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

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):
Large accelerated filer
 
ý
  
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   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
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.


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.

1

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.

2

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.

3

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.

4

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

 

 

 




5

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

6

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

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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
)

8

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
%

9

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.

10

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.

11

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
)


12

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


13

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
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
)
 

14

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

15

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
)

16

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.

17

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.


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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.


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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.


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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.

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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.


22

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. 

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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.

24

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%<