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GLOBE LIFE INC. - Annual Report: 2016 (Form 10-K)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from                              to                             
Commission file number: 001-08052
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TORCHMARK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
63-0780404
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
3700 South Stonebridge Drive, McKinney, TX
 
75070
(Address of principal executive offices)
 
(Zip Code)
972-569-4000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
CUSIP
 
Name of each exchange on
which registered
Common Stock, $1.00 par value per share
 
891027104
 
New York Stock Exchange
Common Stock, $1.00 par value per share
 
891027104
 
The International Stock Exchange, London, England

Securities registered pursuant to Section 12(g) of the Act:     None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     
Yes  x      No   ¨    
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ¨      No x   
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     
Yes  x      No ¨   
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x     No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
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  x
As of June 30, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $7,409,307,020 based on the closing sale price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
  
Outstanding at February 17, 2017
Common Stock, $1.00 par value per share
  
117,761,153 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
  
Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Stockholders to be
held April 27, 2017 (Proxy Statement)
  
Part III



TORCHMARK CORPORATION
INDEX
 
  
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 1B.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 
 
Item 7.
 
 
 
 
 
Item 7A.
 
 
 
 
 
Item 8.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 9.
 
 
 
 
 
Item 9A.
 
 
 
 
 
Item 9B.
 
 
 
 



 
 
 
 
 
 
 
 
Item 10.
 
 
 
 
 
Item 11.
 
 
 
 
 
Item 12.
 
 
 
 
 
Item 13.
 
 
 
 
 
Item 14.
 
 
 
 
 
 
 
 
 
 
 
 
Item 15.


Table of Contents

Index to Financial Statements

PART I
 
Item 1. Business
 
Torchmark Corporation (Torchmark) is an insurance holding company incorporated in Delaware in 1979. Its primary subsidiaries are American Income Life Insurance Company (American Income), Liberty National Life Insurance Company (Liberty National), Globe Life And Accident Insurance Company (Globe), United American Insurance Company (United American), and Family Heritage Life Insurance Company of America (Family Heritage).

Torchmark’s website is: www.torchmarkcorp.com. Torchmark makes available free of charge through its website, its annual report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after they have been electronically filed with or furnished to the Securities and Exchange Commission. Other information included in Torchmark's website is not incorporated into this filing.
 
The following table presents Torchmark’s business by primary marketing distribution method.
 
 
Primary
Distribution Method
 
Company
 
Products and Target Markets
 
Distribution
 
 
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American Income Exclusive Agency
 
American Income Life Insurance Company
Waco, Texas
 
Individual life and supplemental health insurance marketed to working families.
 
6,870 producing agents in the U.S., Canada, and New Zealand.
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Globe Life Direct Response
 
Globe Life And Accident Insurance Company
McKinney, Texas
 
Individual life and supplemental health insurance including juvenile and senior life coverage and Medicare Supplement to middle-income Americans.
 
Nationwide distribution through direct-to-consumer channels; including direct mail, electronic media and insert media.

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Family Heritage Exclusive Agency
 
Family Heritage Life Insurance Company of America
Cleveland, Ohio
 
Supplemental limited-benefit health insurance to middle-income families.
 
909 producing agents in the U.S.
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Liberty National Exclusive Agency
 
Liberty National Life Insurance Company
McKinney, Texas
 
Individual life and supplemental health insurance marketed to middle-income families.
 
1,758 producing agents in the U.S.
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United American Independent Agency
 
United American
Insurance Company
McKinney, Texas
 
Medicare Supplement coverage to Medicare beneficiaries and, to a lesser extent, supplemental limited-benefit health coverage to people under age 65.
 
4,144 independent producing agents in the U.S.
 
Additional information concerning industry segments may be found in Management’s Discussion and Analysis and in Note 14—Business Segments in the Notes to the Consolidated Financial Statements.


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Insurance
 
Life Insurance
 
Torchmark’s insurance subsidiaries write a variety of nonparticipating ordinary life insurance products. These include traditional and interest sensitive whole-life insurance, term life insurance, and other life insurance. The following table presents selected information about Torchmark’s life products.
 
 
Annualized Premium in Force
(Amounts in thousands)
 
2016
 
2015

2014
Whole life:





Traditional
$
1,471,054


$
1,378,290


$
1,296,403

Interest-sensitive
47,358


50,808


54,490

Term
657,797


642,599


619,782

Other
86,527


78,801


73,870

 
$
2,262,736

 
$
2,150,498

 
$
2,044,545

 
The distribution methods for life insurance products include direct response, exclusive agents and independent agents. These methods are described in more depth in the Distribution Method chart earlier in this report. The following table presents life annualized premium in force by distribution method.
 
