GLOBE LIFE INC. - Quarter Report: 2015 June (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 June 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 July 29, 2015
	Common Stock, $1.00 Par Value		125,115,360

Index of Exhibits (Page 48).

Total number of pages included are 49.

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	22

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	46

Item 4.	Controls and Procedures	46

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	48

Item 6.	Exhibits	48

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PART I–FINANCIAL INFORMATION



Item 1.	Condensed Consolidated Financial Statements

TORCHMARK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollar amounts in thousands)



	June 30, 2015			December 31, 2014
Assets
Investments:
Fixed maturities, available for sale, at fair value (amortized cost: 2015–$13,126,918; 2014–$12,823,612)	$	14,121,462		$	14,493,060
Equity securities, at fair value (cost: 2015–$776; 2014–$776)	1,545			1,477
Policy loans	479,953			472,109
Other long-term investments	11,039			10,449
Short-term investments	28,695			15,882
Total investments	14,642,694			14,992,977
Cash	62,849			66,019
Accrued investment income	206,653			204,879
Other receivables	627,660			543,988
Deferred acquisition costs	3,550,836			3,471,781
Goodwill	441,591			441,591
Other assets	488,627			493,495
Total assets	$	20,020,910		$	20,214,730
Liabilities and Shareholders’ Equity
Liabilities:
Future policy benefits	$	12,004,366		$	11,750,495
Unearned and advance premiums	76,978			72,275
Policy claims and other benefits payable	232,352			212,137
Other policyholders’ funds	95,468			95,446
Total policy liabilities	12,409,164			12,130,353
Current and deferred income taxes payable	1,564,951			1,797,265
Other liabilities	360,571			359,118
Short-term debt	636,862			238,398
Long-term debt (fair value: 2015–$868,801; 2014–$1,148,749)	743,306			992,130
Total liabilities	15,714,854			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 8,976,671 held in treasury and 2014–134,218,183 issued, less 6,287,907 held in treasury)	134,218			134,218
Additional paid-in capital	476,791			457,613
Accumulated other comprehensive income	555,319			997,452
Retained earnings	3,568,715			3,376,846
Treasury stock, at cost	(428,987		)	(268,663		)
Total shareholders’ equity	4,306,056			4,697,466
Total liabilities and shareholders’ equity	$	20,020,910		$	20,214,730

See accompanying Notes to Condensed Consolidated Financial Statements.

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TORCHMARK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollar amounts in thousands except per share data)



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014*			2015			2014*
Revenue:
Life premium	$	520,038		$	491,952		$	1,033,380		$	981,010
Health premium	315,492			307,791			632,257			637,654
Other premium	37			123			78			222
Total premium	835,567			799,866			1,665,715			1,618,886
Net investment income	194,823			189,930			386,419			377,981
Realized investment gains	2,613			577			2,732			17,196
Other income	691			663			1,360			1,144
Total revenue	1,033,694			991,036			2,056,226			2,015,207
Benefits and expenses:
Life policyholder benefits	347,364			324,192			687,065			644,368
Health policyholder benefits	235,175			220,554			477,326			476,272
Other policyholder benefits	9,754			10,461			19,799			21,084
Total policyholder benefits	592,293			555,207			1,184,190			1,141,724
Amortization of deferred acquisition costs	112,904			104,561			224,167			209,294
Commissions, premium taxes, and non-deferred acquisition costs	64,018			62,020			127,286			121,398
Other operating expense	56,977			56,400			113,589			113,356
Interest expense	19,114			19,037			38,174			38,086
Total benefits and expenses	845,306			797,225			1,687,406			1,623,858
Income before income taxes	188,388			193,811			368,820			391,349
Income taxes	(61,278		)	(62,888		)	(120,062		)	(127,570		)
Net income	$	127,110		$	130,923		$	248,758		$	263,779

Basic net income per share	$	1.01		$	1.00		$	1.97		$	1.99
Diluted net income per share	$	1.00		$	0.98		$	1.94		$	1.97
Dividends declared per common share	$	0.14		$	0.13		$	0.27		$	0.25

* 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.

