GLOBE LIFE INC. - Quarter Report: 2015 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended September 30, 2015

Commission File Number 1-8052

TORCHMARK CORPORATION

(Exact name of registrant as specified in its charter)



DELAWARE		63-0780404
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3700 South Stonebridge Drive, McKinney, Texas		75070
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (972) 569-4000

NONE

Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No ¨

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No ý

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the last practicable date.



	CLASS		OUTSTANDING AT October 30, 2015
	Common Stock, $1.00 Par Value		123,330,265

Index of Exhibits (Page 46).

Total number of pages included are 47.

Table of Contents

INDEX



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive Income	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44

Item 4.	Controls and Procedures	44

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	46

Item 6.	Exhibits	46

Table of Contents

PART I–FINANCIAL INFORMATION



Item 1.	Condensed Consolidated Financial Statements

TORCHMARK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollar amounts in thousands)



	September 30, 2015			December 31, 2014
Assets
Investments:
Fixed maturities, available for sale, at fair value (amortized cost: 2015–$13,166,248; 2014–$12,823,612)	$	14,080,199		$	14,493,060
Equity securities, at fair value (cost: 2015–$776; 2014–$776)	1,582			1,477
Policy loans	486,042			472,109
Other long-term investments	8,662			10,449
Short-term investments	63,663			15,882
Total investments	14,640,148			14,992,977
Cash	59,485			66,019
Accrued investment income	215,919			204,879
Other receivables	676,155			543,988
Deferred acquisition costs	3,585,302			3,471,781
Goodwill	441,591			441,591
Other assets	500,640			493,495
Total assets	$	20,119,240		$	20,214,730
Liabilities and Shareholders’ Equity
Liabilities:
Future policy benefits	$	12,117,926		$	11,750,495
Unearned and advance premiums	70,334			72,275
Policy claims and other benefits payable	245,706			212,137
Other policyholders’ funds	95,798			95,446
Total policy liabilities	12,529,764			12,130,353
Current and deferred income taxes payable	1,588,992			1,797,265
Other liabilities	355,428			359,118
Short-term debt	618,236			238,398
Long-term debt (fair value: 2015–$868,502; 2014–$1,148,749)	743,518			992,130
Total liabilities	15,835,938			15,517,264
Shareholders’ equity:
Preferred stock, par value $1 per share–Authorized 5,000,000 shares; outstanding: -0- in 2015 and in 2014	—			—
Common stock, par value $1 per share–Authorized 320,000,000 shares; outstanding: (2015–134,218,183 issued, less 10,501,488 held in treasury and 2014–134,218,183 issued, less 6,287,907 held in treasury)	134,218			134,218
Additional paid-in capital	488,318			457,613
Accumulated other comprehensive income	499,829			997,452
Retained earnings	3,686,375			3,376,846
Treasury stock, at cost	(525,438		)	(268,663		)
Total shareholders’ equity	4,283,302			4,697,466
Total liabilities and shareholders’ equity	$	20,119,240		$	20,214,730

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

TORCHMARK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollar amounts in thousands except per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014*			2015			2014*
Revenue:
Life premium	$	518,929		$	491,724		$	1,552,309		$	1,472,734
Health premium	280,744			293,879			913,001			931,533
Other premium	41			112			119			334
Total premium	799,714			785,715			2,465,429			2,404,601
Net investment income	193,213			189,588			579,632			567,569
Realized investment gains	5,140			(1,483		)	7,872			15,713
Other income	692			668			2,052			1,812
Total revenue	998,759			974,488			3,054,985			2,989,695
Benefits and expenses:
Life policyholder benefits	342,196			328,116			1,029,261			972,484
Health policyholder benefits	175,496			196,901			652,822			673,173
Other policyholder benefits	9,648			10,515			29,447			31,599
Total policyholder benefits	527,340			535,532			1,711,530			1,677,256
Amortization of deferred acquisition costs	112,523			103,834			336,690			313,128
Commissions, premium taxes, and non-deferred acquisition costs	65,127			63,636			192,413			185,034
Other operating expense	57,779			55,402			171,368			168,758
Interest expense	19,246			19,033			57,420			57,119
Total benefits and expenses	782,015			777,437			2,469,421			2,401,295
Income before income taxes	216,744			197,051			585,564			588,400
Income taxes	(71,358		)	(64,639		)	(191,420		)	(192,209		)
Net income	$	145,386		$	132,412		$	394,144		$	396,191

Basic net income per share	$	1.17		$	1.02		$	3.13		$	3.01
Diluted net income per share	$	1.15		$	1.00		$	3.09		$	2.97
Dividends declared per common share	$	0.14		$	0.13		$	0.41		$	0.38

* Certain balances were retrospectively adjusted to give effect to the adoption of new accounting guidance as described in Note G- Adoption of New Accounting Standards.

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

TORCHMARK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited and in thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Net income	$	145,386		$	132,412		$	394,144		$	396,191

Other comprehensive income (loss):

Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period	(72,228		)	(2,627		)	(740,934		)	1,057,710
Reclassification adjustment for (gains) losses on securities included in net income	(5,540		)	1,261			(7,138		)	(15,935		)
Reclassification adjustment for amortization of (discount) and premium	(1,569		)	(2,354		)	(4,840		)	(6,898		)
Foreign exchange adjustment on securities recorded at fair value	(1,217		)	(523		)	(2,480		)	(654		)
Unrealized gains (losses) on securities	(80,554		)	(4,243		)	(755,392		)	1,034,223
Unrealized gains (losses) on other investments	(1,063		)	63			(3,390		)	2,766
Total unrealized investment gains (losses)	(81,617		)	(4,180		)	(758,782		)	1,036,989
Less applicable (taxes) benefits	28,690			1,478			265,555			(362,872		)
Unrealized investment gains (losses), net of tax	(52,927		)	(2,702		)	(493,227		)	674,117

Unrealized gains (losses) attributable to deferred acquisition costs	1,436			693			5,041			(6,580		)
Less applicable (taxes) benefits	(502		)	(243		)	(1,764		)	2,303
Unrealized gains (losses) attributable to deferred acquisition costs, net of tax	934			450			3,277			(4,277		)

Foreign exchange translation adjustments, other than securities	(9,031		)	(6,650		)	(22,567		)	(4,642		)
Less applicable (taxes) benefits	3,164			2,084			7,667			1,334
Foreign exchange translation adjustments, other than securities, net of tax	(5,867		)	(4,566		)	(14,900		)	(3,308		)

Pension adjustments	3,646			2,571			11,118			8,176
Less applicable (taxes) benefits	(1,276		)	(900		)	(3,891		)	(2,862		)
Pension adjustments, net of tax	2,370			1,671			7,227			5,314

Other comprehensive income (loss)	(55,490		)	(5,147		)	(497,623		)	671,846
Comprehensive income (loss)	$	89,896		$	127,265		$	(103,479	)	$	1,068,037