Annualized Premium in Force
(Amounts in thousands)
 
2016
 
2015
 
2014
Globe Life Direct Response
$
782,222

 
$
757,518

 
$
721,261

Exclusive agents:
 
 
 
 
 
American Income
966,990

 
880,021

 
807,935

Liberty National
288,005

 
284,597

 
285,201

Independent agents:
 
 
 
 
 
United American
13,292

 
14,488

 
15,831

Other
212,227

 
213,874

 
214,317

 
$
2,262,736

 
$
2,150,498

 
$
2,044,545

 
Health Insurance
 
Torchmark offers limited-benefit supplemental health insurance products that include primarily critical illness and accident plans. These policies are designed to supplement health coverage that applicants already own. Medicare Supplements are also offered to enrollees in the traditional fee-for-service Medicare program. Medicare Supplement plans are standardized by federal regulation and are designed to pay deductibles and co-payments not paid by Medicare.

On July 1, 2016, Torchmark sold its Medicare Part D business to an unaffiliated third party. Torchmark decided to exit its Medicare Part D business due to declining margins, increased risks, higher drug costs, and increased administrative and compliance costs. Management believes this sale allows the Company to better focus on its core protection life and health insurance businesses. As the historical results for the Medicare Part D business are accounted for as discontinued operations, all business results and relevant forward looking statements of the Company are reported as continuing operations, excluding the Medicare Part D business.  For further discussion of the disposition of the Medicare Part D business, see Note 6—Discontinued Operations in the Notes to the Consolidated Financial Statements.


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The following table presents supplemental health annualized premium in force information for the three years ended December 31, 2016 by product category.
 
Annualized Premium in Force
(Amounts in thousands)
 
2016
 
2015
 
2014
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount  
 
% of
Total
Medicare Supplement
$
502,691

 
51
 
$
498,696

 
51
 
$
488,142

 
52
Limited-benefit plans
495,943

 
49
 
474,346

 
49
 
459,181

 
48

$
998,634

 
100
 
$
973,042

 
100
 
$
947,323

 
100
 
The following table presents supplemental health annualized premium in force for the three years ended December 31, 2016 by distribution method.
 
 
Annualized Premium in Force
(Amounts in thousands)
 
2016
 
2015
 
2014
Direct Response
$
74,261

 
$
72,423

 
$
72,659

Exclusive agents:
 
 
 
 
 
Liberty National
210,260

 
216,139

 
226,599

American Income
78,947

 
74,058

 
71,942

Family Heritage
249,857

 
234,120

 
217,742

Independent agents:
 
 
 
 
 
United American
385,309

 
376,302

 
358,381

 
$
998,634

 
$
973,042

 
$
947,323

 
Annuities
 
Annuity products include single-premium and flexible-premium deferred annuities. Annuities in each of the three years ended December 31, 2016 comprised less than 1% of premium.
 
Pricing
 
Premium rates for life and health insurance products are established using assumptions as to future mortality, morbidity, persistency, and expenses. These assumptions are based on Company experience and projected investment earnings. Revenues for individual life and health insurance products are primarily derived from premium income, and, to a lesser extent, through policy charges to the policyholder account values on annuity products and certain individual life products. Profitability is affected to the extent actual experience deviates from the assumptions made in pricing and to the extent investment income varies from that which is required for policy reserves.
 
Collections for annuity products and certain life products are not recognized as revenues but are added to policyholder account values. Revenues from these products are derived from charges to the account balances for insurance risk and administrative costs. Profits are earned to the extent these revenues exceed actual costs. Profits are also earned from investment income on the deposits invested in excess of the amounts credited to policyholder accounts.

Underwriting
 
The underwriting standards of each Torchmark insurance subsidiary are established by management. Each subsidiary uses information from the application and, in some cases, telephone interviews with applicants, inspection reports, pharmacy data, doctors’ statements and/or medical examinations to determine whether a policy should be issued in accordance with the application, with a different rating, with a rider, with reduced coverage or rejected.
 

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Reserves
 
The life insurance policy reserves reflected in Torchmark’s financial statements as future policy benefits are calculated based on accounting principles generally accepted in the United States of America (GAAP). These reserves, with premiums to be received in the future and the interest thereon compounded annually at assumed rates, must be sufficient to cover policy and contract obligations as they mature. Generally, the mortality and persistency assumptions used in the calculations of reserves are based on Company experience. Similar reserves are held on most of the health policies written by Torchmark’s insurance subsidiaries, since these policies generally are issued on a guaranteed-renewable basis. The assumptions used in the calculation of Torchmark’s reserves are reported in Note 1—Significant Accounting Policies in the Notes to the Consolidated Financial Statements. Reserves for annuity products and certain life products consist of the policyholders’ account values and are increased by policyholder deposits and interest credited and are decreased by policy charges and benefit payments.
 
Investments
 
The nature, quality, and percentage mix of insurance company investments are regulated by state laws. The investments of Torchmark insurance subsidiaries consist predominantly of high-quality, investment-grade securities. Fixed maturities represented 96% of total investments at fair value at December 31, 2016. (See Note 4—Investments in the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis.)
 
Competition
 
Torchmark competes with other insurance carriers through policyholder service, price, product design, and sales efforts. While there are insurance companies competing with Torchmark, no individual company dominates any of Torchmark’s life or health markets.
 