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TORCHMARK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited and in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Net income	$	127,110		$	130,923		$	248,758		$	263,779

Other comprehensive income (loss):

Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period	(935,288		)	431,271			(668,706		)	1,060,337
Reclassification adjustment for (gains) losses on securities included in net income	(1,479		)	(577		)	(1,598		)	(17,196		)
Reclassification adjustment for amortization of (discount) and premium	(1,599		)	(2,317		)	(3,271		)	(4,544		)
Foreign exchange adjustment on securities recorded at fair value	1,295			740			(1,263		)	(131		)
Unrealized gains (losses) on securities	(937,071		)	429,117			(674,838		)	1,038,466
Unrealized gains (losses) on other investments	(3,470		)	1,495			(2,327		)	2,703
Total unrealized investment gains (losses)	(940,541		)	430,612			(677,165		)	1,041,169
Less applicable taxes	328,996			(150,683		)	236,865			(364,350		)
Unrealized investment gains (losses), net of tax	(611,545		)	279,929			(440,300		)	676,819

Unrealized gains (losses) attributable to deferred acquisition costs	2,953			(3,045		)	3,605			(7,273		)
Less applicable taxes	(1,034		)	1,066			(1,262		)	2,546
Unrealized gains (losses) attributable to deferred acquisition costs, net of tax	1,919			(1,979		)	2,343			(4,727		)

Foreign exchange translation adjustments, other than securities	(4,845		)	3,185			(13,536		)	2,008
Less applicable taxes	1,774			(1,189		)	4,503			(750		)
Foreign exchange translation adjustments, other than securities, net of tax	(3,071		)	1,996			(9,033		)	1,258

Pension adjustments	3,653			3,031			7,472			5,605
Less applicable taxes	(1,278		)	(1,061		)	(2,615		)	(1,962		)
Pension adjustments, net of tax	2,375			1,970			4,857			3,643

Other comprehensive income (loss)	(610,322		)	281,916			(442,133		)	676,993
Comprehensive income (loss)	$	(483,212	)	$	412,839		$	(193,375	)	$	940,772

See accompanying Notes to Condensed Consolidated Financial Statements.

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TORCHMARK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)



	Six Months Ended June 30,
	2015			2014
Cash provided from operations	$	454,121		$	419,383
Cash provided from (used for) investment activities:
Long-term investments sold or matured:
Fixed maturities available for sale—sold	14,287			28,194
Fixed maturities available for sale—matured, called, and repaid	213,989			107,394
Equity securities	—			700
Other long-term investments	431			23
Total long-term investments sold or matured	228,707			136,311
Long-term investments acquired:
Fixed maturities	(541,875		)	(325,574		)
Other long-term investments	(1,886		)	—
Total long-term investments acquired	(543,761		)	(325,574		)
Net increase in policy loans	(7,844		)	(8,937		)
Net (increase) decrease in short-term investments	(12,813		)	28,329
Net change in payable or receivable for securities	4,980			—
Disposition of properties	—			19
Additions to properties	(13,949		)	(10,006		)
Investment in low-income housing interests	(11,954		)	(22,030		)
Cash used for investment activities	(356,634		)	(201,888		)
Cash provided from (used for) financing activities:
Proceeds from exercise of stock options	21,507			35,015
Net borrowings (repayments) of commercial paper	148,970			45,874
Excess tax benefit from stock option exercises	10,989			11,098
Acquisition of treasury stock	(211,567		)	(238,313		)
Cash dividends paid to shareholders	(33,306		)	(31,980		)
Net receipts (withdrawals) from deposit-type products	(42,815		)	(33,104		)
Cash provided by (used for) financing activities	(106,222		)	(211,410		)
Effect of foreign exchange rate changes on cash	5,565			2,775
Net (decrease) increase in cash	(3,170		)	8,860
Cash at beginning of year	66,019			36,943
Cash at end of period	$	62,849		$	45,803

See accompanying Notes to Condensed Consolidated Financial Statements.