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

TORCHMARK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)



	Nine Months Ended September 30,
	2015			2014
Cash provided from operations	$	729,892		$	644,398
Cash provided from (used for) investment activities:
Long-term investments sold or matured:
Fixed maturities available for sale—sold	26,330			56,447
Fixed maturities available for sale—matured, called, and repaid	342,796			217,929
Equity securities	—			700
Other long-term investments	2,452			70
Total long-term investments sold or matured	371,578			275,146
Long-term investments acquired:
Fixed maturities	(730,145		)	(499,950		)
Other long-term investments	(1,906		)	—
Total long-term investments acquired	(732,051		)	(499,950		)
Net increase in policy loans	(13,933		)	(16,112		)
Net (increase) decrease in short-term investments	(47,781		)	(2,207		)
Disposition of properties	—			54
Additions to properties	(30,663		)	(14,482		)
Investment in low-income housing interests	(27,078		)	(39,279		)
Cash used for investment activities	(479,928		)	(296,830		)
Cash provided from (used for) financing activities:
Proceeds from exercise of stock options	32,519			39,557
Net borrowings (repayments) of commercial paper	130,215			61,352
Excess tax benefit from stock option exercises	15,679			12,484
Acquisition of treasury stock	(330,066		)	(342,084		)
Cash dividends paid to shareholders	(50,217		)	(48,628		)
Net receipts (withdrawals) from deposit-type products	(69,188		)	(49,431		)
Cash provided by (used for) financing activities	(271,058		)	(326,750		)
Effect of foreign exchange rate changes on cash	14,560			9,237
Net (decrease) increase in cash	(6,534		)	30,055
Cash at beginning of year	66,019			36,943
Cash at end of period	$	59,485		$	66,998

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note A—Accounting Policies

The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all of the annual disclosures required by accounting principles generally accepted in the United States of America (GAAP). However, in the opinion of management, these statements include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the condensed consolidated financial position at September 30, 2015, and the condensed consolidated results of operations, comprehensive income, and cash flows for the periods ended September 30, 2015 and 2014. The interim period condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements that are included in the Form 10-K filed with the Securities Exchange Commission (SEC) on February 27, 2015.

Effective January 1, 2015, Torchmark adopted Financial Accounting Standards Board (FASB) Accounting Standards Update No. 2014-01 Investments-Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects (ASU 2014-01). As a result of the adoption, the Company retrospectively adjusted prior periods. See Note G- Adoption of New Accounting Standards for further detail.

Note B—Earnings Per Share

A reconciliation of basic and diluted weighted-average shares outstanding is as follows:



	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2015	2014	2015	2014
Basic weighted average shares outstanding	124,457,996	129,969,902	125,788,925	131,529,818
Weighted average dilutive options outstanding	1,682,313	1,907,303	1,614,164	1,901,522
Diluted weighted average shares outstanding	126,140,309	131,877,205	127,403,089	133,431,340
Antidilutive shares	—	—	—	—

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note C—Postretirement Benefit Plans

The following tables present a summary of post-retirement benefit costs by component.

Components of Post-Retirement Benefit Costs



	Three Months Ended September 30,
	Pension Benefits						Other Benefits
	2015			2014			2015		2014
Service cost	$	3,990		$	3,231		$	—	$	25
Interest cost	5,003			4,695			203		(63		)
Expected return on assets	(5,323		)	(4,768		)	—		—
Amortization:
Prior service cost	81			529			—		—
Actuarial (gain) loss	3,533			2,035			30		3
Actuarial valuation adjustment	—			—			—		460
Direct recognition of expense	—			131			166		114
Net periodic benefit cost	$	7,284		$	5,853		$	399	$	539

	Nine Months Ended September 30,
	Pension Benefits						Other Benefits
	2015			2014			2015		2014
Service cost	$	11,971		$	9,694		$	—	$	74
Interest cost	15,009			14,333			610		234
Expected return on assets	(15,969		)	(14,273		)	—		—
Amortization:
Prior service cost	244			1,586			—		—
Actuarial (gain)/loss	10,601			6,127			90		3
Actuarial valuation adjustment	—			—			—		460
Direct recognition of expense	—			131			493		10
Net periodic benefit cost	$	21,856		$	17,598		$	1,193	$	781

The following table presents assets at fair value for the defined-benefit pension plans at September 30, 2015 and the prior-year end.

Pension Assets by Component



	September 30, 2015			December 31, 2014
	Amount		%	Amount		%
Corporate debt	$	153,536	49	$	166,825	52
Other fixed maturities	279		—	284		—
Equity securities	121,199		39	127,568		39
Short-term investments	16,414		5	9,038		3
Guaranteed annuity contract	16,973		6	15,027		5
Other	3,571		1	4,156		1
Total	$	311,972	100	$	322,898	100

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

The liability for the funded defined-benefit pension plans was $386 million at September 30, 2015 and $403 million at December 31, 2014. Cash contributions of $13.6 million were made to the qualified pension plans during the nine months ended September 30, 2015. Torchmark does not expect to make further cash contributions to these plans during 2015. With respect to the Company’s non-qualified supplemental retirement plan, life insurance policies on the lives of plan participants have been established with an unaffiliated carrier to fund a portion of the Company’s obligations under the plan. These policies, as well as investments deposited with an unaffiliated trustee, were previously placed in a Rabbi Trust to provide for payment of the plan obligations. At September 30, 2015, the combined value of the insurance policies and investments in the Rabbi Trust to support plan liabilities were $78 million, compared with $74 million at year-end 2014. Since this plan is non-qualified, the values of the insurance policies and investments are recorded as other assets in the Condensed Consolidated Balance Sheets and are not included in the chart of plan assets above. The liability for the non-qualified pension plan was $73 million at September 30, 2015 and $71 million at December 31, 2014.

Note D—Investments

Portfolio Composition:

A summary of fixed maturities and equity securities available for sale by cost or amortized cost and estimated fair value at September 30, 2015 is as follows:

Portfolio Composition as of September 30, 2015



	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		% of Total Fixed Maturities*
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	373,835	$	1,618	$	(5,696	)	$	369,757	3
States, municipalities, and political subdivisions	1,296,976		138,075		(1,374		)	1,433,677		10
Foreign governments	20,905		1,545		(4		)	22,446		—
Corporates, by sector:
Financial	2,688,462		340,450		(44,834		)	2,984,078		21
Utilities	2,105,221		274,626		(21,681		)	2,358,166		17
Energy	1,538,147		89,072		(111,771		)	1,515,448		11
Other corporate sectors	4,648,140		363,206		(163,826		)	4,847,520		34
Total corporates	10,979,970		1,067,354		(342,112		)	11,705,212		83
Collateralized debt obligations	63,960		16,745		(8,593		)	72,112		1
Other asset-backed securities	19,273		978		—			20,251		—
Redeemable preferred stocks, by sector:
Financial	382,674		48,618		(4,431		)	426,861		3
Utilities	28,655		1,228		—			29,883		—
Total redeemable preferred stocks	411,329		49,846		(4,431		)	456,744		3
Total fixed maturities	13,166,248		1,276,161		(362,210		)	14,080,199		100
Equity securities	776		806		—			1,582
Total fixed maturities and equity securities	$	13,167,024	$	1,276,967	$	(362,210	)	$	14,081,781

* At fair value

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note D—Investments (continued)

A schedule of fixed maturities by contractual maturity date at September 30, 2015 is shown below on an amortized cost basis and on a fair value basis. Actual maturity dates could differ from contractual maturities due to call or prepayment provisions.



