could be materially adversely affected. The collection, maintenance, use, disclosure and disposal of individually identifiable data by our insurance subsidiaries are regulated at the international, federal and state levels. These laws and rules are subject to change by legislation or administrative or judicial interpretation. Various state laws address the use and disclosure of individually identifiable health data to the extent they are more restrictive than those contained in the privacy and security provisions in the federal Gramm-Leach-Bliley Act of 1999 (GLBA) and in the Health Insurance Portability and Accountability Act of 1996 (HIPAA). HIPAA also requires that we impose privacy and security requirements on our business associates (as that term is defined in the HIPAA regulations). Noncompliance with any privacy laws or any security breach involving the misappropriation, loss or other unauthorized disclosure of sensitive or confidential information, whether by us or by one of our business associates, could have a material adverse effect on our business, reputation and results of operations and could include material fines and penalties, various forms of damages, consent orders regarding our privacy and security practices, adverse actions against our licenses to do business and injunctive relief.
Litigation Risk:
Litigation could result in substantial judgments against us or our subsidiaries. We are, and in the future may be, subject to litigation in the ordinary course of business. Some of these proceedings have been brought on behalf of various alleged classes of complainants, and, in certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. Members of our management and legal teams review litigation on a quarterly and annual basis. However, the outcome of any such litigation cannot be predicted with certainty. A number of civil jury verdicts have been returned against insurers in the jurisdictions in which Torchmark and its insurance subsidiaries do business involving the insurers’ sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. These lawsuits have resulted in the award of substantial judgments against insurers that are disproportionate to the actual damages, including material amounts of punitive damages. In some states in which we operate, juries have substantial discretion in awarding punitive damages. This discretion creates the potential for unpredictable material adverse judgments in any given punitive damages suit.
Our pending and future litigation could adversely affect us because of the costs of defending these cases, the costs of settlement or judgments against us, or changes in our operations that could result from litigation. Substantial legal liability in these or future legal actions could also have a material financial effect or cause significant harm to our reputation, which, in turn, could materially harm our business and our business prospects.
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Catastrophic Event Risk:
Our business is subject to the risk of the occurrence of catastrophic events. Our insurance policies are issued to and held by a large number of policyholders throughout the United States in relatively low-face amounts. Accordingly, it is unlikely that a large portion of our policyholder base would be affected by a single natural disaster. However, our insurance operations could be exposed to the risk of catastrophic mortality or morbidity, caused by events such as a pandemic, hurricane, earthquake, or man-made catastrophes, including acts of terrorism or war, which may produce significant claims in larger areas, especially those that are heavily populated. Claims resulting from natural or man-made catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or harm our financial condition.
Information Security and Technology Risk:
A security breach, the introduction of malware in our computing environment, employee error or malfeasance, unauthorized access, a natural or man-made disaster, or other unanticipated event could compromise the information security systems of Torchmark or its subsidiaries, and could damage our business and adversely affect our financial condition and results of operations.
A failure in our information security systems could result in a loss or disclosure of confidential information, damage to our reputation, loss of cash flow and impairment of our ability to conduct business effectively. In some cases we may not become aware of such incident for some time after it occurs, which could increase our exposure.
Anyone who is able to circumvent our security measures could access, view, misappropriate, alter or delete confidential information in the systems, including personally identifiable customer information and proprietary business information. In addition, an increasing number of states require that customers be notified of unauthorized access, use, or disclosure of their information. Any such breach of confidential information could damage our reputation in the marketplace, deter people from purchasing our products, result in the loss of existing customers, subject us to significant civil and criminal liability, and require us to incur significant technical, legal and other expenses.
In the event of a disaster, such as a natural catastrophe, an industrial accident, a blackout, or a terrorist attack or war, our computer systems may be inaccessible to our employees or customers for a period of time. Even if our employees are able to report to work, they may be unable to perform their duties for an extended period of time if our data or systems are disabled or destroyed and if existing contingency plans cannot function as designed.
Item 1B. Unresolved Staff Comments
As of December 31, 2015, Torchmark had no unresolved staff comments.
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Item 2. Properties
Torchmark, through its subsidiaries, owns or leases buildings that are used in the normal course of business. Torchmark owns and occupies a 300,000 square foot facility in McKinney, Texas (a north Dallas suburb). This facility is Torchmark’s corporate headquarters and also houses the operations of a subsidiary, United American, as well as the operations of other subsidiaries. In addition, United American leases 5,000 square feet of space in Omaha, Nebraska and, through a subsidiary, leases 2,500 square feet in an office area in Syracuse, New York.
Liberty National, though headquartered in McKinney, Texas, operates its main activities out of a 24,000 square foot facility leased in Hoover, Alabama (a Birmingham suburb). An 8,000 square foot facility is leased for storage in Pelham, Alabama, close to the Hoover facility.
Globe leases a 30,300 square foot office area in the City Place Tower building located in downtown Oklahoma City, Oklahoma. Globe also leases 11,000 square feet at a nearby facility used for storage. Globe Marketing Services, a subsidiary of Globe, owns a 133,000 square foot facility in Oklahoma City which houses the Globe Life Direct Response operation.
American Income owns and is the sole occupant of an office building located in Waco, Texas. The two-floored building contains 70,000 square feet. American Income also has leased 10,800 square feet in a building across the street from the main office building. American Income Marketing Services, a subsidiary of American Income, owns a 43,000 square foot facility located in Waco, Texas, housing American Income’s direct response operation. American Income also leases office space throughout the United States to support its marketing operations.
Family Heritage owns 50% of a partnership that owns an approximate 66,000 square foot building in Broadview Heights, Ohio (a suburb of Cleveland), serving as Family Heritage’s headquarters. The partnership also leases a portion of the building to unrelated tenants.
Item 3. Legal Proceedings
Torchmark and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including claims involving 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. Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, management does not believe that such litigation will have a material adverse effect on Torchmark’s financial condition, future operating results or liquidity; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future. This bespeaks caution, particularly in states with reputations for high punitive damage verdicts. Torchmark’s management recognizes that large punitive damage awards bearing little or no relation to actual damages continue to be awarded by juries in jurisdictions in which Torchmark and its subsidiaries have substantial business, creating the potential for unpredictable material adverse judgments in any given punitive damage suit.
Torchmark subsidiaries are currently the subject of audits regarding the identification, reporting and escheatment of unclaimed property arising from life insurance policies and a limited number of annuity contracts. These audits are being conducted by private entities that have contracted with forty-seven various states through their respective Departments of Revenue, and have not resulted in any financial assessment from any state nor indicated any liability. The audits are wide-ranging and seek large amounts of data regarding claims handling, procedures, and payments of contract benefits arising from unreported death claims. No estimate of range can be made at this time for loss contingencies related to possible administrative penalties or amounts that could be payable to the states for the escheatment of abandoned property.
Item 4. Mine Safety Disclosures.
Not Applicable.
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PART II
Item 5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters
The principal market in which Torchmark’s common stock is traded is the New York Stock Exchange. There were 2,915 shareholders of record on December 31, 2015, excluding shareholder accounts held in nominee form. The market prices and cash dividends paid by calendar quarter for the past two years are presented in the following table.
2015 Market Price | Dividends Per Share | ||||||||||||||
Quarter | High | Low | |||||||||||||
1 | $ | 55.66 | $ | 50.07 | $ | 0.1267 | |||||||||
2 | 59.15 | 54.98 | 0.1350 | ||||||||||||
3 | 63.12 | 55.62 | 0.1350 | ||||||||||||
4 | 61.19 | 55.36 | 0.1350 | ||||||||||||
Year-end closing price | $ | 57.16 | |||||||||||||
2014 Market Price | Dividends Per Share | ||||||||||||||
Quarter | High | Low | |||||||||||||
1 | $ | 53.51 | $ | 48.37 | $ | 0.1133 | |||||||||
2 | 55.07 | 50.97 | 0.1267 | ||||||||||||
3 | 55.68 | 52.37 | 0.1267 | ||||||||||||
4 | 55.42 | 50.32 | 0.1267 | ||||||||||||
Year-end closing price | $ | 54.17 | |||||||||||||
The line graph shown below compares Torchmark’s cumulative total return on its common stock with the cumulative total returns of the Standard and Poor’s 500 Stock Index (S&P 500) and the Standard and Poor’s Life & Health Insurance Index (S&P Life & Health Insurance). Torchmark is one of the companies whose stock is included within both the S&P 500 and the S&P Life & Health Insurance Index.
*100 invested on 12/31/10 in stock or index, including reinvestment of dividends. (Copyright © 2016 S&P, a division of McGraw Hill Financial.)
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(c) Purchases of Certain Equity Securities by the Issuer and Others for the Fourth Quarter 2015
Period | (a) Total Number of Shares Purchased | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares (or Approximate Dollar Amount) that May Yet Be Purchased Under the Plans or Programs | |||||||
October 1-31, 2015 | 400,649 | $ | 56.95 | 400,649 | |||||||
November 1-30, 2015 | 447,661 | 59.69 | 447,661 | ||||||||
December 1-31, 2015 | 657,764 | 59.17 | 657,764 | ||||||||
On August 5, 2015, Torchmark’s Board reaffirmed its continued authorization of the Company’s stock repurchase program in amounts and with timing that management, in consultation with the Board, determined to be in the best interest of the Company. The program has no defined expiration date or maximum shares to be purchased.