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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 June 30, 2015, and the condensed consolidated results of operations, comprehensive income, and cash flows for the periods ended June 30, 2015 and 2014. The interim period condensed consolidated financial statements should be read in conjunction with the Condensed Consolidated Financial Statements that are included in the Form 10-K filed 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 June 30,		For the Six Months Ended June 30,
	2015	2014	2015	2014
Basic weighted average shares outstanding	125,816,943	131,491,182	126,465,420	132,322,704
Weighted average dilutive options outstanding	1,622,698	1,823,640	1,553,309	1,856,496
Diluted weighted average shares outstanding	127,439,641	133,314,822	128,018,729	134,179,200
Antidilutive shares	—	—	—	—

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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 June 30,
	Pension Benefits						Other Benefits
	2015			2014			2015		2014
Service cost	$	3,991		$	3,231		$	—	$	(7	)
Interest cost	5,004			4,819			204		150
Expected return on assets	(5,323		)	(4,752		)	—		—
Amortization:
Prior service cost	82			529			—		—
Actuarial (gain) loss	3,534			2,047			37		—
Direct recognition of expense	—			—			151		(42		)
Net periodic benefit cost	$	7,288		$	5,874		$	392	$	101

	Six Months Ended June 30,
	Pension Benefits						Other Benefits
	2015			2014			2015		2014
Service cost	$	7,981		$	6,463		$	—	$	49
Interest cost	10,006			9,638			407		297
Expected return on assets	(10,646		)	(9,505		)	—		—
Amortization:
Prior service cost	163			1,057			—		—
Actuarial (gain)/loss	7,068			4,092			60		—
Direct recognition of expense	—			—			327		(104		)
Net periodic benefit cost	$	14,572		$	11,745		$	794	$	242

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

Pension Assets by Component



	June 30, 2015			December 31, 2014
	Amount		%	Amount		%
Corporate debt	$	155,642	48	$	166,825	52
Other fixed maturities	277		—	284		—
Equity securities	127,530		40	127,568		39
Short-term investments	19,047		6	9,038		3
Guaranteed annuity contract	15,259		5	15,027		5
Other	3,063		1	4,156		1
Total	$	320,818	100	$	322,898	100

The liability for the funded defined-benefit pension plans was $394 million at June 30, 2015 and $403 million at December 31, 2014. Cash contributions of $12 million were made to the qualified pension plans during the six months ended June 30, 2015. Torchmark expects to make cash contributions to these plans during 2015 in an amount not to exceed $20 million. 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

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TORCHMARK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

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 June 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 June 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 June 30, 2015 is as follows:

Portfolio Composition as of June 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	$	371,529	$	449	$	(17,422	)	$	354,556	3
States, municipalities, and political subdivisions	1,298,664		132,850		(2,151		)	1,429,363		10
Foreign governments	23,037		1,425		(379		)	24,083		—

Corporates, by sector:
Financial	2,675,863		314,572		(38,366		)	2,952,069		21
Utilities	2,138,355		258,616		(27,006		)	2,369,965		17
Energy	1,541,450		115,442		(46,261		)	1,610,631		11
Other corporate sectors	4,514,626		360,704		(110,304		)	4,765,026		34
Total corporates	10,870,294		1,049,334		(221,937		)	11,697,691		83

Collateralized debt obligations	64,782		16,525		(7,639		)	73,668		—
Other asset-backed securities	19,450		1,182		—			20,632		—

Redeemable preferred stocks, by sector:
Financial	450,496		48,332		(6,754		)	492,074		4
Utilities	28,666		751		(22		)	29,395		—
Total redeemable preferred stocks	479,162		49,083		(6,776		)	521,469		4

Total fixed maturities	13,126,918		1,250,848		(256,304		)	14,121,462		100
Equity securities	776		769		—			1,545
Total fixed maturities and equity securities	$	13,127,694	$	1,251,617	$	(256,304	)	$	14,123,007

* At fair value

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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 June 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	$	72,803	$	73,790
Due from one to five years	533,791		592,958
Due from five to ten years	972,641		1,063,069
Due from ten to twenty years	3,827,375		4,267,617
Due after twenty years	7,633,945		8,027,399
Mortgage-backed and asset-backed securities	86,363		96,629
	$	13,126,918	$	14,121,462

Selected information about sales of fixed maturities is as follows.