	Amortized Cost		Fair Value
Fixed maturities available for sale:
Due in one year or less	$	53,589	$	54,217
Due from one to five years	572,013		632,991
Due from five to ten years	951,645		1,042,986
Due from ten to twenty years	3,841,490		4,296,570
Due after twenty years	7,662,273		7,958,875
Mortgage-backed and asset-backed securities	85,238		94,560
	$	13,166,248	$	14,080,199

Selected information about sales of fixed maturities is as follows.



For the Nine Months Ended September 30,
	2015			2014
Proceeds from sales	$	26,330		$	56,447
Gross realized gains	260			16,473
Gross realized losses	(354		)	(1,701		)

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note D—Investments (continued)

Fair Value Measurements:

The following table represents assets measured at fair value on a recurring basis.

Fair Value Measurements at September 30, 2015 Using:



Description	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	—		$	369,757		$	—		$	369,757
States, municipalities, and political subdivisions	—			1,433,677			—			1,433,677
Foreign governments	—			22,446			—			22,446
Corporates, by sector:
Financial	—			2,920,889			63,189			2,984,078
Utilities	15,180			2,206,803			136,183			2,358,166
Energy	—			1,488,583			26,865			1,515,448
Other corporate sectors	—			4,534,087			313,433			4,847,520
Total corporates	15,180			11,150,362			539,670			11,705,212
Collateralized debt obligations	—			—			72,112			72,112
Other asset-backed securities	—			20,251			—			20,251
Redeemable preferred stocks, by sector:
Financial	10,068			416,793			—			426,861
Utilities	—			29,883			—			29,883
Total redeemable preferred stocks	10,068			446,676			—			456,744
Total fixed maturities	25,248			13,443,169			611,782			14,080,199
Equity securities	723			—			859			1,582
Total fixed maturities and equity securities	$	25,971		$	13,443,169		$	612,641		$	14,081,781
Percent of total	0.2		%	95.5		%	4.3		%	100.0		%

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note D—Investments (continued)

The following table represents an analysis of changes in fair value measurements using significant unobservable inputs (Level 3).

Analysis of Changes in Fair Value Measurements Using

Significant Unobservable Inputs (Level 3)



	For the Nine Months Ended September 30, 2015
	Collateralized debt obligations			Corporates ⁽¹⁾			Equities			Total
Balance at January 1, 2015	$	63,232		$	512,714		$	833		$	576,779
Total gains or losses:
Included in realized gains/losses	—			1,182			—			1,182
Included in other comprehensive income	12,797			(3,121		)	26			9,702
Acquisitions	—			38,600			—			38,600
Amortization	4,183			14			—			4,197
Other ⁽²⁾	(8,100		)	(9,719		)	—			(17,819		)
Transfers in and/or out of Level 3 ⁽³⁾	—			—			—			—
Balance at September 30, 2015	$	72,112		$	539,670		$	859		$	612,641
Percent of total fixed maturity and equity securities	0.5		%	3.8		%	—		%	4.3		%

	For the Nine Months Ended September 30, 2014
	Collateralized debt obligations			Corporates ⁽¹⁾			Equities			Total
Balance at January 1, 2014	$	58,205		$	300,300		$	776		$	359,281
Total gains or losses:
Included in realized gains/losses	15,924			1			—			15,925
Included in other comprehensive income	3,929			19,967			57			23,953
Acquisitions	—			186,365			—			186,365
Sales	(16,049		)	(1		)	—			(16,050		)
Amortization	4,072			10			—			4,082
Other ⁽²⁾	(3,231		)	(1,773		)	—			(5,004		)
Transfers in and/or out of Level 3 ⁽³⁾	—			—			—			—
Balance at September 30, 2014	$	62,850		$	504,869		$	833		$	568,552
Percent of total fixed maturity and equity securities	0.4		%	3.6		%	—		%	4.0		%


(1)	Includes redeemable preferred stocks.


(2)	Includes capitalized interest, foreign exchange adjustments, and principal repayments.


(3)	Considered to be transferred at the end of the period. Transfers into Level 3 occur when observable inputs are no longer available. Transfers out of Level 3 occur when observable inputs become available.

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note D—Investments (continued)

Other-Than-Temporary Impairments:

There were no other-than-temporary impairments during the nine-month periods ended September 30, 2015 and 2014, respectively.

Unrealized Loss Analysis:

The following table discloses information about investments in an unrealized loss position.



	Less than Twelve Months	Twelve Months or Longer	Total
Number of issues (CUSIP numbers) held:
As of September 30, 2015	368	66	434
As of December 31, 2014	80	173	253

Torchmark’s entire fixed-maturity and equity portfolio consisted of 1,570 issues at September 30, 2015 and 1,604 issues at December 31, 2014. The weighted average quality rating of all unrealized loss positions as of September 30, 2015 was BBB+. Although Torchmark’s fixed-maturity investments are available for sale, Torchmark’s management generally does not intend to sell and does not believe it will be required to sell any securities which are temporarily impaired before they recover due to the strong and stable cash flows generated by its insurance products.

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note D—Investments (continued)

The following table discloses unrealized investment losses by class of investment at September 30, 2015 for the period of time in a loss position. Torchmark does not view these investments as other-than-temporarily impaired.