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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)
Year ended December 31, | 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||
Premium revenue: | |||||||||||||||||||
Life | $ | 2,073,065 | $ | 1,966,300 | $ | 1,885,332 | $ | 1,808,524 | $ | 1,726,244 | |||||||||
Health | 925,520 | 869,440 | 863,818 | 730,019 | 733,783 | ||||||||||||||
Other | 135 | 400 | 532 | 559 | 608 | ||||||||||||||
Total | 2,998,720 | 2,836,140 | 2,749,682 | 2,539,102 | 2,460,635 | ||||||||||||||
Net investment income(1) | 773,951 | 758,286 | 734,650 | 716,132 | 707,305 | ||||||||||||||
Realized investment gains (losses) | (8,791 | ) | 23,548 | 7,990 | 37,833 | 25,904 | |||||||||||||
Total revenue(1) | 3,766,065 | 3,620,095 | 3,494,253 | 3,294,644 | 3,195,995 | ||||||||||||||
Income from continuing operations | 516,293 | 528,074 | 507,205 | 509,297 | 483,237 | ||||||||||||||
Income from discontinued operations, net of tax | 10,807 | 14,865 | 21,267 | 20,027 | 14,379 | ||||||||||||||
Loss on disposal, net of tax | — | — | — | — | (455 | ) | |||||||||||||
Net income | 527,100 | 542,939 | 528,472 | 529,324 | 497,161 | ||||||||||||||
Per common share: | |||||||||||||||||||
Basic earnings: | |||||||||||||||||||
Income from continuing operations | 4.13 | 4.04 | 3.68 | 3.51 | 2.98 | ||||||||||||||
Income (loss) from discontinued operations | 0.08 | 0.11 | 0.16 | 0.14 | 0.08 | ||||||||||||||
Net income | 4.21 | 4.15 | 3.84 | 3.65 | 3.06 | ||||||||||||||
Diluted earnings: | |||||||||||||||||||
Income from continuing operations | 4.07 | 3.98 | 3.63 | 3.47 | 2.93 | ||||||||||||||
Income (loss) from discontinued operations | 0.09 | 0.11 | 0.16 | 0.13 | 0.09 | ||||||||||||||
Net income | 4.16 | 4.09 | 3.79 | 3.60 | 3.02 | ||||||||||||||
Cash dividends declared | 0.54 | 0.51 | 0.45 | 0.40 | 0.31 | ||||||||||||||
Cash dividends paid | 0.53 | 0.49 | 0.44 | 0.38 | 0.30 | ||||||||||||||
Basic average shares outstanding | 125,095 | 130,722 | 137,647 | 144,921 | 162,417 | ||||||||||||||
Diluted average shares outstanding | 126,757 | 132,640 | 139,564 | 146,848 | 164,723 | ||||||||||||||
As of December 31, | 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||
Cash and invested assets(2) | $ | 14,405,073 | $ | 15,058,996 | $ | 13,456,944 | $ | 14,155,919 | $ | 12,437,699 | |||||||||
Total assets(2) | 19,853,213 | 20,272,259 | 18,217,757 | 18,810,132 | 16,611,781 | ||||||||||||||
Short-term debt | 490,129 | 238,398 | 229,070 | 319,043 | 224,842 | ||||||||||||||
Long-term debt(3) | 743,733 | 992,130 | 990,865 | 989,686 | 914,282 | ||||||||||||||
Shareholders' equity | 4,055,552 | 4,697,466 | 3,776,342 | 4,361,786 | 3,859,631 | ||||||||||||||
Per diluted share | 32.71 | 36.19 | 27.66 | 30.56 | 25.27 | ||||||||||||||
Effect of fixed maturity revaluation on diluted equity per share(4) | 2.62 | 8.28 | 1.81 | 7.07 | 3.96 | ||||||||||||||
Annualized premium in force: | |||||||||||||||||||
Life(2) | 2,150,498 | 2,044,545 | 1,955,401 | 1,895,017 | 1,813,705 | ||||||||||||||
Health(2) | 973,042 | 947,323 | 887,444 | 902,753 | 733,406 | ||||||||||||||
Total | 3,123,540 | 2,991,868 | 2,842,845 | 2,797,770 | 2,547,111 | ||||||||||||||
Basic shares outstanding | 122,370 | 127,930 | 134,252 | 141,353 | 150,869 | ||||||||||||||
Diluted shares outstanding | 123,996 | 129,812 | 136,537 | 142,707 | 152,712 | ||||||||||||||
Note: Certain balances were retrospectively adjusted to give effect to the discontinued continued operations presentation as described in Note 6-Discontinued Operations.
(1) Net investment income retrospectively adjusted to give effect to the adoption of new accounting guidance as described in Note 1- Significant Accounting Policies under the caption "Low-Income Housing Tax Credit Interests."
(2) At December 31, 2012, cash and invested assets included $615 million, total assets included $869 million, annualized life premium in force included $949 thousand, and annualized health premium in force included $188 million, representing the business acquired in the acquisition of Family Heritage in 2012.
(3) Includes Torchmark's 7.1% Junior Subordinated Debentures reported as "Due to affiliates" on the Consolidated Balance Sheet at year end 2011 in the amount of $123.7 million.
(4) There is an accounting rule (ASC 320-10-35-1, Investments- Debt and Equity Securities) requiring available-for-sale fixed maturities to be revalued at fair value each period. The effect of this rule on diluted equity per share reflects the amount added or (deducted) under this rule to produce GAAP Shareholders’ equity per share. See discussion under the caption Capital Resources in Management’s Discussion and Analysis in this report concerning the effect this rule has on Torchmark’s equity.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
RESULTS OF OPERATIONS
How Torchmark Views Its Operations: Torchmark is the holding company for a group of insurance companies which market primarily individual life, and supplemental health insurance to middle income households throughout the United States. We view our operations by segments, which are the insurance product lines of life, health, and annuities, and the investment segment that supports the product lines. Segments are aligned based on their common characteristics, comparability of the profit margins, and management techniques used to operate each segment.
Insurance Product Line Segments. As fully explained in Note 14—Business Segments in the Notes to the Consolidated Financial Statements, the insurance product line segments involve the marketing, underwriting, and the administration of policies. Each product line is further segmented by the various distribution units that market the insurance policies. Each distribution unit operates in a niche market offering insurance products designed for that particular market. Whether analyzing profitability of a segment as a whole, or the individual distribution units within the segment, the measure of profitability used by management is the underwriting margin, which is:
Premium revenue
Less:
Policy obligations
Policy acquisition costs and commissions
Investment Segment. The investment segment involves the management of our capital resources, including investments and the management of corporate debt and liquidity. Our measure of profitability for the investment segment is excess investment income, which is:
Net investment income
Less:
Required interest on net policy liabilities
Financing costs
The tables in Note 14—Business Segments in the Notes to the Consolidated Financial Statements reconcile Torchmark’s revenues and expenses by segment to its major income statement line items for each of the years in the three-year period ended December 31, 2015. Additionally, this Note provides a summary of the profitability measures that demonstrates year-to-year comparability and which reconciles to net income. That summary is reproduced below from the Consolidated Financial Statements to present our overall operations in the manner that we use to manage the business.
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Analysis of Profitability by Segment
(Dollar amounts in thousands)
2015 | 2014 | 2013 | 2015 Change | % | 2014 Change | % | |||||||||||||||||||
Life insurance underwriting margin | $ | 569,402 | $ | 556,489 | $ | 545,059 | $ | 12,913 | 2 | $ | 11,430 | 2 | |||||||||||||
Health insurance underwriting margin | 204,377 | 199,319 | 196,507 | 5,058 | 3 | 2,812 | 1 | ||||||||||||||||||
Annuity underwriting margin | 4,568 | 4,312 | 3,939 | 256 | 6 | 373 | 9 | ||||||||||||||||||
Excess investment income | 219,504 | 224,364 | 218,161 | (4,860 | ) | (2 | ) | 6,203 | 3 | ||||||||||||||||
Other insurance: | |||||||||||||||||||||||||
Other income | 2,379 | 2,354 | 2,208 | 25 | 1 | 146 | 7 | ||||||||||||||||||
Administrative expense | (186,191 | ) | (174,832 | ) | (175,651 | ) | (11,359 | ) | 6 | 819 | — | ||||||||||||||
Corporate and adjustments | (37,667 | ) | (40,362 | ) | (34,137 | ) | 2,695 | (7 | ) | (6,225 | ) | 18 | |||||||||||||
Pre-tax total | 776,372 | 771,644 | 756,086 | 4,728 | 1 | 15,558 | 2 | ||||||||||||||||||
Applicable taxes | (253,459 | ) | (252,041 | ) | (246,686 | ) | (1,418 | ) | 1 | (5,355 | ) | 2 | |||||||||||||
After-tax total, before discontinued operations | 522,913 | 519,603 | 509,400 | 3,310 | 1 | 10,203 | 2 | ||||||||||||||||||
Discontinued operations (after tax)(1) | 10,807 | 14,865 | 21,267 | (4,058 | ) | (27 | ) | (6,402 | ) | (30 | ) | ||||||||||||||
Total | 533,720 | 534,468 | 530,667 | (748 | ) | — | 3,801 | 1 | |||||||||||||||||
Realized gains (losses)—investments (after tax) | (5,714 | ) | 15,306 | 3,965 | (21,020 | ) | 11,341 | ||||||||||||||||||
Family Heritage acquisition finalization adjustments (after tax) | — | — | 522 | — | (522 | ) | |||||||||||||||||||
Legal settlement expenses (after tax) | — | (1,519 | ) | (5,931 | ) | 1,519 | 4,412 | ||||||||||||||||||
Guaranty Fund assessment (after tax) | — | — | (751 | ) | — | 751 | |||||||||||||||||||
Administrative settlements (after tax) | (906 | ) | (5,316 | ) | — | 4,410 | (5,316 | ) | |||||||||||||||||
Net income | $ | 527,100 | $ | 542,939 | $ | 528,472 | $ | (15,839 | ) | (3 | ) | $ | 14,467 | 3 | |||||||||||
(1) Income from discontinued operations (after tax) is included for purposes of reconciling to net income.