For the Six Months Ended June 30,
	2015			2014
Proceeds from sales	$	14,287		$	28,194
Gross realized gains	82			16,286
Gross realized losses	(104		)	(3		)

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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 June 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	$	—		$	354,556		$	—		$	354,556
States, municipalities, and political subdivisions	—			1,429,363			—			1,429,363
Foreign governments	—			24,083			—			24,083

Corporates, by sector:
Financial	—			2,883,531			68,538			2,952,069
Utilities	25,174			2,209,586			135,205			2,369,965
Energy	—			1,583,301			27,330			1,610,631
Other corporate sectors	—			4,474,070			290,956			4,765,026
Total corporates	25,174			11,150,488			522,029			11,697,691

Collateralized debt obligations	—			—			73,668			73,668
Other asset-backed securities	—			20,632			—			20,632

Redeemable preferred stocks, by sector:
Financial	15,226			476,848			—			492,074
Utilities	—			29,395			—			29,395
Total redeemable preferred stocks	15,226			506,243			—			521,469

Total fixed maturities	40,400			13,485,365			595,697			14,121,462
Equity securities	712			—			833			1,545
Total fixed maturities and equity securities	$	41,112		$	13,485,365		$	596,530		$	14,123,007
Percent of total	0.3		%	95.5		%	4.2		%	100.0		%

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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 Six Months Ended June 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	—			—			—			—
Included in other comprehensive income	13,531			(8,426		)	—			5,105
Acquisitions	—			19,400			—			19,400
Amortization	2,810			7			—			2,817
Other ⁽²⁾	(5,905		)	(1,666		)	—			(7,571		)
Transfers in and/or out of Level 3 ⁽³⁾	—			—			—			—
Balance at June 30, 2015	$	73,668		$	522,029		$	833		$	596,530
Percent of total fixed maturity and equity securities	0.5		%	3.7		%	—		%	4.2		%

	For the Six Months Ended June 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	8,702			19,513			57			28,272
Acquisitions	—			90,680			—			90,680
Sales	(16,049		)	(1		)	—			(16,050		)
Amortization	2,668			5			—			2,673
Other ⁽²⁾	(3,231		)	(1,165		)	—			(4,396		)
Transfers in and/or out of Level 3 ⁽³⁾	—			—			—			—
Balance at June 30, 2014	$	66,219		$	409,333		$	833		$	476,385
Percent of total fixed maturity and equity securities	0.5		%	2.9		%	—		%	3.4		%


(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.

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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 six-month periods ended June 30, 2015 or 2014.

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 June 30, 2015	407	61	468
As of December 31, 2014	80	173	253

Torchmark’s entire fixed-maturity and equity portfolio consisted of 1,580 issues at June 30, 2015 and 1,604 issues at December 31, 2014. The weighted average quality rating of all unrealized loss positions as of June 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 June 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 June 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	$	305,538	$	(16,522	)	$	14,642	$	(900	)	$	320,180	$	(17,422	)
States, municipalities and political subdivisions	79,844		(1,803		)	1,687		(112		)	81,531		(1,915		)
Foreign governments	4,134		(379		)	—		—			4,134		(379		)
Corporates, by sector:
Financial	334,577		(17,515		)	—		—			334,577		(17,515		)
Utilities	498,821		(27,006		)	—		—			498,821		(27,006		)
Energy	372,105		(30,440		)	59,712		(9,727		)	431,817		(40,167		)
Other corporate sectors	1,530,184		(96,962		)	45,852		(7,340		)	1,576,036		(104,302		)
Total corporates	2,735,687		(171,923		)	105,564		(17,067		)	2,841,251		(188,990		)
Redeemable preferred stocks, by sector:
Utilities	—		—			1,645		(22		)	1,645		(22		)
Total redeemable preferred stocks	—		—			1,645		(22		)	1,645		(22		)
Total investment grade	3,125,203		(190,627		)	123,538		(18,101		)	3,248,741		(208,728		)
Below investment grade:
Bonds:
States, municipalities and political subdivisions	—		—			319		(236		)	319		(236		)
Corporates, by sector:
Financial	—		—			84,947		(20,851		)	84,947		(20,851		)
Energy	55,653		(6,094		)	—		—			55,653		(6,094		)
Other corporate sectors	15,889		(823		)	57,213		(5,179		)	73,102		(6,002		)
Total corporates	71,542		(6,917		)	142,160		(26,030		)	213,702		(32,947		)
Collateralized debt obligations	—		—			12,361		(7,639		)	12,361		(7,639		)
Redeemable preferred stocks, by sector:
Financial	—		—			55,582		(6,754		)	55,582		(6,754		)
Total redeemable preferred stocks	—		—			55,582		(6,754		)	55,582		(6,754		)
Total below investment grade	71,542		(6,917		)	210,422		(40,659		)	281,964		(47,576		)
Total fixed maturities	3,196,745		(197,544		)	333,960		(58,760		)	3,530,705		(256,304		)
Equity securities	—		—			—		—			—		—
Total fixed maturities and equity securities	$	3,196,745	$	(197,544	)	$	333,960	$	(58,760	)	$	3,530,705	$	(256,304	)

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 six month periods ended June 30, 2015 and 2014.