Analysis of Gross Unrealized Investment Losses

At September 30, 2015



	Less than Twelve Months					Twelve Months or Longer					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Fixed maturities available for sale:
Investment grade:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	216,022	$	(5,042	)	$	14,920	$	(654	)	$	230,942	$	(5,696	)
States, municipalities and political subdivisions	48,097		(1,033		)	1,685		(107		)	49,782		(1,140		)
Foreign governments	4,574		(4		)	—		—			4,574		(4		)
Corporates, by sector:
Financial	283,220		(11,605		)	—		—			283,220		(11,605		)
Utilities	403,693		(21,681		)	—		—			403,693		(21,681		)
Energy	650,698		(69,271		)	92,025		(31,189		)	742,723		(100,460		)
Other corporate sectors	1,547,634		(126,366		)	44,927		(8,257		)	1,592,561		(134,623		)
Total corporates	2,885,245		(228,923		)	136,952		(39,446		)	3,022,197		(268,369		)
Total investment grade	3,153,938		(235,002		)	153,557		(40,207		)	3,307,495		(275,209		)
Below investment grade:
Bonds:
States, municipalities and political subdivisions	—		—			321		(234		)	321		(234		)
Corporates, by sector:
Financial	—		—			72,564		(33,229		)	72,564		(33,229		)
Energy	42,319		(8,391		)	8,106		(2,920		)	50,425		(11,311		)
Other corporate sectors	61,857		(22,737		)	55,836		(6,466		)	117,693		(29,203		)
Total corporates	104,176		(31,128		)	136,506		(42,615		)	240,682		(73,743		)
Collateralized debt obligations	—		—			11,407		(8,593		)	11,407		(8,593		)
Redeemable preferred stocks, by sector:
Financial	—		—			22,730		(4,431		)	22,730		(4,431		)
Total redeemable preferred stocks	—		—			22,730		(4,431		)	22,730		(4,431		)
Total below investment grade	104,176		(31,128		)	170,964		(55,873		)	275,140		(87,001		)
Total fixed maturities	3,258,114		(266,130		)	324,521		(96,080		)	3,582,635		(362,210		)
Equity securities	—		—			—		—			—		—
Total fixed maturities and equity securities	$	3,258,114	$	(266,130	)	$	324,521	$	(96,080	)	$	3,582,635	$	(362,210	)

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note E—Supplemental Information about Changes to Accumulated Other Comprehensive Income

An analysis of the change in balance by component of Accumulated Other Comprehensive Income is as follows for the three and nine month periods ended September 30, 2015 and 2014.

Components of Accumulated Other Comprehensive Income



	For the Three Months Ended September 30, 2015
	Available for Sale Assets			Deferred Acquisition Costs			Foreign Exchange			Pension Adjustments			Total
Balance at July 1, 2015	$	649,973		$	(8,415	)	$	8,353		$	(94,592	)	$	555,319
Other comprehensive income (loss) before reclassifications, net of tax	(48,306		)	934			(5,867		)	1			(53,238		)
Reclassifications, net of tax	(4,621		)	—			—			2,369			(2,252		)
Other comprehensive income (loss)	(52,927		)	934			(5,867		)	2,370			(55,490		)
Balance at September 30, 2015	$	597,046		$	(7,481	)	$	2,486		$	(92,222	)	$	499,829

	For the Three Months Ended September 30, 2014
	Available for Sale Assets			Deferred Acquisition Costs			Foreign Exchange			Pension Adjustments			Total
Balance at July 1, 2014	$	933,015		$	(11,455	)	$	26,124		$	(59,710	)	$	887,974
Other comprehensive income (loss) before reclassifications, net of tax	(1,991		)	450			(4,566		)	2			(6,105		)
Reclassifications, net of tax	(711		)	—			—			1,669			958
Other comprehensive income (loss)	(2,702		)	450			(4,566		)	1,671			(5,147		)
Balance at September 30, 2014	$	930,313		$	(11,005	)	$	21,558		$	(58,039	)	$	882,827

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note E—Supplemental Information about Changes to Accumulated Other Comprehensive Income (continued)

Components of Accumulated Other Comprehensive Income



	For the Nine Months Ended September 30, 2015
	Available for Sale Assets			Deferred Acquisition Costs			Foreign Exchange			Pension Adjustments			Total
Balance at January 1, 2015	$	1,090,273		$	(10,758	)	$	17,386		$	(99,449	)	$	997,452
Other comprehensive income (loss) before reclassifications, net of tax	(485,441		)	3,277			(14,900		)	118			(496,946		)
Reclassifications, net of tax	(7,786		)	—			—			7,109			(677		)
Other comprehensive income (loss)	(493,227		)	3,277			(14,900		)	7,227			(497,623		)
Balance at September 30, 2015	$	597,046		$	(7,481	)	$	2,486		$	(92,222	)	$	499,829

	For the Nine Months Ended September 30, 2014
	Available for Sale Assets			Deferred Acquisition Costs			Foreign Exchange			Pension Adjustments			Total
Balance at January 1, 2014	$	256,196		$	(6,728	)	$	24,866		$	(63,353	)	$	210,981
Other comprehensive income (loss) before reclassifications, net of tax	688,958			(4,277		)	(3,308		)	299			681,672
Reclassifications, net of tax	(14,841		)	—			—			5,015			(9,826		)
Other comprehensive income (loss)	674,117			(4,277		)	(3,308		)	5,314			671,846
Balance at September 30, 2014	$	930,313		$	(11,005	)	$	21,558		$	(58,039	)	$	882,827

Reclassifications out of Accumulated Other Comprehensive Income are presented below for the three and nine month periods ended September 30, 2015 and 2014.

Reclassification Adjustments



	Three Months Ended September 30,						Nine Months Ended September 30,						Affected line items in the Statement of Operations
	2015			2014			2015			2014			Affected line items in the Statement of Operations
Unrealized investment gains (losses) on available for sale assets:
Realized (gains) losses	$	(5,540	)	$	1,261		$	(7,138	)	$	(15,935	)	Realized investment gains (losses)
Amortization of (discount) premium	(1,569		)	(2,354		)	(4,840		)	(6,898		)	Net investment income
Total before tax	(7,109		)	(1,093		)	(11,978		)	(22,833		)
Tax	2,488			382			4,192			7,992			Income Taxes
Total after tax	(4,621		)	(711		)	(7,786		)	(14,841		)
Pension adjustments:
Amortization of prior service cost	81			529			244			1,586			Other operating expenses
Amortization of actuarial gain (loss)	3,563			2,038			10,691			6,130			Other operating expenses
Total before tax	3,644			2,567			10,935			7,716
Tax	(1,275		)	(898		)	(3,826		)	(2,701		)	Income Taxes
Total after tax	2,369			1,669			7,109			5,015
Total reclassifications (after tax)	$	(2,252	)	$	958		$	(677	)	$	(9,826	)

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note F—Business Segments

Torchmark is comprised of life insurance companies which primarily market individual life and supplemental health insurance products through niche distribution channels to middle income Americans. Torchmark’s core operations are insurance marketing and underwriting, and management of its investments. The insurance marketing and underwriting operation is segmented by the types of insurance products offered: life, health, Medicare Part D, and annuity. Premium income for Medicare Part D health insurance is included with the premium for other health products in the Condensed Consolidated Statements of Operations. Annuity revenue is classified as “Other premium.” Management’s measure of profitability for each insurance segment is insurance underwriting margin, which is underwriting income before other income and insurance administrative expenses. It represents the profit margin on insurance products before administrative expenses, and is calculated by deducting net policy obligations (claims incurred and change in reserves), commissions and other acquisition expenses from premium revenue. Torchmark further views the profitability of each insurance product segment by the marketing groups that distribute the products of that segment: direct response, independent agencies, or captive agencies.