Torchmark’s operations on a segment-by-segment basis are discussed in depth under the appropriate captions following in this report.
Summary of Operations: Net income was $527 million in 2015, compared with $543 million in 2014. Net income increased in 2014 from $528 million in 2013. On a diluted per share basis, 2015 net income rose 2% to $4.16 after an 8% increase in 2014. Net income per diluted share in 2014 rose to $4.09 from $3.79 in 2013. The per-share results have exceeded the growth in dollar amounts due to our share repurchase program. Also, each year’s per share net income was affected by realized investment gains, which were $(0.05), $0.12, and $0.03, in 2015, 2014 and 2013, respectively. More information concerning realized investment gains and losses can be found under the caption Realized Gains and Losses in this report where there is a more complete discussion. Also, as explained in Note 14—Business Segments in the Notes to the Consolidated Financial Statements, we do not consider realized gains and losses to be a component of our core insurance operations or operating segments. Additionally, we do not consider non-operating items which are not related to the current ongoing reporting performance of our segments to be part of our segment operating income.
Management has committed to a plan to sell the Medicare Part D business in 2016. Torchmark no longer emphasizes its Medicare Part D business due to declining margins, increased risks, higher drug costs, and increased administrative and compliance costs. Management believes this sale will allow the Company to better focus on its core protection life and health insurance businesses as well as provide additional capital to invest. The Medicare Part D business met the criteria for discontinued operations in accordance with applicable accounting guidance, and as such, the business is reflected as discontinued operations in the financial statements. As this business has been classified as held for sale and its operations are discontinued, the financial results of this business are excluded from Torchmark's continuing operations. For more information, refer to Note 6—Discontinued Operations in the Notes to the Consolidated Financial Statements.
As shown in the above chart, after-tax segment results of continuing operations rose each year over the prior year from $509 million in 2013 to $520 million in 2014 to $523 million in 2015. The primary contributor to the growth in both 2015 and 2014 was the underwriting margin in our life insurance segment, in which margins rose $13 million in 2015 and $11 million in 2014. The life insurance segment is our strongest segment and is the largest contributor to earnings
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in each year presented. Also contributing to growth in income in both years was our health insurance segment, which provided $5 million of additional margin in 2015 and $3 million in 2014.
Excess investment income, the measure of profitability of our investment segment, decreased to $220 million or 2% from the prior year amount of $224 million. In 2014, excess investment income increased 3%. Although interest rates increased slightly in 2015, the low interest rate environment continued to pressure investment yields and spreads related to required interest on net policy liabilities throughout the three-year period. Excess investment income has also been hampered by a lag in government reimbursements of Medicare Part D costs. The impact of the lost investment income from delayed receipt of reimbursements is reflected in income from continuing operations rather than discontinued operations in accordance with applicable accounting rules. As noted previously, the Medicare Part D business has been classified as discontinued operations. In 2015 and 2014, the timing of cash flows in the Medicare Part D business had a negative impact on excess investment income, pre-tax of approximately $8 million and $5 million, respectively.
Total revenues rose 4% in 2015 to $3.8 billion, or $146 million over the prior year total of $3.6 billion. Life premium rose 5% or $107 million in 2015 to $2.1 billion. Life premium increased $81 million in 2014 to $2.0 billion. Net investment income rose $24 million or 3% in 2014, and rose 2% or $16 million in 2015. Health premium increased 6% to $926 million in 2015 and contributed $56 million to 2015 revenue growth, after having gained 1% to $869 million in 2014. Health premium contributed $6 million to 2014 revenue growth.
Life insurance premium and underwriting margins have grown steadily in each of the three years ended December 31, 2015. The increase in life premium was driven by sales growth and improvements in persistency. While premium and underwriting margins grew, margin as a percent of premium fell slightly in 2015 to 27%, after decreasing from 29% to 28% from 2013 to 2014. These fluctuations were due primarily to higher than expected claims. Net life sales increased 9% in 2015 to $412 million after increasing 12% in 2014. The life insurance segment is discussed further in this report under the caption Life Insurance.
With regard to health insurance, we primarily market Medicare Supplement insurance and limited-benefit products including critical illness and accident products. In 2013 and 2014, the limited-benefit health premiums have exceeded the Medicare supplement premiums due to the inclusion of Family Heritage at the end of 2012. In late 2014, we experienced an unusually large volume of group sales of our Medicare Supplement product. As a result of increased growth in group sales, the Medicare Supplement premiums increased $43 million, which exceeded the limit-benefit premiums. Health insurance premium income increased 6% to $926 million in 2015. Health net sales fell 13% to $156 million during 2015, as a result of a 29% decrease in Medicare Supplement sales. First-year collected health premium rose 32% to $157 million from the prior year total of $119 million. The decrease in 2015 Health net sales and increase in 2015 first-year collected premium was reflective of the previously mentioned large volume of group sales in 2014. Health margins declined to 22%, with underwriting income increasing to $204 million for 2015. Margins were $199 million for the same period in 2014. The 2015 change was due to lower pricing margins on the group business sold in 2014.
We do not currently market annuities. See the caption Annuities for discussion of the Annuity segment.
The investment segment’s pretax profitability, or excess investment income, is based on three major components: net investment income, required interest on net policy liabilities (interest applicable to insurance products), and financing costs. In 2015, net investment income rose 2%, compared with 3% in 2014. At the same time, our investment portfolio grew 3% in both 2015 and 2014. In recent years, net investment income has not grown as fast as the portfolio due to new investments being made at yield rates lower than the yield rates earned on securities that matured or were otherwise disposed of. Also, there is sometimes a lag between the time when proceeds from maturities and dispositions are received and when the proceeds are reinvested, during which the funds are held in cash. Growth in total investment income is also somewhat negatively affected by Torchmark’s share repurchase program (described later under this caption), which has diverted cash that could have otherwise been used to acquire investments. In 2015 and 2014, net investment income was negatively impacted by our Medicare Part D business. Under the program, we are required to cover certain claim costs in the current period that are the federal government’s responsibility, but are not reimbursed until late in the next calendar year. This delay in reimbursement reduced our funds available for investment in 2015 and 2014, resulting in reduced investment income in both periods.
The interest required on net policy liabilities is deducted from net investment income, and generally grows in conjunction with the net policy liabilities that are supported by the invested assets. The lower new-money yields resulting from the
18
low-interest-rate environment noted above have compressed excess investment income as required interest has continued to grow at approximately the same rate that net policy liabilities have grown. Financing costs, which consist of the interest required for debt service on our long and short-term debt, are also deducted from net investment income. Financing costs in 2015 were up slightly to $77 million from $76 million in 2014. This increase was primarily the result of increased short term borrowings coupled with slightly higher short term interest rates. The 2014 decline resulted from the maturity and repayment in 2013 of our $94.5 million principal amount 7.375% Notes.
Torchmark’s current investment policy regarding fixed maturities limits new fixed maturity acquisitions to investment-grade securities generally with longer maturities (often exceeding twenty years) that meet our quality and yield objectives. Approximately 96% of our invested assets at fair value consist of fixed maturities of which 96% were investment grade at December 31, 2015. The average quality rating of the portfolio was A-. The portfolio contains no securities backed by sub prime or Alt-A mortgages, no direct investment in residential mortgages, no credit default swaps, or other derivative contracts. See the analysis of excess investment income and investment activities under the caption Investments in this report and Note 4—Investments in the Notes to the Consolidated Financial Statements for a more detailed discussion of this segment.
Insurance administrative expenses were up 6.5% in 2015 when compared with the prior year period. The primary reasons for the increase in administrative expenses are higher information technology and employee costs, including pension-related costs. Stock compensation expense declined $4 million in 2015 to $28.7 million compared with an increase of $7 million in 2014 to $32.2 million. The decline in stock compensation expense in 2015 resulted primarily from lower expense associated with performance shares as well as lower option values on 2015 option awards.
In each of the years 2013 through 2015, net income was affected by certain significant, unusual, and nonrecurring nonoperating items. We do not view these items as components of core operating results because they are not indicative of past performance or future prospects of the insurance operations. Accordingly, as described in Note 14—Business Segments in the Notes to the Consolidated Financial Statements, we remove items such as these that relate to prior periods or are non-operating items when evaluating the results of current operations, and therefore exclude such matters from our segment analysis for current periods.
Torchmark has in place an ongoing share repurchase program which began in 1986. With no specified authorization amount, we determine the amount of repurchases based on the amount of the Company’s excess cash flow, general market conditions, and other alternative uses. The majority of these purchases are made from excess operating cash flow. Additionally, when stock options are exercised, proceeds from these exercises and the tax benefit are used to repurchase additional shares on the open market to minimize dilution as a result of the option exercises. The Board of Directors has authorized the Company’s share repurchase program in amounts and with timing that management, in consultation with the Board, determines to be in the best interest of the Company and its shareholders. The following chart summarizes share purchase activity for each of the last three years.
Analysis of Share Purchases
(Amounts in thousands)
2015 | 2014 | 2013 | ||||||||||||||||||
Purchases | Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||
Excess cash flow | 6,292 | $ | 358,552 | 7,155 | $ | 375,042 | 8,280 | $ | 360,001 | |||||||||||
Option proceeds | 1,049 | 59,974 | 1,394 | 74,266 | 2,789 | 122,263 | ||||||||||||||
Total | 7,341 | $ | 418,526 | 8,549 | $ | 449,308 | 11,069 | $ | 482,264 | |||||||||||
Throughout the remainder of this discussion, share purchases refer only to those made from excess cash flow and borrowings.