Components of Accumulated Other Comprehensive Income



	For the Three Months Ended June 30, 2015
	Available for Sale Assets			Deferred Acquisition Costs			Foreign Exchange			Pension Adjustments			Total
Balance at April 1, 2015	$	1,261,518		$	(10,334	)	$	11,424		$	(96,967	)	$	1,165,641
Other comprehensive income (loss) before reclassifications, net of tax	(609,544		)	1,919			(3,071		)	—			(610,696		)
Reclassifications, net of tax	(2,001		)	—			—			2,375			374
Other comprehensive income (loss)	(611,545		)	1,919			(3,071		)	2,375			(610,322		)
Balance at June 30, 2015	$	649,973		$	(8,415	)	$	8,353		$	(94,592	)	$	555,319

	For the Three Months Ended June 30, 2014
	Available for Sale Assets			Deferred Acquisition Costs			Foreign Exchange			Pension Adjustments			Total
Balance at April 1, 2014	$	653,086		$	(9,476	)	$	24,128		$	(61,680	)	$	606,058
Other comprehensive income (loss) before reclassifications, net of tax	281,810			(1,979		)	1,996			297			282,124
Reclassifications, net of tax	(1,881		)	—			—			1,673			(208		)
Other comprehensive income (loss)	279,929			(1,979		)	1,996			1,970			281,916
Balance at June 30, 2014	$	933,015		$	(11,455	)	$	26,124		$	(59,710	)	$	887,974

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 Six Months Ended June 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	(437,135		)	2,343			(9,033		)	117			(443,708		)
Reclassifications, net of tax	(3,165		)	—			—			4,740			1,575
Other comprehensive income (loss)	(440,300		)	2,343			(9,033		)	4,857			(442,133		)
Balance at June 30, 2015	$	649,973		$	(8,415	)	$	8,353		$	(94,592	)	$	555,319

	For the Six Months Ended June 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	690,949			(4,727		)	1,258			297			687,777
Reclassifications, net of tax	(14,130		)	—			—			3,346			(10,784		)
Other comprehensive income (loss)	676,819			(4,727		)	1,258			3,643			676,993
Balance at June 30, 2014	$	933,015		$	(11,455	)	$	26,124		$	(59,710	)	$	887,974

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

Reclassification Adjustments



	Three Months Ended June 30,						Six Months Ended June 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	$	(1,479	)	$	(577	)	$	(1,598	)	$	(17,196	)	Realized investment gains (losses)
Amortization of (discount) premium	(1,599		)	(2,317		)	(3,271		)	(4,544		)	Net investment income
Total before tax	(3,078		)	(2,894		)	(4,869		)	(21,740		)
Tax	1,077			1,013			1,704			7,610			Income Taxes
Total after tax	(2,001		)	(1,881		)	(3,165		)	(14,130		)
Pension adjustments:
Amortization of prior service cost	82			528			163			1,056			Other operating expenses
Amortization of actuarial gain (loss)	3,571			2,046			7,128			4,092			Other operating expenses
Total before tax	3,653			2,574			7,291			5,148
Tax	(1,278		)	(901		)	(2,551		)	(1,802		)	Income Taxes
Total after tax	2,375			1,673			4,740			3,346
Total reclassifications (after tax)	$	374		$	(208	)	$	1,575		$	(10,784	)

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.

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)

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 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. Torchmark expects its benefit ratio to be in line with pricing. 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:



	Six Months Ended June 30,
	2015			2014
Benefit costs deferred	$	47,335		$	60,899
Government risk-sharing premium adjustment	(16,470		)	(35,131		)
Pre-tax addition to segment interim period income	$	30,865		$	25,768
After tax amount	$	20,062		$	16,749

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.