Torchmark’s management prefers to evaluate the performance of its underwriting and investment activities separately, rather than allocating investment income to the underwriting results. As such, the investment function is presented as a stand-alone segment.

The investment segment includes the management of the investment portfolio, debt, and cash flow. Management’s measure of profitability for this segment is excess investment income, which is the income earned on the investment portfolio less the required interest on net policy liabilities and financing costs. Financing costs include the interest on Torchmark’s debt. Other income and insurance administrative expense are classified in a separate “Other” segment.

The majority of the Company’s required interest on net policy liabilities (benefit reserves less the deferred acquisition cost asset) is not credited to policyholder accounts. Instead, it is an actuarial assumption for discounting cash flows in the computation of benefit reserves and the amortization of the deferred acquisition cost asset. Investment income required to fund the required interest on net policy liabilities is removed from the investment segment and applied to the insurance segments to eliminate the effect of the required interest from the insurance segments. As a result, the investment segment measures net investment income against the required interest on net policy liabilities and financing costs, while the insurance segments simply measure premiums against benefits and expenses. We believe this presentation facilitates a more meaningful analysis of the Company’s underwriting and investment performance as the underwriting results are based on premiums, claims, and expenses and are not affected by unanticipated fluctuations in investment yields.

As noted, Torchmark’s “core operations” are insurance and investment management. The insurance segments issue policies for which premiums are collected for the eventual payment of policy benefits. In addition to policy benefits, operating expenses are incurred including acquisition costs, administrative expenses, and taxes. Because life and health contracts can be long term, premium receipts in excess of current expenses are invested. Investment activities, conducted by the investment segment, focus on seeking quality investments with a yield and term appropriate to support the insurance product obligations. These investments generally consist of fixed maturities, and, over the long term, the expected yields are taken into account when setting insurance premium rates and product profitability expectations. As a result, fixed maturities are generally held for long periods to support the liabilities, and Torchmark generally expects to hold investments until maturity. Dispositions of investments occur from time to time, generally as a result of credit concerns, calls by issuers, or other factors usually beyond the control of management.

Dispositions are sometimes required in order to maintain the Company’s investment policies and objectives. Investments are also occasionally written down as a result of other-than-temporary impairment. Torchmark does not actively trade investments. As a result, realized gains and losses from the disposition and write down of investments are generally incidental to operations and are not considered a material factor in insurance pricing or product profitability. While from time to time these realized gains and losses could be significant to net income in the period in which they occur, they generally have a limited effect on the yield of the total investment portfolio. Further, because the proceeds of the disposals are reinvested in the portfolio, the disposals have little effect on the size of the portfolio and the income

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note F—Business Segments (continued)

from the reinvestments is included in net investment income. Therefore, management removes realized investment gains and losses from results of core operations when evaluating the performance of the Company. For this reason, these gains and losses are excluded from Torchmark’s operating segments.

Torchmark accounts for its stock options and restricted stock under current accounting guidance requiring stock options and stock grants to be expensed based on fair value at the time of grant. Management considers stock compensation expense to be an expense of the Parent Company. Therefore, stock compensation expense is treated as a corporate expense in Torchmark’s segment analysis.

Torchmark provides coverage under the Medicare Part D prescription drug plan for Medicare beneficiaries. In accordance with GAAP, Part D premiums are recognized evenly throughout the year when they become due, but benefit costs are recognized when the costs are incurred. Due to the design of the Part D product, premiums are evenly distributed throughout the year, but benefit costs are higher earlier in the year. As a result, under GAAP, benefit costs can exceed premiums in the first part of the year, but be less than premiums during the remainder of the year. In order to more closely match the benefit cost with the associated revenue for interim periods, Torchmark defers these excess benefits for segment reporting purposes. In addition, GAAP recognizes in each quarter a government risk-sharing premium adjustment consistent with the contract as if the quarter represented an entire contract period. These quarterly risk-sharing adjustments are removed in the segment analysis because the actual contract payments are based upon the experience of the full contract year, not the experience of interim periods. Total premiums less total benefits will be the same for segment reporting purposes as they will be under GAAP for the full calendar year. The Company’s presentation results in the underwriting margin percentage in interim periods reflecting the expected margin percentage for the full year. These interim adjustments do not impact the full year results.

An analysis of the adjustments for the difference in the interim results as presented for segment purposes and GAAP for Medicare Part D is as follows:



	Nine Months Ended September 30,
	2015		2014
Benefit costs deferred	$	11,649	$	45,382
Government risk-sharing premium adjustment	9,322		(28,532		)
Pre-tax addition to segment interim period income	$	20,971	$	16,850
After tax amount	$	13,631	$	10,952

Additionally, management does not view the risk-sharing premium for Medicare Part D as a component of premium income, and accordingly adjusts health premium income in its segment analysis. A reconciliation of health premium included in the segment analysis with health premium as reported in the Condensed Consolidated Statements of Operations is presented in the following table.



	Nine Months Ended September 30,
	2015			2014		% Change
Premium per segment analysis:
Medicare Part D premium	$	232,102		$	258,243	(10	)
Other health premium	690,221			644,758		7
Part D risk-sharing adjustment	(9,322		)	28,532		(133	)
Health premium per Condensed Consolidated Statements of Operations	$	913,001		$	931,533	(2	)

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note F—Business Segments (continued)

During the first nine months of 2014, Torchmark accrued for certain litigation cases in the net amount of $3.7 million ($2.4 million after tax) that were not directly related to its insurance operations. Additionally, Torchmark received $1.3 million ($853 thousand after tax) in settlement of litigation regarding investments. Also in the second quarter of 2014, the Company recorded $8.2 million in administrative settlements ($5.3 million after tax) related to benefits paid for deaths occurring in prior years where claims had not been filed. These administrative settlements were the result of the Company matching policyholder information against the Social Security death master file and obtaining due proof of loss. These administrative settlements were included in "Policyholder benefits" in the Consolidated Statements of Operations in 2014. Torchmark removes amounts that do not relate to its core insurance operations from its segment analysis.

The following tables set forth a reconciliation of Torchmark’s revenues and operations by segment to its pretax income and each significant line item in its Condensed Consolidated Statements of Operations.