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A discussion of each of Torchmark’s segments follows. The following discussions are presented in the manner we view our operations, as described in Note 14—Business Segments in the Notes to the Consolidated Financial Statements.
Life Insurance. Life insurance is our largest insurance segment, with 2015 life premium representing 69% of total premium. Life underwriting income before other income and administrative expense represented 73% of the total in 2015. Additionally, investments supporting the reserves for life products produce the majority of excess investment income attributable to the investment segment.
Life insurance premium rose 5% to $2.1 billion in 2015 after having increased 4% in 2014 to $2.0 billion. Life insurance products are marketed through several distribution channels. Premium income by channel for each of the last three years is as follows:
LIFE INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
2015 | 2014 | 2013 | |||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||
American Income Exclusive Agency | $ | 830,903 | 40 | $ | 766,458 | 39 | $ | 715,366 | 38 | ||||||||
Globe Life Direct Response | 746,693 | 36 | 702,023 | 36 | 663,544 | 35 | |||||||||||
Liberty National Exclusive Agency | 271,113 | 13 | 272,265 | 14 | 275,980 | 15 | |||||||||||
Other Agencies | 224,356 | 11 | 225,554 | 11 | 230,442 | 12 | |||||||||||
$ | 2,073,065 | 100 | $ | 1,966,300 | 100 | $ | 1,885,332 | 100 | |||||||||
We use three statistical measures as indicators of premium growth and sales over the near term: “annualized premium in force,” “net sales,” and “first-year collected premium.” Annualized premium in force is defined as the premium income that would be received over the following twelve months at any given date on all active policies if those policies remain in force throughout the twelve-month period. Annualized premium in force is an indicator of potential growth in premium revenue. Net sales is annualized premium issued, net of cancellations in the first thirty days after issue, except in the case of Globe Life Direct Response where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer period has expired. We believe that net sales is a superior indicator of the rate of premium growth relative to annualized premium issued. First-year collected premium is defined as the premium collected during the reporting period for all policies in their first policy year. First-year collected premium takes lapses into account in the first year when lapses are more likely to occur, and thus is a useful indicator of how much new premium is expected to be added to premium income in the future.
Annualized life premium in force was $2.15 billion at December 31, 2015, an increase of 5% over $2.04 billion a year earlier. Annualized life premium in force was $1.96 billion at December 31, 2013.
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The following table shows net sales information for each of the last three years by distribution method.
LIFE INSURANCE
Net Sales by Distribution Method
(Dollar amounts in thousands)
2015 | 2014 | 2013 | |||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||
American Income Exclusive Agency | $ | 198,046 | 48 | $ | 172,271 | 45 | $ | 152,646 | 45 | ||||||||
Globe Life Direct Response | 164,348 | 40 | 158,089 | 42 | 144,363 | 43 | |||||||||||
Liberty National Exclusive Agency | 35,782 | 9 | 34,402 | 9 | 31,050 | 9 | |||||||||||
Other Agencies | 13,705 | 3 | 13,492 | 4 | 11,000 | 3 | |||||||||||
$ | 411,881 | 100 | $ | 378,254 | 100 | $ | 339,059 | 100 | |||||||||
The table below discloses first-year collected life premium by distribution channel.
LIFE INSURANCE
First-Year Collected Premium by Distribution Method
(Dollar amounts in thousands)
2015 | 2014 | 2013 | |||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||
American Income Exclusive Agency | $ | 156,206 | 52 | $ | 134,202 | 50 | $ | 127,978 | 50 | ||||||||
Globe Life Direct Response | 106,417 | 35 | 100,287 | 37 | 93,089 | 36 | |||||||||||
Liberty National Exclusive Agency | 27,554 | 9 | 25,777 | 9 | 25,580 | 10 | |||||||||||
Other Agencies | 12,036 | 4 | 10,473 | 4 | 9,962 | 4 | |||||||||||
$ | 302,213 | 100 | $ | 270,739 | 100 | $ | 256,609 | 100 | |||||||||
The American Income Exclusive Agency has historically marketed primarily to members of labor unions. While labor unions are still the core market for this agency, American Income has diversified in recent years by focusing heavily on other affinity groups and referrals to help ensure sustainable growth. The life business of this agency is Torchmark’s highest-margin life business and it is the largest contributor to life premium of any distribution channel at 40% of Torchmark’s 2015 total. This group produced premium income of $831 million, an increase of 8% over the prior year total of $766 million, after having risen 7% in 2014. First-year collected premium was $156 million compared to $134 million in 2014, an increase of 16%. First-year collected premium rose 5% in 2014. Net sales increased 15% to $198 million in 2015 over the 2014 total of $172 million. Net sales increased 13% in 2014 over the 2013 total of $153 million. Sales growth in our captive agencies is generally dependent on growth in the size of the agency force. The American Income Agency's average agent count rose 11% to 6,529 for the year ended December 31, 2015 compared with 5,868 for the same period in 2014. The average agent count is based on the actual count at the end of each week during the period. The American Income Agency has been focusing on growing and strengthening middle management to support sustainable growth of the agency force. To accomplish this, we have placed an increased emphasis on agent training programs and financial incentives that appropriately reward agents at all levels for helping develop and train personnel. The agency continues to provide more home-office and webinar training programs. These programs are designed to provide each agent, from new recruits to top level managers, coaching and instruction specifically designed for each individual’s level of experience and responsibility.
The Globe Life Direct Response unit offers adult and juvenile life insurance through a variety of direct-to-consumer marketing approaches, which include direct mailings, insert media, and electronic media. These different approaches support and complement one another in the unit’s efforts to reach the consumer. The Globe Life Direct Response channel’s growth has been fueled by constant innovation. In recent years, electronic media production has grown rapidly as management has aggressively increased marketing activities related to internet and mobile technology, and
21
has focused on driving traffic to the inbound call center. We continually introduce new initiatives in this unit in an attempt to increase response rates.
While the juvenile market is an important source of sales, it also is a vehicle to reach the parents and grandparents of juvenile policyholders, who are more likely to respond favorably to a Globe Life Direct Response solicitation for life coverage on themselves than is the general adult population. Also, both juvenile policyholders and their parents are low acquisition-cost targets for sales of additional coverage over time.
Globe Life Direct Response’s life premium income rose 6% to $747 million, representing 36% of Torchmark’s total life premium during 2015. Life premium in this channel increased 6% in 2014 to $702 million over the 2013 total of $664 million. Net sales of $164 million for this group increased 4% from $158 million in 2014, after a 10% in 2014. First-year collected premium increased 6% to $106 million in 2015 after having risen 8% in 2014.
The Liberty National Exclusive Agency markets individual and group life insurance to middle-income customers. Life premium income for this agency was $271 million in 2015, a slight decline from $272 million in 2014. Life premium income in 2013 totaled $276 million. Net sales increased 4% during 2015 to $36 million over the 2014 total of $34 million. Net sales in 2014 increased 11%. The increase in net sales during 2014 marked the first increase in several years, reflecting changes in structure of the agency that management has put in place in recent years. First-year collected premium increased 7% to $28 million during 2015 and was flat in 2014 compared to 2013 at $26 million.
The Liberty average agent count increased 2% to 1,535 for the year ended December 31, 2015 compared with 1,505 for the same period in 2014. We continue to execute our long term plan to grow this agency through expansion from small-town markets in the southeast to more densely populated areas with larger pools of potential agent recruits and customers. Expansion of this agency’s presence into more heavily populated, less-penetrated areas will help create long term agency growth. Additionally, our prospecting training program has helped to improve the ability of agents to develop new work site marketing business.
The Other Agencies distribution channels offering life insurance include the Military Agency, the UA Independent Agency (which predominantly writes health insurance), and various smaller distribution channels. The Other Agencies contributed $224 million of life premium income, or 11% of Torchmark’s total in 2015, but contributed only 3% of net sales for the year.
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
2015 | 2014 | 2013 | ||||||||||||||||||
Amount | % of Premium | Amount | % of Premium | Amount | % of Premium | |||||||||||||||
Premium and policy charges | $ | 2,073,065 | 100 | $ | 1,966,300 | 100 | $ | 1,885,332 | 100 | |||||||||||
Policy obligations | 1,374,608 | 67 | 1,293,384 | 66 | 1,227,857 | 65 | ||||||||||||||
Required interest on reserves | (552,298 | ) | (27 | ) | (530,192 | ) | (27 | ) | (508,236 | ) | (27 | ) | ||||||||
Net policy obligations | 822,310 | 40 | 763,192 | 39 | 719,621 | 38 | ||||||||||||||
Commissions, premium taxes, and non-deferred acquisition expenses | 154,811 | 8 | 143,174 | 7 | 131,721 | 7 | ||||||||||||||
Amortization of acquisition costs | 526,542 | 25 | 503,445 | 26 | 488,931 | 26 | ||||||||||||||
Total expense | 1,503,663 | 73 | 1,409,811 | 72 | 1,340,273 | 71 | ||||||||||||||
Insurance underwriting margin before other income and administrative expenses | $ | 569,402 | 27 | $ | 556,489 | 28 | $ | 545,059 | 29 | |||||||||||
Life insurance underwriting income before insurance administrative expense was $569 million in 2015 compared with $556 million in 2014 and $545 million in 2013. As a percentage of premium, underwriting margins declined to 27% in 2015 from 28% in 2014. The decrease in underwriting margin as a percentage of premium in 2015 and 2014 was due primarily to higher than expected Globe Life Direct Response policy obligations and to increases in non-deferred acquisition costs in the Globe Life Direct Response and American Income units. Non-deferred acquisition expense
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increased primarily as a result of additional investments made to support our distribution channels which are expected to result in increased sales and premium income in future periods. The higher than expected claims in the Globe Life Direct Response Unit primarily relate to policies issued since 2011 where prescription information was used in the underwriting process for certain policies in order to improve the overall mortality of the policies written. To date, improvements in the actual mortality on such policies have been less than expected, causing an increase in our net policy obligations.