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)



	Six Months Ended June 30,
	2015		2014		% Change
Premium per segment analysis:
Medicare Part D premium	$	154,705	$	167,990	(8	)
Other health premium	461,082		434,533		6
Part D risk-sharing adjustment	16,470		35,131		(53	)
Health premium per Condensed Consolidated Statements of Operations	$	632,257	$	637,654	(1	)

During the first six 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 $3.1 million in administrative settlements ($2.0 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's program of 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 these segment analysis amounts that do not relate to its core insurance operations.

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 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 Six Months Ended June 30, 2015
	Life			Health			Medicare Part D		Annuity			Investment			Other & Corporate			Adjustments				Consolidated
Revenue:
Premium	$	1,033,380		$	461,082		$	154,705	$	78								$	16,470		⁽¹⁾	$	1,665,715
Net investment income												$	386,419									386,419
Other income															$	1,464		(104		)	⁽³⁾	1,360
Total revenue	1,033,380			461,082			154,705		78			386,419			1,464			16,366				2,053,494
Expenses:
Policy benefits	687,065			299,227			130,764		19,799									47,335			⁽¹⁾	1,184,190
Required interest on:
Policy reserves	(273,615		)	(34,034		)			(26,756		)	334,405										—
Deferred acquisition costs	85,985			11,358			446		607			(98,396		)								—
Amortization of acquisition costs	177,265			40,924			1,769		4,209													224,167
Commissions, premium taxes, and non-deferred acquisition costs	75,900			40,418			11,049		23									(104		)	⁽³⁾	127,286
Insurance administrative expense (2)															94,063							94,063
Parent expense															4,485							4,485
Stock compensation expense															15,041							15,041
Interest expense												38,174										38,174
Total expenses	752,600			357,893			144,028		(2,118		)	274,183			113,589			47,231				1,687,406
Subtotal	280,780			103,189			10,677		2,196			112,236			(112,125		)	(30,865		)		366,088
Nonoperating items																		30,865			⁽¹⁾	30,865
Measure of segment profitability (pretax)	$	280,780		$	103,189		$	10,677	$	2,196		$	112,236		$	(112,125	)	$	—			396,953
Deduct applicable income taxes																						(129,909		)
Segment profits after tax																						267,044
Add back income taxes applicable to segment profitability																						129,909
Add (deduct) realized investment gains (losses)																						2,732
Deduct Part D adjustment (1)																						(30,865		)
Pretax income per Condensed Consolidated Statement of Operations																						$	368,820


(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 Six Months Ended June 30, 2014
	Life			Health			Medicare Part D		Annuity			Investment			Other & Corporate			Adjustments				Consolidated
Revenue:
Premium	$	981,010		$	434,533		$	167,990	$	222								$	35,131		⁽¹⁾	$	1,618,886
Net investment income												$	377,981									377,981
Other income															$	1,266		(122		)	⁽³⁾	1,144
Total revenue	981,010			434,533			167,990		222			377,981			1,266			35,009				1,998,011
Expenses:
Policy benefits	641,311			280,140			135,233		21,084									63,956			^(1,5)	1,141,724
Required interest on:
Policy reserves	(262,328		)	(31,758		)			(27,616		)	321,702										—
Deferred acquisition costs	83,633			11,223			354		764			(95,974		)								—
Amortization of acquisition costs	167,991			36,072			1,377		3,854													209,294
Commissions, premium taxes, and non-deferred acquisition costs	69,068			39,611			12,815		26									(122		)	⁽³⁾	121,398
Insurance administrative expense (2)															89,573			2,337			⁽⁴⁾	91,910
Parent expense															4,045							4,045
Stock compensation expense															17,401							17,401
Interest expense												38,086										38,086
Total expenses	699,675			335,288			149,779		(1,888		)	263,814			111,019			66,171				1,623,858
Subtotal	281,335			99,245			18,211		2,110			114,167			(109,753		)	(31,162		)		374,153
Nonoperating items																		31,162			^(1,4,5)	31,162
Measure of segment profitability (pretax)	$	281,335		$	99,245		$	18,211	$	2,110		$	114,167		$	(109,753	)	$	—			405,315
Deduct applicable income taxes																						(132,458		)
Segment profits after tax																						272,857
Add back income taxes applicable to segment profitability																						132,458
Add (deduct) realized investment gains (losses)																						17,196
Deduct Part D adjustment (1)																						(25,768		)
Deduct legal settlement expenses (4)																						(2,337		)
Deduct administrative settlements (5)																						(3,057		)
Pretax income from continuing operations per Condensed Consolidated Statement of Operations																						$	391,349