Reconciliation of Segment Operating Information to the Consolidated Statement of Operations



	For the Nine Months Ended September 30, 2015
	Life			Health			Medicare Part D		Annuity			Investment			Other & Corporate			Adjustments				Consolidated
Revenue:
Premium	$	1,552,309		$	690,221		$	232,102	$	119								$	(9,322	)	(1)	$	2,465,429
Net investment income												$	579,632									579,632
Other income															$	2,201		(149		)	(3)	2,052
Total revenue	1,552,309			690,221			232,102		119			579,632			2,201			(9,471		)		3,047,113
Expenses:
Policy benefits	1,029,261			448,539			192,634		29,447									11,649			(1)	1,711,530
Required interest on reserves	(412,264		)	(51,450		)			(40,084		)	503,798										—
Required interest on DAC	129,339			17,058			673		885			(147,955		)								—
Amortization of acquisition costs	265,641			61,858			2,649		6,542													336,690
Commissions and premium tax	115,452			60,820			16,258		32									(149		)	(3)	192,413
Insurance administrative expense ⁽²⁾															142,829							142,829
Parent expense															6,662							6,662
Stock compensation expense															21,877							21,877
Interest expense												57,420										57,420
Total expenses	1,127,429			536,825			212,214		(3,178		)	413,263			171,368			11,500				2,469,421
Subtotal	424,880			153,396			19,888		3,297			166,369			(169,167		)	(20,971		)		577,692
Nonoperating items																		20,971			(1)	20,971
Measure of segment profitability (pretax)	$	424,880		$	153,396		$	19,888	$	3,297		$	166,369		$	(169,167	)	$	—			598,663
Deduct applicable income taxes																						(196,005		)
Segment profits after tax																						402,658
Add back income taxes applicable to segment profitability																						196,005
Add (deduct) realized investment gains (losses)																						7,872
Deduct Part D adjustment ⁽¹⁾																						(20,971		)
Pretax income per Consolidated Statements of Operations																						$	585,564

(1) Medicare Part D items adjusted to GAAP from the segment analysis, which matches expected benefits with policy premium.

(2) Administrative expense is not allocated to insurance segments.

(3) Elimination of intersegment commission.

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note F—Business Segments (continued)

Reconciliation of Segment Operating Information to the Condensed Consolidated Statement of Operations *



	For the Nine Months Ended September 30, 2014
	Life			Health			Medicare Part D		Annuity			Investment			Other & Corporate			Adjustments				Consolidated
Revenue:
Premium	$	1,472,734		$	644,758		$	258,243	$	334								$	28,532		(1)	$	2,404,601
Net investment income												$	567,569									567,569
Other income															$	1,990		(178		)	(3)	1,812
Total revenue	1,472,734			644,758			258,243		334			567,569			1,990			28,354				2,973,982
Expenses:
Policy benefits	964,305			414,607			213,184		31,599									53,561			(1,5)	1,677,256
Required interest on reserves	(395,595		)	(48,018		)			(41,576		)	485,189										—
Required interest on DAC	125,758			16,823			534		1,120			(144,235		)								—
Amortization of acquisition costs	251,954			53,088			2,127		5,959													313,128
Commissions and premium tax	105,724			59,787			19,664		37									(178		)	(3)	185,034
Insurance administrative expense ⁽²⁾															134,918			2,337			(4)	137,255
Parent expense															6,284							6,284
Stock compensation expense															25,219							25,219
Interest expense												57,119										57,119
Total expenses	1,052,146			496,287			235,509		(2,861		)	398,073			166,421			55,720				2,401,295
Subtotal	420,588			148,471			22,734		3,195			169,496			(164,431		)	(27,366		)		572,687
Nonoperating items																		27,366			(1,4,5)	27,366
Measure of segment profitability (pretax)	$	420,588		$	148,471		$	22,734	$	3,195		$	169,496		$	(164,431	)	$	—			600,053
Deduct applicable income taxes																						(196,288		)
Segment profits after tax																						403,765
Add back income taxes applicable to segment profitability																						196,288
Add (deduct) realized investment gains (losses)																						15,713
Deduct Part D adjustment ⁽¹⁾																						(16,850		)
Deduct legal settlement expense ⁽⁴⁾																						(2,337		)
Deduct administrative settlements ⁽⁵⁾																						(8,179		)
Pretax income per Consolidated Statements of Operations																						$	588,400

(1) Medicare Part D items adjusted to GAAP from the segment analysis, which matches expected benefits with policy premium.

(2) Administrative expense is not allocated to insurance segments.

(3) Elimination of intersegment commission.

(4) Legal settlement expenses.

(5) Administrative settlements.

* Retrospectively adjusted to give effect to the adoption ASU 2014-01 as described in Note G- Adoption of New Accounting Standards.

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note F—Business Segments (continued)

The following table summarizes the measures of segment profitability for comparison. It also reconciles segment profits to net income.

Analysis of Profitability by Segment



	Nine Months Ended September 30,						Increase (Decrease)
	2015			2014*			Amount			%
Life	$	424,880		$	420,588		$	4,292		1
Health	153,396			148,471			4,925			3
Medicare Part D	19,888			22,734			(2,846		)	(13	)
Annuity	3,297			3,195			102			3
Investment	166,369			169,496			(3,127		)	(2	)
Other and corporate:
Other income	2,201			1,990			211			11
Administrative expense	(142,829		)	(134,918		)	(7,911		)	6
Corporate	(28,539		)	(31,503		)	2,964			(9	)
Pretax total	598,663			600,053			(1,390		)	—
Applicable taxes	(196,005		)	(196,288		)	283			—
Total	402,658			403,765			(1,107		)	—
Reconciling items, net of tax:
Realized gains (losses) - Investments	5,117			10,213			(5,096		)	(50	)
Part D adjustment	(13,631		)	(10,952		)	(2,679		)	24
Administrative settlements	—			(5,316		)	5,316			(100	)
Legal settlement expense	—			(1,519		)	1,519			(100	)
Net income	$	394,144		$	396,191		$	(2,047	)	(1	)

* Retrospectively adjusted to give effect to the adoption of ASU 2014-01 as described in Note G-Adoption of New Accounting Standards.

Table of Contents

TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note G—Adoption of New Accounting Standards

Low-income housing tax credits: As described in Note A, the FASB issued and Torchmark adopted new guidance concerning Investments-Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects (ASU 2014-01) as of January 1, 2015. The guidance replaces the effective-yield method of amortization with respect to investments in qualified affordable housing acquired after the date of adoption and, if certain conditions are present, provides for a proportional amortization method. The proportional amortization method allows an investor to amortize the cost of its investment based on the proportion of the tax credits received during the year to the total expected tax credits to be received over the life of the investment. The guidance further provides that the effective-yield method of amortization may continue to be used with respect to investments acquired before the date of adoption. Amortization, previously required to be recognized in the Condensed Consolidated Statements of Operations as a component of "Net investment income", will now be included in "Income tax expense."

Torchmark will continue to use the effective-yield method of amortization with respect to its guaranteed investments acquired prior to January 1, 2015, but will retroactively adopt the new guidance and apply the proportional method of amortization with respect to its non-guaranteed investments. The proportional method of amortization is consistent with Torchmark’s historical method of amortization. As a result, the only impact of the adoption is to reclassify amortization expense from “Net investment income” to “Income tax expense” with no impact on Torchmark's historical net income, cash flows, liquidity, or statutory earnings of its insurance subsidiaries.