Health Insurance. Health insurance sold by Torchmark includes primarily Medicare Supplement insurance, critical illness coverage, accident coverage, and other limited-benefit supplemental health products. In this analysis, all health coverage plans other than Medicare Supplement are classified as limited-benefit plans.
Health premium accounted for 31% of our total premium in 2015, while the health underwriting margin accounted for 26% of total underwriting margin, reflective of the lower underwriting margin as a percent of premium for health compared with life insurance. As noted under the caption Life Insurance, we have emphasized life insurance sales relative to health, due to life’s superior profitability and its greater contribution to excess investment income.
HEALTH INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
2015 | 2014 | 2013 | |||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||
United American Independent Agency | |||||||||||||||||
Limited-benefit plans | $ | 15,260 | $ | 19,028 | $ | 24,173 | |||||||||||
Medicare Supplement | 330,070 | 286,340 | 274,125 | ||||||||||||||
345,330 | 37 | 305,368 | 35 | 298,298 | 35 | ||||||||||||
Family Heritage Exclusive Agency | |||||||||||||||||
Limited-benefit plans | 221,091 | 204,667 | 190,923 | ||||||||||||||
Medicare Supplement | — | — | — | ||||||||||||||
221,091 | 24 | 204,667 | 24 | 190,923 | 22 | ||||||||||||
Liberty National Exclusive Agency | |||||||||||||||||
Limited-benefit plans | 142,130 | 143,722 | 152,415 | ||||||||||||||
Medicare Supplement | 67,020 | 78,295 | 88,849 | ||||||||||||||
209,150 | 23 | 222,017 | 25 | 241,264 | 28 | ||||||||||||
American Income Exclusive Agency | |||||||||||||||||
Limited-benefit plans | 79,984 | 78,244 | 78,862 | ||||||||||||||
Medicare Supplement | 355 | 478 | 573 | ||||||||||||||
80,339 | 9 | 78,722 | 9 | 79,435 | 9 | ||||||||||||
Direct Response | |||||||||||||||||
Limited-benefit plans | 869 | 805 | 313 | ||||||||||||||
Medicare Supplement | 68,741 | 57,861 | 53,585 | ||||||||||||||
69,610 | 7 | 58,666 | 7 | 53,898 | 6 | ||||||||||||
Total Premium | |||||||||||||||||
Limited-benefit plans | 459,334 | 50 | 446,466 | 51 | 446,686 | 52 | |||||||||||
Medicare Supplement | 466,186 | 50 | 422,974 | 49 | 417,132 | 48 | |||||||||||
$ | 925,520 | 100 | $ | 869,440 | 100 | $ | 863,818 | 100 | |||||||||
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We market supplemental health insurance products through a number of distribution channels. The following table presents net sales by distribution method for the last three years.
HEALTH INSURANCE
Net Sales by Distribution Method
(Dollar amounts in thousands)
2015 | 2014 | 2013 | |||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||
United American Independent Agency | |||||||||||||||||
Limited-benefit plans | $ | 734 | $ | 873 | $ | 916 | |||||||||||
Medicare Supplement | 70,891 | 82,971 | 40,512 | ||||||||||||||
71,625 | 46 | 83,844 | 46 | 41,428 | 38 | ||||||||||||
Family Heritage Exclusive Agency | |||||||||||||||||
Limited-benefit plans | 50,266 | 47,102 | 43,520 | ||||||||||||||
Medicare Supplement | — | — | — | ||||||||||||||
50,266 | 32 | 47,102 | 26 | 43,520 | 39 | ||||||||||||
Liberty National Exclusive Agency | |||||||||||||||||
Limited-benefit plans | 18,021 | 17,084 | 13,906 | ||||||||||||||
Medicare Supplement | 41 | 299 | 394 | ||||||||||||||
18,062 | 12 | 17,383 | 10 | 14,300 | 13 | ||||||||||||
American Income Exclusive Agency | |||||||||||||||||
Limited-benefit plans | 11,501 | 9,162 | 6,985 | ||||||||||||||
Medicare Supplement | — | — | — | ||||||||||||||
11,501 | 7 | 9,162 | 5 | 6,985 | 6 | ||||||||||||
Direct Response | |||||||||||||||||
Limited-benefit plans | — | 6 | 591 | ||||||||||||||
Medicare Supplement | 5,003 | 23,099 | 3,685 | ||||||||||||||
5,003 | 3 | 23,105 | 13 | 4,276 | 4 | ||||||||||||
Total Net Sales | |||||||||||||||||
Limited-benefit plans | 80,522 | 51 | 74,227 | 41 | 65,918 | 60 | |||||||||||
Medicare Supplement | 75,935 | 49 | 106,369 | 59 | 44,591 | 40 | |||||||||||
$ | 156,457 | 100 | $ | 180,596 | 100 | $ | 110,509 | 100 | |||||||||
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The following table discloses first-year collected health premium by distribution method.
HEALTH INSURANCE
First-Year Collected Premium by Distribution Method
(Dollar amounts in thousands)
2015 | 2014 | 2013 | |||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||
United American Independent Agency | |||||||||||||||||
Limited-benefit plans | $ | 660 | $ | 710 | $ | 795 | |||||||||||
Medicare Supplement | 76,575 | 49,519 | 38,399 | ||||||||||||||
77,235 | 49 | 50,229 | 42 | 39,194 | 39 | ||||||||||||
Family Heritage Exclusive Agency | |||||||||||||||||
Limited-benefit plans | 39,196 | 36,392 | 36,340 | ||||||||||||||
Medicare Supplement | — | — | — | ||||||||||||||
39,196 | 25 | 36,392 | 31 | 36,340 | 36 | ||||||||||||
Liberty National Exclusive Agency | |||||||||||||||||
Limited-benefit plans | 14,690 | 13,132 | 12,010 | ||||||||||||||
Medicare Supplement | 168 | 306 | 558 | ||||||||||||||
14,858 | 9 | 13,438 | 11 | 12,568 | 12 | ||||||||||||
American Income Exclusive Agency | |||||||||||||||||
Limited-benefit plans | 12,041 | 9,500 | 8,957 | ||||||||||||||
Medicare Supplement | — | — | — | ||||||||||||||
12,041 | 8 | 9,500 | 8 | 8,957 | 9 | ||||||||||||
Direct Response | |||||||||||||||||
Limited-benefit plans | (2 | ) | 143 | 544 | |||||||||||||
Medicare Supplement | 13,843 | 9,196 | 3,310 | ||||||||||||||
13,841 | 9 | 9,339 | 8 | 3,854 | 4 | ||||||||||||
Total First-Year Collected Premium | |||||||||||||||||
Limited-benefit plans | 66,585 | 42 | 59,877 | 50 | 58,646 | 58 | |||||||||||
Medicare Supplement | 90,586 | 58 | 59,021 | 50 | 42,267 | 42 | |||||||||||
$ | 157,171 | 100 | $ | 118,898 | 100 | $ | 100,913 | 100 | |||||||||
Health premium increased 6% to $926 million in 2015 compared with $869 million in 2014 after an increase of 1% in 2014 over the 2013 total of $864 million. Medicare Supplement premium increased 10% to $466 million, while other limited-benefit health premium increased 3% to $459 million.
Health net sales declined 13% to $156 million in 2015 from $181 million in 2014. Net sales in 2013 totaled $111 million. Medicare Supplement net sales decreased 29% to $76 million in 2015. A decrease in 2015 Medicare Supplement net sales was expected due to the unusually high level of group sales and individual sales in late 2014. Group sales can vary significantly from period to period due to the impact of large groups that can occur from time to time. Limited-benefit net sales increased 8% to $81 million. Health first-year collected premium rose 32% to $157 million due to the aforementioned high level of group sales in 2014. Health first-year collected premium was up 18% during 2014. First year Medicare Supplement premium was up 53% as a result of an increase in the UA independent agency individual sales and the 2014 group sales noted above. As a result of the Medicare Supplement sales activity occurring in the fourth quarter, the full impact of this activity on collected premium is seen in the following year.
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We do not expect recent health care reform activity to have a significant impact on our operations. The Affordable Care Act (ACA) imposes an annual fee to health insurance issuers offering commercial health insurance as well as another fee for premium stabilization. These taxes totaled $1.2 million and $1.8 million in 2015 and 2014, respectively.
The UA Independent Agency consists of independent agencies appointed with Torchmark who may also sell for other companies. The UA Independent Agency was Torchmark’s largest health agency in terms of health premium income. In 2015, premium income was $345 million, representing 37% of Torchmark’s total health premium. Net sales were $72 million, or 46% of Torchmark’s health sales. This agency is Torchmark’s largest producer of Medicare Supplement insurance, with Medicare Supplement premium income of $330 million. The UA Independent Agency represents approximately 71% of all Torchmark Medicare Supplement premium and 93% of Medicare Supplement net sales. Medicare Supplement premium in this agency rose 15%. Total health premium increased 13% in 2015 and 2% in 2014. Medicare Supplement net sales decreased 15% in 2015 from prior year. Individual sales were up 36% due to the high volume of sales in late 2014 and 2015. As previously discussed, group sales significantly increased in late 2014 resulting in a 42% decline in the current year, which is consistent with historical fluctuation from period to period.