(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 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 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



	Six Months Ended June 30,						Increase (Decrease)
	2015			2014*			Amount			%
Life	$	280,780		$	281,335		$	(555	)	—
Health	103,189			99,245			3,944			4
Medicare Part D	10,677			18,211			(7,534		)	(41	)
Annuity	2,196			2,110			86			4
Investment	112,236			114,167			(1,931		)	(2	)
Other and corporate:
Other income	1,464			1,266			198			16
Administrative expense	(94,063		)	(89,573		)	(4,490		)	5
Corporate	(19,526		)	(21,446		)	1,920			(9	)
Pretax total	396,953			405,315			(8,362		)	(2	)
Applicable taxes	(129,909		)	(132,458		)	2,549			(2	)
Total	267,044			272,857			(5,813		)	(2	)
Reconciling items, net of tax:
Realized gains (losses) - Investments	1,776			11,177			(9,401		)
Part D adjustment	(20,062		)	(16,749		)	(3,313		)
Administrative settlements	—			(1,987		)	1,987
Legal settlement expense	—			(1,519		)	1,519
Net income	$	248,758		$	263,779		$	(15,021	)	(6	)

* 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 six months ended June 30, 2014.



Three Months Ended June 30, 2014
Income Statement	As previously reported			Adjustments			As adjusted
Net investment income	$	182,877		$	7,053		$	189,930
Total revenue	983,983			7,053			991,036
Income before income taxes	186,758			7,053			193,811
Income taxes	(55,835		)	(7,053		)	(62,888		)
Net income	130,923			—			130,923



Six Months Ended June 30, 2014
Income Statement	As previously reported			Adjustments			As adjusted
Net investment income	$	363,877		$	14,104		$	377,981
Total revenue	2,001,103			14,104			2,015,207
Income before income taxes	377,245			14,104			391,349
Income taxes	(113,466		)	(14,104		)	(127,570		)
Net income	263,779			—			263,779

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 will require 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 costs will still 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.

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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 six month periods ended June 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 six 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 six months of 2015 with the first six months of 2014. Net income per diluted share decreased 2% to $1.94 from $1.97. Included in net income in 2015 were after-tax realized investment gains of $2 million ($.01 per share) compared with gains of $11 million or $.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 $1.6 billion. Total net sales rose 2% to $308 million. After removing the impact of sales of Medicare Part D, net sales rose 10% to $276 million. First-year collected premium was $297 million for the 2015 period, compared with $226 million for the 2014 period. Excluding Part D, there was a 24% increase in first-year collected premium.

Life insurance premium income grew 5% to $1 billion. Life net sales increased 11% to $212 million. First-year collected life premium gained 13% to $150 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 remained steady at $281 million for the first six months of 2015 and 2014.

Health insurance premium income, excluding Medicare Part D premium, increased 6% to $461 million. Health net sales rose 5% to $64 million for the six month period, as a result of a 12% increase in limited-benefit sales. First-year collected health premium rose 52% to $78 million, due to strong increases in limited-benefit and Medicare Supplement. Health margins declined to 22% with underwriting income increasing to $103 million for the first six months of 2015 compared with $99 million for the same period in 2014.

In the manner we view our Medicare Part D prescription drug business as described in Note F—Business Segments, policyholder premium was $155 million in 2015 compared with $168 million in 2014, a decrease of 8%, primarily resulting from a decline in auto-enrollees, partially offset by increases in voluntary individual and group sales.

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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 $20 million after-tax charge to earnings in 2015 ($.16 per share) and a $17 million charge in 2014 ($.12 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.

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 4% in 2015 to $0.88 from $0.85, while the dollar amount of excess investment income decreased 2% to $112 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 $8 million or 2% to $386 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 5.86% in the 2015 period from 5.92% in the prior period, as the impact of the low-interest-rate environment on average yield continues. Required interest rose 5% or $10 million to $236 million while average net policy liabilities grew 4%. Financing costs were $38 million in both periods. Please refer to the discussion under Capital Resources for more information on debt and interest expense.

