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GLOBE LIFE INC. - Quarter Report: 2015 June (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 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):
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 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
 
 
 
 
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)

 
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.

1

Table of Contents

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.

2

Table of Contents

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.

3

Table of Contents

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.

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 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

 

 

 




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 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

6

Table of Contents
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

7

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 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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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 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
%

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 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.

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 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.

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 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
)


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 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


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 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
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
)
 

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.

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)

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.

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)

 
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.

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)

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.

18

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.

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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.


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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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Table of Contents

Life Insurance
Summary of Results
(Dollar amounts in thousands)