The Family Heritage Exclusive Agency primarily markets limited-benefit supplemental health insurance in non-urban areas. Most of their policies include a cash-back feature, such as a return of premium whereby any excess of premiums over claims paid is returned to the policyholder at the end of a specified period stated within the insurance policy. Management expects to grow this agency through geographic expansion and continuing incorporation of Torchmark’s recruiting programs. The Family Heritage Agency contributed $50 million in net sales in 2015, compared with $47 million in 2014 and $44 million in 2013. Health premium income was $221 million in 2015, representing 24% of Torchmark’s health premium. This compared with $205 million or 24% of health premium in 2014 and $191 million or 22% in 2013. The average agent count was 882 for the year ended December 31, 2015, compared with 740 for the same period in 2014, an increase of 19%.
The Liberty National Exclusive Agency represented 23% of all Torchmark health premium income at $209 million in 2015. The Liberty Agency markets limited-benefit supplemental health products consisting primarily of critical illness insurance. Much of Liberty’s health business is now generated through work site marketing targeting small businesses of 10 to 25 employees. In 2015, health premium income in the Agency declined 6% from prior year premium of $222 million after declining 8% during 2014. Liberty’s health premium decline has been due primarily to its declining Medicare Supplement block.
Other distribution. Certain of our other distribution channels market health products, although their main emphasis is on life insurance. On a combined basis, they accounted for 16% of health premium in 2015. The American Income Exclusive Agency primarily markets accident plans. The Direct Response group markets primarily Medicare Supplements to employer or union-sponsored groups. Direct Response added $5 million of Medicare Supplement net sales in 2015 compared with $23 million in 2014. The higher net sales in 2014 were due to the addition of a large new group in the third quarter of 2014.
As presented in the following table, Torchmark’s health insurance underwriting margin before other income and administrative expense increased 3% to $204 million in 2015, after an increase of 1% to $199 million in 2014. As a percentage of health premium, margins were down slightly to 22% in 2015, due to increased benefit ratios in the Direct Response and UA channels. The group business sold in 2014 was priced at higher benefit ratios.
26
HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
2015 | 2014 | 2013 | ||||||||||||||||||
Amount | % of Premium | Amount | % of Premium | Amount | % of Premium | |||||||||||||||
Premium | $ | 925,520 | 100 | $ | 869,440 | 100 | $ | 863,818 | 100 | |||||||||||
Policy obligations | 602,610 | 65 | 559,817 | 64 | 558,982 | 65 | ||||||||||||||
Required interest on reserves | (69,057 | ) | (7 | ) | (64,401 | ) | (7 | ) | (59,858 | ) | (7 | ) | ||||||||
Net policy obligations | 533,553 | 58 | 495,416 | 57 | 499,124 | 58 | ||||||||||||||
Commissions, premium taxes, and non-deferred acquisition expenses | 81,489 | 9 | 79,475 | 9 | 75,895 | 9 | ||||||||||||||
Amortization of acquisition costs | 106,101 | 11 | 95,230 | 11 | 92,292 | 10 | ||||||||||||||
Total expense | 721,143 | 78 | 670,121 | 77 | 667,311 | 77 | ||||||||||||||
Insurance underwriting income before other income and administrative expense | $ | 204,377 | 22 | $ | 199,319 | 23 | $ | 196,507 | 23 | |||||||||||
Annuities. Our fixed annuity balances at the end of 2015, 2014, and 2013 were $1.32 billion, $1.36 billion, and $1.38 billion, respectively. Underwriting income was $4.6 million, $4.3 million, and $3.9 million in each of the respective years.
While the fixed annuity account balance has been declining slightly year over year, underwriting income has increased each year over the prior year. Policy charges have actually declined slightly in each successive year. The majority of policy charges consist of surrender charges which are based on a function of account size and time lapsed since deposit. A considerable portion of fixed annuity profitability is derived from the spread of investment income exceeding contractual interest requirements, which can result in negative net policy obligations. In the three-year period, however, spreads tended to level as crediting rates reached guaranteed minimums.
We do not currently market annuity products, favoring instead protection-oriented life and health insurance products. Therefore, we do not expect that annuities will be a significant portion of our business or marketing strategy going forward.
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Administrative expenses. Operating expenses are included in the Other and Corporate Segments and are classified into two categories: insurance administrative expenses and expenses of the parent company. The following table is an analysis of operating expenses for the three years ended December 31, 2015.
Operating Expenses Selected Information
(Dollar amounts in thousands)
2015 | 2014 | 2013 | |||||||||||||||
Amount | % of Premium | Amount | % of Premium | Amount | % of Premium | ||||||||||||
Insurance administrative expenses: | |||||||||||||||||
Salaries | $ | 87,262 | 2.9 | $ | 81,227 | 2.9 | $ | 81,002 | 2.9 | ||||||||
Non-salary employee costs | 30,683 | 1.0 | 27,471 | 1.0 | 33,221 | 1.2 | |||||||||||
Other administrative expense | 61,001 | 2.0 | 56,169 | 2.0 | 51,834 | 1.9 | |||||||||||
Legal expense—insurance | 7,245 | 0.3 | 9,965 | 0.3 | 9,594 | 0.4 | |||||||||||
Total insurance administrative expenses | 186,191 | 6.2 | 174,832 | 6.2 | 175,651 | 6.4 | |||||||||||
Parent company expense | 9,003 | 8,159 | 8,495 | ||||||||||||||
Stock compensation expense | 28,664 | 32,203 | 25,642 | ||||||||||||||
Litigation settlements | — | 2,337 | 500 | ||||||||||||||
State Guaranty Fund Assessment | — | — | 1,155 | ||||||||||||||
Total operating expenses, per Consolidated Statements of Operations | $ | 223,858 | $ | 217,531 | $ | 211,443 | |||||||||||
Insurance administrative expenses: | ||||||||||||||
Increase (decrease) over prior year | 6.5 | % | (0.5 | )% | 8.2 | % | ||||||||
Total operating expenses: | ||||||||||||||
Increase (decrease) over prior year | 2.9 | % | 2.9 | % | 8.4 | % | ||||||||
Insurance administrative expenses were up 6.5% in 2015 when compared with the prior year after declining slightly during 2014. As a percentage of total premium, insurance administrative expenses were flat during 2015 when compared to 2014 at 6.2% and down when compared to 2013 which stood at 6.4%. Total operating expenses increased 2.9%, consistent with the 2014 increase over 2013. The primary reasons for the increase in administrative expenses are higher information technology and employee costs, including pension-related costs. The decline in stock compensation expense is primarily due to lower expense associated with performance share awards and lower option values on the 2015 grants. The decline in legal settlement expense was attributable to certain legal and administrative settlements that occurred in 2014. As described in Note 14—Business Segments in the Notes on the Consolidated Financial Statements, we recorded legal accruals involving non-insurance matters, partially offset by proceeds for investment litigation. Litigation not related to our direct insurance operations is not considered an insurance administrative expense by Torchmark management and is removed from its analysis of core insurance operations in its segment reporting.
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Investments. We manage our capital resources including investments, debt, and cash flow through the investment segment. Excess investment income represents the profit margin attributable to investment operations. It is the measure that we use to evaluate the performance of the investment segment as described in Note 14—Business Segments in the Notes to the Consolidated Financial Statements. It is defined as net investment income less both the required interest attributable to net policy liabilities and the interest cost associated with capital funding or “financing costs.”
We also view excess investment income per diluted share as an important and useful measure to evaluate the performance of the investment segment. It is defined as excess investment income divided by the total diluted weighted average shares outstanding, representing the contribution by the investment segment to the consolidated earnings per share of the Company. Since implementing our share repurchase program in 1986, we have used over $6.5 billion of cash flow to repurchase Torchmark shares after determining that the repurchases provided a greater return than other investment alternatives. Share repurchases reduce excess investment income because of the foregone earnings on the cash that would otherwise have been invested in interest-bearing assets, but they also reduce the number of shares outstanding. In order to put all capital resource uses on a comparable basis, we believe that excess investment income per diluted share is an appropriate measure of the investment segment.
Excess Investment Income. The following table summarizes Torchmark’s investment income and excess investment income.
Analysis of Excess Investment Income
(Dollar amounts in thousands except for per share data)
2015 | 2014 | 2013 | |||||||||
Net investment income (1) | $ | 773,951 | $ | 758,286 | $ | 734,650 | |||||
Interest on net insurance policy liabilities: | |||||||||||
Interest on reserves | (674,650 | ) | (649,848 | ) | (625,388 | ) | |||||
Interest on deferred acquisition costs | 196,845 | 192,052 | 189,360 | ||||||||
Net required interest | (477,805 | ) | (457,796 | ) | (436,028 | ) | |||||
Financing costs | (76,642 | ) | (76,126 | ) | (80,461 | ) | |||||
Excess investment income | $ | 219,504 | $ | 224,364 | $ | 218,161 | |||||
Excess investment income per diluted share | $ | 1.73 | $ | 1.69 | $ | 1.56 | |||||
Mean invested assets (at amortized cost) | $ | 13,697,129 | $ | 13,278,028 | $ | 12,838,010 | |||||
Average net insurance policy liabilities(2) | 8,574,699 | 8,240,435 | 7,851,625 | ||||||||
Average debt and preferred securities (at amortized cost) | 1,343,663 | 1,287,740 | 1,321,102 | ||||||||
(1) Net investment income has been retrospectively adjusted for ASU 2014-01 Investments-Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects; see additional information at Note 1—Significant Accounting Policies in the Notes to the Consolidated Financial Statements.
(2) Net of deferred acquisition costs, excluding the associated unrealized gains and losses thereon.