In the first six months of 2015, we invested new money in our fixed-maturity portfolio at an effective annual yield on new investments of 4.59%, compared with 5.00% in the same period of 2014. The portfolio had an average rating of A-, the same as of the previous year end. Approximately 96% of the portfolio at amortized cost was investment grade at June 30, 2015. Cash and short-term investments were $92 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 $995 million during the first six 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 $6 million and $1 million in German and French government bonds, respectively, at June 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 six-month periods ended June 30, 2015 and 2014.

Analysis of Share Purchases

(Amounts in thousands, except per share amounts)



	For the Six Months Ended June 30,
	2015					2014
	Shares	Amount		Average Price		Shares	Amount		Average Price
Purchases with:
Excess cash flow	3,209	$	176,337	$	54.96	3,682	$	190,104	$	51.63
Option exercise proceeds	640	35,230		55.04		910	48,209		53.01
Total	3,849	$	211,567	$	54.97	4,592	$	238,313	$	51.90

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.

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Life insurance, comparing the first six months of 2015 with the first six months of 2014. Life insurance is our predominant segment, representing 63% of premium income and 71% of insurance underwriting margin in the first six 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 billion. The following table presents Torchmark’s life insurance premium by distribution channel.

Life Insurance

Premium

(Dollar amounts in thousands)



	Six Months Ended June 30,						Increase
	2015			2014			(Decrease)
	Amount		% of Total	Amount		% of Total	Amount			%
American Income Exclusive Agency	$	409,047	40	$	376,221	38	$	32,826		9
Globe Life Direct Response	375,891		36	354,710		36	21,181			6
Liberty National Exclusive Agency	136,058		13	137,048		14	(990		)	(1	)
Other Agencies	112,384		11	113,031		12	(647		)	(1	)
Total Life Premium	$	1,033,380	100	$	981,010	100	$	52,370		5

Net sales, defined earlier in this report as an indicator of new business production, grew 11% to $212 million. An analysis of life net sales by distribution channel is presented below.



Life Insurance Net Sales (Dollar amounts in thousands)
	Six Months Ended June 30,						Increase
	2015			2014			(Decrease)
	Amount		% of Total	Amount		% of Total	Amount		%
American Income Exclusive Agency	$	97,356	46	$	82,753	44	$	14,603	18
Globe Life Direct Response	89,443		42	84,857		45	4,586		5
Liberty National Exclusive Agency	17,821		9	16,112		8	1,709		11
Other Agencies	7,179		3	6,570		3	609		9
Total Life Net Sales	$	211,799	100	$	190,292	100	$	21,507	11

First-year collected life premium, defined earlier in this report, was $150 million in the 2015 period, rising 13%. First-year collected life premium by distribution channel is presented in the table below.



Life Insurance First-Year Collected Premium (Dollar amounts in thousands)
	Six Months Ended June 30,						Increase
	2015			2014			(Decrease)
	Amount		% of Total	Amount		% of Total	Amount		%
American Income Exclusive Agency	$	76,028	51	$	64,670	48	$	11,358	18
Globe Life Direct Response	54,266		36	50,822		38	3,444		7
Liberty National Exclusive Agency	13,696		9	12,769		10	927		7
Other Agencies	5,993		4	4,904		4	1,089		22
Total	$	149,983	100	$	133,165	100	$	16,818	13

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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 $409 million, an increase of 9%. First-year collected premium was $76 million, an increase of 18%. Net sales increased 18% to $97 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 17% to 6,460 for the six months ended June 30, 2015 compared with 5,521 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 $376 million, representing 36% of Torchmark’s total life premium in the first six months of 2015. Net sales of $89 million for this group increased 5%. First-year collected premium increased 7% to $54 million.

The Liberty National Exclusive Agency markets individual and group life insurance to middle-income customers. Life premium income for this agency was $136 million in the 2015 period, a 1% decline from $137 million in the 2014 period. First-year collected premium increased 7% to $14 million.

Net sales for the Liberty National Agency increased 11% to $18 million. The Liberty average agent count increased 4% to 1,507 for the six months ended June 30, 2015 compared with 1,446 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.

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 $112 million of life premium income, or 11% of Torchmark’s total in the first six months of 2015, but contributed only 3% of net sales for the period.

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Life Insurance

Summary of Results

(Dollar amounts in thousands)