The following table reflects a summary of the impact of the retrospectively adjusted balances on the Company's Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014.



Three Months Ended September 30, 2014
Income Statement	As previously reported			Adjustments			As adjusted
Net investment income	$	182,101		$	7,487		$	189,588
Total revenue	967,001			7,487			974,488
Income before income taxes	189,564			7,487			197,051
Income taxes	(57,152		)	(7,487		)	(64,639		)
Net income	132,412			—			132,412



Nine Months Ended September 30, 2014
Income Statement	As previously reported			Adjustments			As adjusted
Net investment income	$	545,978		$	21,591		$	567,569
Total revenue	2,968,104			21,591			2,989,695
Income before income taxes	566,809			21,591			588,400
Income taxes	(170,618		)	(21,591		)	(192,209		)
Net income	396,191			—			396,191

Debt Issuance Costs: In April 2015, the FASB issued Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). The guidance requires companies to change the presentation of debt issuance costs in the financial statements by presenting such costs as a direct deduction from the related debt liability rather than as an asset. Amortization of the debt issuance costs will continue to be reported as interest expense. The guidance is effective for fiscal years and interim periods beginning after December 15, 2015 with early adoption permitted. Torchmark adopted this ASU upon issuance and there was no material impact on the consolidated financial statements.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Summary of Operations. Torchmark’s operations are segmented into its insurance underwriting and investment operations as described in Note F—Business Segments. The measures of profitability described in Note F are useful in evaluating the performance of the segments and the marketing groups within each insurance segment, because each of our distribution channels operates in a niche market. These measures enable management to view period-to-period trends, and to make informed decisions regarding future courses of action.

The tables in Note F—Business Segments demonstrate how the measures of profitability are determined. Those tables also reconcile our revenues and expenses by segment to major income statement line items for the nine month periods ended September 30, 2015 and 2014. Additionally, a table in that note, Analysis of Profitability by Segment, provides a summary of the profitability measures that demonstrates year-to-year comparability and reconciles those measures to our net income. That summary represents our overall operations in the manner that management views the business, and is a basis of the following highlights discussion.

A discussion of operations by each segment follows later in this report. These discussions compare the first nine months of 2015 with the same period of 2014, unless otherwise noted. The following discussions are presented in the manner we view our operations, as described in Note F—Business Segments.

Highlights, comparing the first nine months of 2015 with the first nine months of 2014. Net income per diluted share increased 4% to $3.09 from $2.97. Included in net income in 2015 were after-tax realized investment gains of $5 million ($0.04 per share) compared with gains of $10 million ($0.08 per share) in 2014. Realized investment gains and losses are presented more fully under the caption Realized Gains and Losses in this report.

We use three statistical measures as indicators of future premium growth: “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 defined as annualized premium issued, net of cancellations in the first thirty days after issue, except for Globe Life Direct Response, where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer has expired. Annualized premium issued is the gross premium that would be received during the policies’ first year in force, assuming that none of the policies lapsed or terminated. Although lapses and terminations will occur, we believe that net sales is a useful indicator of the rate of acceleration of premium growth. First-year collected premium is 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 policy 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.

Total premium income rose 4% in 2015 to $2.5 billion. Total net sales fell 3% to $451 million. After removing the impact of sales of Medicare Part D, net sales rose 5% to $409 million. First-year collected premium was $446 million for the 2015 period, compared with $350 million for the 2014 period. Excluding Part D, there was a 21% increase in first-year collected premium. The increase in first-year collected premium is primarily the result of prior year life insurance sales growth in the American Income Exclusive Agency and the addition of a large group in the United American Independent Agency in late 2014.

Life insurance premium income grew 5% to $1.6 billion. Life net sales increased 11% to $313 million. First-year collected life premium gained 12% to $226 million. Life underwriting margins were down to 27% from 29% of premium, as a result of increased Globe Life Direct Response policy obligations and additional costs of supporting certain distribution channels. Underwriting income increased to $425 million for the first nine months of 2015 compared to $421 million for the same period in 2014.

Health insurance premium income, excluding Medicare Part D premium, increased 7% to $690 million. Health net sales fell 11% to $97 million for the nine month period, as a result of a 33% decrease in Medicare Supplement sales. This decrease was due to a large group that was added in the third quarter of 2014. First-year collected health premium rose 43% to $116 million, due to strong increases in limited-benefit and Medicare Supplement. Once again, the increase in Medicare Supplement first year collected premium was due to addition of a large group in late 2014. Health margins declined to 22%, with underwriting income increasing to $153 million for the first nine months of 2015. Margins were $148 million for the same period in 2014.

Table of Contents

In the manner we view our Medicare Part D prescription drug business as described in Note F—Business Segments, policyholder premium was $232 million in 2015, compared with $258 million in 2014, a decrease of 10%. This decrease resulted primarily from a decline in auto-enrollees, partially offset by increases in voluntary individual and group sales.

As explained in Note F—Business Segments, differences in our estimate of interim results for Medicare Part D as we view this product for segment purposes and GAAP financial statement purposes resulted in a $14 million after-tax charge to earnings in 2015 ($0.11 per share) and a $11 million charge in 2014 ($0.08 per share). We expect the benefit ratios for interim periods in 2015 to be approximately the same as our expected 2015 full year benefit ratio. There will be no difference in our segment versus financial statement reporting by year end 2015, as it relates to Medicare Part D.

Insurance administrative expenses were up 5.9% 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.

Excess investment income is defined as net investment income less the required interest on net policy liabilities and the interest cost associated with capital funding or “financing costs”. Excess investment income per diluted share increased 3% in 2015 to $1.31 from $1.27, while the dollar amount of excess investment income decreased 2% to $166 million. The increase in per share excess investment income in relation to the decrease in dollar amount resulted from share purchases over the past twelve months, as discussed later in this report. Net investment income rose $12 million or 2% to $580 million, slightly below the 3% growth in our average investment portfolio at amortized cost. The average effective yield on the fixed-maturity portfolio, which represented 96% of our investments at amortized cost, decreased to 5.84% in the 2015 period from 5.91% in the prior period, as the impact of the low-interest-rate environment on average yield continues. Required interest rose 4% or $15 million to $356 million, in line with growth in average net policy liabilities. Financing costs were $57 million in both periods. Please refer to the discussion under Capital Resources for more information on debt and interest expense.

In the first nine months of 2015, we invested new money in our fixed-maturity portfolio at an effective annual yield on new investments of 4.71%, compared with 4.74% in the same period of 2014, with an average rating of BBB+, the same as of the previous year end. Approximately 96% of the portfolio at amortized cost was investment grade at September 30, 2015. Cash and short-term investments were $123 million at that date, compared with $82 million at December 31, 2014.