Excess investment income decreased $5 million or 2% in 2015 over the prior year. Excess investment income increased $6 million or 3% in 2014. Excess investment income has been pressured over the past three years as a result of the impact of lower interest rates on net investment income coupled with the increase in required interest on net policy liabilities discussed later under this caption. On a per diluted share basis, excess investment income increased 2% to $1.73 in 2015. Excess investment income increased 8% to $1.69 per share in 2014, after having declined 3% in the prior year. The significant increase in the 2014 per share amount over 2013 and the increase in the 2015 per share amount over 2014, versus the decrease in dollar amount of excess investment income, is a result of the share repurchase program.
The largest component of excess investment income is net investment income, which rose 2% to $774 million in 2015. It increased 3% to $758 million in 2014 from $735 million in 2013. Growth in net investment income has generally been slower than growth in mean invested assets in recent years due to the declining interest rate environment. In 2015, fixed maturity yields averaged 5.84% on a tax-equivalent and effective-yield basis, compared with 5.91% in 2014 and 5.94% in 2013. Even though mean invested assets have increased each period, net investment income has grown at a slower pace as a result of the decline in average yields. The overall average portfolio yield decreased in the 2013
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to 2015 periods as new money is being invested at lower prevailing yields, and from the result of reinvesting proceeds from bonds that matured or were called at yield rates less than the rates we earned on the bonds before they matured or were called. A significant amount of calls were a negative factor on net investment income in 2013, but calls and maturities were very limited in their affect in 2014 and 2015. During 2014 and 2015, the proceeds from all dispositions have been reinvested at yield rates closer to the yield rates on the disposed assets.
Net investment income has also been negatively affected in 2014 and 2015 by the CMS requirement for us to pay certain Medicare Part D claims costs during the current period that are ultimately the responsibility of the government, but are not reimbursed until the following year. Because of the overall design of the program and higher Part D claims due to the approval of new Hepatitis C drugs and higher overall drug costs, we have incurred extensive upfront costs that are not reimbursed by CMS until late in the following respective year. These delays in reimbursements have caused a delay in cash flows available for new investments that resulted in a loss of approximately $5 million and $8 million of pre-tax net investment income in 2014 and 2015, respectively, and will cause us to lose approximately $9 million of additional investment income in 2016.
Presented in the following chart is the growth in net investment income and the growth in mean invested assets.
2015 | 2014 | 2013 | ||||||
Growth in net investment income | 2.1 | % | 3.2 | % | 2.6 | % | ||
Growth in mean invested assets (at amortized cost) | 3.2 | % | 3.4 | % | 9.3 | % | ||
While net investment income in recent years has been negatively impacted by the factors discussed above, we would expect to see only modest declines in the average portfolio yield rate over the next few years. We anticipate that less than 2% of fixed maturities on average are expected to run off each year over the next five years and the average yield rate on assets acquired with the proceeds of dispositions is not expected to be significantly less than the yield rate earned on the assets prior to their disposal. Accordingly, we believe it is unlikely that dispositions will have a significant negative impact on net investment income and the growth rate of net investment income in the next few years.
Required interest on net insurance policy liabilities reduces net investment income as it is the amount of net investment income considered by management necessary to “fund” the required interest included in the insurance segments. As such, it is removed from the investment segment and applied to the insurance segments to offset the effect of the required interest from the insurance segments. As discussed in Note 14-Business Segments in the Notes to the Consolidated Financial Statements, management believes this provides a more meaningful analysis of the investment and insurance segments. Required interest is based on the actuarial interest assumptions used in discounting the benefit reserve liability and the amortization of deferred acquisition costs for our insurance policies in force. The great majority of our life and health insurance policies are fixed interest-rate protection policies, not investment products, and are accounted for under current accounting guidance for long-duration insurance products which mandates that interest rate assumptions for a particular block of business be “locked in” for the life of that block of business. Each calendar year, we set the discount rate to be used to calculate the benefit reserve liability and the amortization of the deferred acquisition cost asset for all insurance policies issued that year. That rate is based on the new money yields that we expect to earn on cash flow received in the future from policies of that issue year, and cannot be changed. The discount rate used for policies issued in the current year has no impact on the in force policies issued in prior years as the rates of all prior issue years are also locked in. As such, the overall discount rate for the entire in force block is a weighted average of the discount rates being used from all issue years. Changes in the overall weighted-average discount rate over time are caused by changes in the mix of the reserves and the deferred acquisition cost asset by issue year on the entire block of in force business. Business issued in the current year has very little impact on the overall weighted-average discount rate due to the size of our in force business.
Because actuarial discount rates are locked in for life on essentially all of our business, benefit reserves and deferred acquisition costs are not affected by interest rate fluctuations unless a loss recognition event occurs. Due to the strength of our underwriting margins and the current positive spread between the yield on our investment portfolio and the weighted-average discount rate of our in force block, we don’t expect an extended low-interest-rate environment to cause a loss recognition event.
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Information about interest on policy liabilities is shown in the following table.
Required Interest on Net Insurance Policy Liabilities
(Dollar amounts in thousands)
Required Interest | Average Net Insurance Policy Liabilities | Average Discount Rate | ||||||||
2015 | ||||||||||
Life and Health | $ | 418,432 | $ | 7,256,732 | 5.77 | % | ||||
Annuity | 59,373 | 1,317,967 | 4.50 | |||||||
Total | $ | 477,805 | $ | 8,574,699 | 5.57 | |||||
Increase in 2015 | 4.37 | % | 4.06 | % | ||||||
2014 | ||||||||||
Life and Health | $ | 396,658 | $ | 6,901,566 | 5.75 | % | ||||
Annuity | 61,138 | 1,338,869 | 4.57 | |||||||
Total | $ | 457,796 | $ | 8,240,435 | 5.56 | |||||
Increase in 2014 | 4.99 | % | 4.95 | % | ||||||
2013 | ||||||||||
Life and Health | $ | 373,079 | $ | 6,528,469 | 5.71 | % | ||||
Annuity | 62,949 | 1,323,156 | 4.76 | |||||||
Total | $ | 436,028 | $ | 7,851,625 | 5.55 | |||||
Increase in 2013 | 9.13 | % | 10.53 | % | ||||||
The large increases in 2013 are due to the inclusion of Family Heritage for a full year.
Excess investment income is also impacted by financing costs. Financing costs for the investment segment primarily consist of interest on our various debt instruments and are deducted from excess investment income. The table below presents the components of financing costs and reconciles interest expense per the Consolidated Statements of Operations.
Analysis of Financing Costs
(Amounts in thousands)
2015 | 2014 | 2013 | |||||||||
Interest on funded debt | $ | 71,180 | $ | 71,072 | $ | 75,136 | |||||
Interest on short-term debt | 5,457 | 5,013 | 5,299 | ||||||||
Other | 5 | 41 | 26 | ||||||||
Financing costs | $ | 76,642 | $ | 76,126 | $ | 80,461 | |||||
Financing costs increased slightly from 2014 to 2015. The decrease of $4 million or 5% in 2014 was related to the maturity and repayment of our $94 million par amount 7.375% Notes during the third quarter of 2013. In 2015, interest on short-term debt increased primarily because of the increase in the weighted-average interest rate and the average balance on short-term debt. More information on our debt transactions are disclosed in the Financial Condition section of this report and in Note 11—Debt in the Notes to Consolidated Financial Statements.
As previously noted, growth rates in our excess investment income decline when growth in income from the portfolio is less than that of the interest required by policy liabilities and financing costs as has been the case in recent years. In an extended low-interest-rate environment, the portfolio yield will tend to decline as we invest new money at lower long-term rates. We believe, however, the decline would be relatively slow as on average less than 2% of fixed maturities are expected to run off each year over the next five years.
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In response to the lower interest rates, we raised the premium rates for new business on major life products in early 2012 and again in late 2013. The increased premium provides additional margin on these policies to help offset higher mandatory cash values and the possible future reductions in excess investment income. Despite these increases in premium rates, we have continued to see growth in net sales.
Excess investment income benefits from increases in long-term rates available on new investments and decreases in short-term borrowing rates. Of these two factors, higher investment rates have the greater impact because the amount of cash that we invest is significantly greater than the amount that we borrow at short-term rates. Therefore, Torchmark would benefit if rates, especially long-term rates, were to rise.
Investment Acquisitions. Torchmark’s investment policy calls for investing in fixed maturities that are investment grade and meet our quality and yield objectives. We generally prefer to invest in securities with longer maturities because they more closely match the long-term nature of our policy liabilities. We believe this strategy is appropriate because our cash flows are generally stable and predictable. If longer-term securities that meet our quality and yield objectives are not available, we do not relax our quality objectives, but instead, consider investing in shorter term or lower yielding securities, taking into consideration the slope of the yield curve and other factors.
During calendar years 2013 through 2015, Torchmark invested almost exclusively in fixed maturity securities, primarily in corporate bonds with longer-term maturities. The following table summarizes selected information for fixed maturity purchases for the last three years. The effective annual yield shown is the yield calculated to the potential termination date that produces the lowest yield, commonly referred to as the “worst call date.” For non-callable bonds, the worst-call date is always the maturity date. For callable bonds, the worst-call date is the call date that produces the lowest yield, typically the first call date.