The net unrealized gain position in our fixed-maturity portfolio declined from $1.7 billion at December 31, 2014 to $914 million during the first nine months of 2015, largely due to an increase in market interest rates during 2015. The fixed-maturity portfolio contains no commercial mortgage-backed securities. We have no direct investments in residential mortgages, nor do we have any counterparty risks as we are not a party to any credit default swaps or other derivative contracts. We do not participate in securities lending, we have no off-balance sheet investments, and we have only insignificant exposure to European Sovereign debt consisting of $5 million of German government bonds at September 30, 2015. We have no direct exposure to Greek sovereign debt and we have no exposure to companies that do business primarily in Greece.

We have an on-going share repurchase program which began in 1986 which is reviewed quarterly and is reaffirmed by the Board of Directors on an annual basis. The program was reaffirmed on August 5, 2015. With no specified authorization amount, we determine the amount of repurchases based on the amount of our excess cash flow, general market conditions, and other alternative uses. These purchases are made at the Parent with excess cash flow. Share purchases are also made with the proceeds from option exercises by current and former employees, in order to reduce dilution. The following chart summarizes share purchases for the nine-month periods ended September 30, 2015 and 2014.

Table of Contents

Analysis of Share Purchases

(Amounts in thousands, except per share amounts)



	For the Nine Months Ended September 30,
	2015					2014
	Shares	Amount		Average Price		Shares	Amount		Average Price
Purchases with:
Excess cash flow	4,878	$	275,598	$	56.50	5,500	$	287,743	$	52.32
Option exercise proceeds	957	54,468		56.94		1,022	54,341		53.15
Total	5,835	$	330,066	$	56.57	6,522	$	342,084	$	52.45

Throughout the remainder of this discussion, share purchases will only refer to those made from excess cash flow.

A detailed discussion of our operations by component segment follows.

Life insurance, comparing the first nine months of 2015 with the first nine months of 2014. Life insurance is our predominant segment, representing 63% of premium income and 71% of insurance underwriting margin in the first nine months of 2015. In addition, investments supporting the reserves for life business generate the majority of excess investment income attributable to the investment segment. Life insurance premium income increased 5% to $1.6 billion. The following table presents Torchmark’s life insurance premium by distribution channel.

Life Insurance

Premium

(Dollar amounts in thousands)



	Nine Months Ended September 30,						Increase
	2015			2014			(Decrease)
	Amount		% of Total	Amount		% of Total	Amount			%
American Income Exclusive Agency	$	618,378	40	$	570,122	39	$	48,256		8
Globe Life Direct Response	561,718		36	528,501		36	33,217			6
Liberty National Exclusive Agency	203,915		13	204,932		14	(1,017		)	—
Other Agencies	168,298		11	169,179		11	(881		)	(1	)
Total Life Premium	$	1,552,309	100	$	1,472,734	100	$	79,575		5

Net sales, defined earlier in this report as an indicator of new business production, grew 11% to $313 million. An analysis of life net sales by distribution channel is presented below.



Life Insurance Net Sales (Dollar amounts in thousands)
	Nine Months Ended September 30,						Increase
	2015			2014			(Decrease)
	Amount		% of Total	Amount		% of Total	Amount		%
American Income Exclusive Agency	$	147,781	47	$	126,115	45	$	21,666	17
Globe Life Direct Response	127,641		41	120,321		43	7,320		6
Liberty National Exclusive Agency	26,827		9	24,988		9	1,839		7
Other Agencies	10,285		3	9,821		3	464		5
Total Life Net Sales	$	312,534	100	$	281,245	100	$	31,289	11

First-year collected life premium, defined earlier in this report, was $226 million in the 2015 period, rising 12%. First-year collected life premium by distribution channel is presented in the table below.

Table of Contents



Life Insurance First-Year Collected Premium (Dollar amounts in thousands)
	Nine Months Ended September 30,						Increase
	2015			2014			(Decrease)
	Amount		% of Total	Amount		% of Total	Amount		%
American Income Exclusive Agency	$	115,642	51	$	98,868	49	$	16,774	17
Globe Life Direct Response	80,540		36	75,738		38	4,802		6
Liberty National Exclusive Agency	20,613		9	19,156		9	1,457		8
Other Agencies	8,973		4	7,580		4	1,393		18
Total	$	225,768	100	$	201,342	100	$	24,426	12

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 total. This group produced premium income of $618 million, an increase of 8%. First-year collected premium was $116 million, an increase of 17%. Net sales increased 17% to $148 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 14% to 6,508 for the nine months ended September 30, 2015 compared with 5,716 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 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 $562 million, representing 36% of Torchmark’s total life premium in the first nine months of 2015. Net sales of $128 million for this group increased 6%. First-year collected premium increased 6% to $81 million.

The Liberty National Exclusive Agency markets individual and group life insurance to middle-income customers. Life premium income for this agency was $204 million in the 2015 period, a slight decline from $205 million in the 2014 period. First-year collected premium increased 8% to $21 million.

Net sales for the Liberty National Agency increased 7% to $27 million. The Liberty average agent count increased 3% to 1,533 for the nine months ended September 30, 2015 compared with 1,482 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 worksite marketing business.

Table of Contents

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 $168 million of life premium income, or 11% of Torchmark’s total in the first nine months of 2015, but contributed only 3% of net sales for the period.



Life Insurance Summary of Results (Dollar amounts in thousands)
	Nine Months Ended September 30,						Increase
	2015			2014			(Decrease)
	Amount		% of Premium	Amount		% of Premium	Amount		%
Premium and policy charges	$	1,552,309	100	$	1,472,734	100	$	79,575	5
Net policy obligations	616,997		40	568,710		38	48,287		8
Commissions and acquisition expense	510,432		33	483,436		33	26,996		6
Insurance underwriting income before other income and administrative expense	$	424,880	27	$	420,588	29	$	4,292	1

Life insurance underwriting income before insurance administrative expense was $425 million in the first nine months of 2015 compared with $421 million for the same period in 2014. As a percentage of premium, underwriting margins declined to 27% from 29%. The decrease in underwriting margin as a percentage of premium was due 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 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 Response Unit primarily relate to policies issued since 2011 where additional 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, comparing the first nine months of 2015 with the first nine months of 2014. Health insurance sold by Torchmark includes primarily Medicare Supplement insurance, cancer 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. Our Medicare Part D health business will be discussed under another caption.

Health premium accounted for 28% of our total premium in the 2015 period, 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 premium increased 7% to $690 million in the 2015 period. Medicare Supplement premium increased 11% to $347 million, while other limited-benefit health premium increased 4% to $343 million.

Health net sales decreased 11% to $97 million. Medicare Supplement net sales decreased 33% to $37 million in 2015. A decrease in 2015 Medicare Supplement net sales was expected due to the unusually high level of group sales in 2014. Group sales tend to vary significantly from period to period. Limited-benefit net sales increased 11% to $60 million. Health first-year collected premium rose 43%<