Fixed Maturity Acquisitions Selected Information
(Dollar amounts in thousands)
Year Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Cost of acquisitions: | |||||||||||
Investment-grade corporate securities | $ | 1,026,520 | $ | 696,264 | $ | 1,113,175 | |||||
Taxable municipal securities | 29,092 | — | — | ||||||||
Other investment-grade securities | 15,296 | 8,729 | 30,666 | ||||||||
Total fixed-maturity acquisitions | $ | 1,070,908 | $ | 704,993 | $ | 1,143,841 | |||||
Effective annual yield (one year compounded)(1) | 4.79 | % | 4.77 | % | 4.65 | % | |||||
Average life (in years, to next call) | 27.2 | 22.9 | 26.0 | ||||||||
Average life (in years to maturity) | 27.9 | 23.4 | 26.5 | ||||||||
Average rating | BBB+ | BBB+ | BBB+ | ||||||||
(1) Tax-equivalent basis, where the yield on tax-exempt securities, is adjusted to produce a yield equivalent to the pretax yield on taxable securities.
We prefer to invest primarily in bonds that are not callable (on other than a make-whole basis) prior to maturity, but we periodically invest some funds in callable bonds when the incremental yield available on such bonds warrants doing so. For investments in callable bonds, the actual life of the investment will depend on whether the issuer calls the investment prior to the maturity date. Given our investments in callable bonds, the actual average life of our investments cannot be known at the time of the investment. However absent sales, the average life will not be less than the average life to next call and will not exceed the average life to maturity. Data for both of these average life measures is provided in the above chart.
During the three years 2013 through 2015, acquisitions consisted of securities spanning a diversified range of issuers, industry sectors, and geographical regions. All of the acquired securities were investment grade. In addition to the fixed maturity acquisitions, Torchmark invested $30 million in a limited partnership in 2015. The limited partnership is a diversified investment fund that currently invests opportunistically in global credit assets with the potential for attractive returns relative to risk. It is classified within long-term investments.
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New cash flow available for investment has been primarily provided through our insurance operations and coupons received on existing investments. In some years, a significant amount of new investments can be derived from proceeds from dispositions including issuer calls. Issuer calls, as a result of the low-interest environment experienced during the past three years were an important factor, especially in 2013. Calls increase funds available for investment, but as noted earlier in this discussion, they can have a negative impact on investment income if the proceeds from the calls are reinvested in bonds that have lower yields than those of the bonds that were called. Issuer calls were $178 million in 2015, $160 million in 2014, and $344 million in 2013. The higher level of acquisitions in 2013 was primarily due to the additional funds available from the higher level of 2013 calls. The lower level of acquisitions in 2014 was primarily due to the delay in receiving CMS reimbursements as discussed earlier.
Portfolio Composition. The composition of the investment portfolio at book value on December 31, 2015 was as follows:
Invested Assets At December 31, 2015
(Dollar amounts in thousands)
Amount | % of Total | ||||
Fixed maturities(at amortized cost) | $ | 13,251,871 | 96 | ||
Equities (at cost) | 776 | — | |||
Policy loans | 492,462 | 4 | |||
Other long-term investments | 36,803 | — | |||
Short-term investments | 54,766 | — | |||
Total | $ | 13,836,678 | 100 | ||
Approximately 96% of our investments at book value are in a diversified fixed maturity portfolio. Policy loans, which are secured by policy cash values, make up approximately 4% of our investments. We also have insignificant investments in equity securities and other long-term investments. Because fixed maturities represent such a significant portion of our investment portfolio, the remainder of the discussion of portfolio composition will focus on fixed maturities.
Selected information concerning the fixed maturity portfolio is as follows:
Fixed Maturities
Fixed Maturity Portfolio Selected Information
At December 31, | |||||
2015 | 2014 | ||||
Average annual effective yield (1) | 5.83 | % | 5.89 | % | |
Average life, in years, to: | |||||
Next call (2) | 17.8 | 17.8 | |||
Maturity (2) | 20.3 | 20.5 | |||
Effective duration to: | |||||
Next call (2, 3) | 10.2 | 10.9 | |||
Maturity (2, 3) | 11.2 | 12.0 | |||
(1) | Tax-equivalent basis, where the yield on tax-exempt securities is adjusted to produce a yield equivalent to the pretax yield on taxable securities. |
(2) | Torchmark calculates the average life and duration of the fixed-maturity portfolio two ways: |
(a) | based on the next call date which is the next call date for callable bonds and the maturity date for noncallable bonds, and |
(b) | based on the maturity date of all bonds, whether callable or not. |
(3) | Effective duration is a measure of the price sensitivity of a fixed-income security to a particular change in interest rates. |
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Credit Risk Sensitivity. The following table summarizes certain information about the major corporate sectors (representing 4% or more of the portfolio) and security types held in our fixed-maturity portfolio at December 31, 2015.
Fixed Maturities by Sector
At December 31, 2015
(Dollar amounts in thousands)
Below Investment Grade | Total FIxed Maturities | % of Total Fixed Maturities | |||||||||||||||||||||||||||||||||
Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | At Amortized Cost | At Fair Value | ||||||||||||||||||||||||||
Corporates: | |||||||||||||||||||||||||||||||||||
Financial | |||||||||||||||||||||||||||||||||||
Insurance - life, health, P&C | $ | 58,534 | $ | 2,410 | $ | (6,366 | ) | $ | 54,578 | $ | 1,912,580 | $ | 212,640 | $ | (21,634 | ) | $ | 2,103,586 | 14 | 15 | |||||||||||||||
Banks | 41,606 | 452 | (4,781 | ) | 37,277 | 605,957 | 65,740 | (5,942 | ) | 665,755 | 5 | 5 | |||||||||||||||||||||||
Other financial | 74,954 | — | (29,916 | ) | 45,038 | 624,532 | 69,170 | (32,086 | ) | 661,616 | 5 | 5 | |||||||||||||||||||||||
Total financial | 175,094 | 2,862 | (41,063 | ) | 136,893 | 3,143,069 | 347,550 | (59,662 | ) | 3,430,957 | 24 | 25 | |||||||||||||||||||||||
Utilities | |||||||||||||||||||||||||||||||||||
Electric | 9,646 | 1,003 | — | 10,649 | 1,571,784 | 194,932 | (20,000 | ) | 1,746,716 | 12 | 13 | ||||||||||||||||||||||||
Gas and water | — | — | — | — | 438,101 | 29,334 | (8,319 | ) | 459,116 | 3 | 3 | ||||||||||||||||||||||||
Total utilities | 9,646 | 1,003 | — | 10,649 | 2,009,885 | 224,266 | (28,319 | ) | 2,205,832 | 15 | 16 | ||||||||||||||||||||||||
Industrial - Energy | |||||||||||||||||||||||||||||||||||
Pipelines | 45,420 | — | (16,971 | ) | 28,449 | 830,190 | 29,638 | (124,357 | ) | 735,471 | 6 | 5 | |||||||||||||||||||||||
Exploration and production | 10,923 | — | (872 | ) | 10,051 | 532,425 | 15,975 | (61,838 | ) | 486,562 | 4 | 4 | |||||||||||||||||||||||
Oil field services | 38,962 | — | (11,088 | ) | 27,874 | 87,986 | 4,226 | (11,455 | ) | 80,757 | 1 | 1 | |||||||||||||||||||||||
Refiner | — | — | — | — | 63,072 | 3,937 | (1,162 | ) | 65,847 | 1 | — | ||||||||||||||||||||||||
Driller | 5,382 | — | (2,600 | ) | 2,782 | 54,719 | — | (20,289 | ) | 34,430 | — | — | |||||||||||||||||||||||
Total energy | 100,687 | — | (31,531 | ) | 69,156 | 1,568,392 | 53,776 | (219,101 | ) | 1,403,067 | 12 | 10 | |||||||||||||||||||||||
Industrial - Basic materials | |||||||||||||||||||||||||||||||||||
Chemicals | — | — | — | — | 493,634 | 16,254 | (21,339 | ) | 488,549 | 4 | 4 | ||||||||||||||||||||||||
Metals and mining | 49,891 | — | (27,661 | ) | 22,230 | 402,545 | 4,389 | (90,070 | ) | 316,864 | 3 | 2 | |||||||||||||||||||||||
Forestry products and paper | — | — | — | — | 103,599 | 8,386 | (2,952 | ) | 109,033 | 1 | 1 | ||||||||||||||||||||||||
Total basic materials | 49,891 | — | (27,661 | ) | 22,230 | 999,778 | 29,029 | (114,361 | ) | 914,446 | 8 | 7 | |||||||||||||||||||||||
Industrial - Consumer, non-cyclical | 13,499 | 1,106 | — | 14,605 | 1,158,828 | 86,401 | (26,917 | ) | 1,218,312 | 9 | 9 | ||||||||||||||||||||||||
Other industrials | 76,457 | 1,195 | (5,704 | ) | 71,948 | 979,187 | 64,579 | (36,555 | ) | 1,007,211 | 7 | 7 | |||||||||||||||||||||||
Industrial - Transportation | 26,771 | — | (7,953 | ) | 18,818 | 571,474 | 44,720 | (26,702 | ) | 589,492 | 4 | 4 | |||||||||||||||||||||||
Other corporate sectors | 123,889 | 1,337 | (7,339 | ) | 117,887 | 1,051,925 | 69,297 | (26,376 | ) | 1,094,846 | 8 | 8 | |||||||||||||||||||||||
Total corporates | 575,934 | 7,503 | (121,251 | ) | 462,186 | 11,482,538 | 919,618 | (537,993 | ) | 11,864,163 | 87 | 86 | |||||||||||||||||||||||
Other fixed maturities: | |||||||||||||||||||||||||||||||||||
Government (U.S., municipal, and foreign) | 554 | — | (255 | ) | 299 | 1,684,846 | 133,117 | (16,148 | ) | 1,801,815 | 13 | 13 | |||||||||||||||||||||||
Collateralized debt obligations | 63,662 | 16,158 | (9,438 | ) | |||||||||||||||||||||||||||||||