Torchmark’s health insurance products compete with, in addition to the products of other health insurance carriers, health maintenance organizations, preferred provider organizations, and other health care-related institutions which provide medical benefits based on contractual agreements.
 
Management believes Torchmark companies operate at lower policy acquisition and administrative expense levels than peer companies. This allows Torchmark to have competitive rates while maintaining higher underwriting margins.
 
Regulation
 
Insurance. Insurance companies are subject to regulation and supervision in the states in which they do business. The laws of the various states establish agencies with broad administrative and supervisory powers which include, among other things, granting and revoking licenses to transact business, regulating trade practices, licensing agents, approving policy forms, approving certain premium rates, setting minimum reserve and loss ratio requirements, determining the form and content of required financial statements, and prescribing the type and amount of investments permitted. They are also required to file detailed annual reports with supervisory agencies, and records of their business are subject to examination at any time. Under the rules of the National Association of Insurance Commissioners (NAIC), insurance companies are examined periodically by one or more of the supervisory agencies.

Risk Based Capital. The NAIC requires a risk based capital formula be applied to all life and health insurers. The risk based capital formula is a threshold formula rather than a target capital formula. It is designed only to identify companies that require regulatory attention and is not to be used to rate or rank companies that are adequately capitalized. All Torchmark insurance subsidiaries are more than adequately capitalized under the risk based capital formula.
 
Guaranty Assessments. State guaranty laws provide for assessments from insurance companies to be placed into a fund which is used, in the event of failure or insolvency of an insurance company, to fulfill the obligations of that company to its policyholders. The amount which a company is assessed is based on its proportional share of the premium in each state. Assessments are recoverable to a great extent as offsets against state premium taxes.
 
Holding Company. States have enacted legislation requiring registration and periodic reporting by insurance companies domiciled within their respective jurisdictions that control or are controlled by other corporations so as to constitute a holding company system. Torchmark and its subsidiaries have registered as a holding company system pursuant to such legislation in Indiana, Nebraska, Ohio, and New York.
 

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Insurance holding company system statutes and regulations impose various limitations on investments in subsidiaries, and may require prior regulatory approval for material transactions between insurers and affiliates and for the payment of certain dividends and other distributions.
 
Personnel
 
At the end of 2016, Torchmark had 3,128 employees.

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Item 1A. Risk Factors
 
Risks Related to Our Business
 
Product Marketplace and Operational Risks:
 
The insurance industry is a regulated industry, populated by many public and private companies. We operate in the life and health insurance sectors of the insurance industry, each with its own set of risks.
 
The development and maintenance of our various distribution systems are critical to growth in product sales and profits. As our insurance sales are primarily made to individuals, rather than groups, and the face amounts of life policies sold are lower than those of policies sold in the higher income market, the development and maintenance of direct-to-consumer systems and development and retention of adequate numbers of producing agents to support sales growth in this market are critical. Adequate compensation that is competitive with other career opportunities and that also motivates producing agents to increase sales is critical. In Globe Life Direct Response, continuous development of new methods of reaching the consumer and cost efficiency are key. Less than optimum execution of these strategies may result in reduced sales and profits.
 
Economic conditions may materially adversely affect our business and results of operations. We serve primarily the middle-income market for individual protection life and health insurance and, as a result, we compete directly with alternative uses of a customer’s disposable income. If disposable income within this demographic group declines or the use of disposable income becomes more limited, as a result of a significant, sustained economic downturn or otherwise, then new sales of our insurance products could become more challenging, and our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Economic conditions could also impact our investment portfolio as discussed under Investment Risks below.
 
Variations in expected to actual rates of mortality, morbidity, and persistency could materially negatively affect our results of operations and financial condition. We establish a liability for our policy reserves to pay future policyholder benefits and claims. These reserves do not represent an exact calculation of liability, but rather are actuarial estimates based on models that include many assumptions and projections which are inherently uncertain. The reserve computations involve the exercise of significant judgment with respect to levels of mortality, morbidity, and persistency as well as the timing of premium and benefit payments. Even though our actuaries continually test expected-to-actual results, actual levels that occur may differ significantly from the levels assumed when premium rates were first set. Accordingly, we cannot determine with precision the ultimate amounts of claims or benefits that we will pay or the timing of such payments. Significant adverse variations from the levels assumed when policy reserves are first set could require policy obligations to be increased and negatively affect our profit margins and income.
 
A ratings downgrade or other negative action by a rating agency could materially affect our business, financial condition and results of operations. Various rating agencies review the financial performance and condition of insurers, including our insurance subsidiaries, and publish their financial strength ratings as indicators of an insurer’s ability to meet policyholder and contract holder obligations. These ratings are important to maintaining public confidence in our insurance products. A downgrade or other negative action by a rating agency with respect to the financial strength ratings of our insurance subsidiaries could negatively affect us in many ways, including the following: limiting or restricting the ability of our insurance subsidiaries to pay dividends to us and adversely affecting our ability to sell insurance products through our independent agencies.
 
Rating agencies also publish credit ratings for us. Credit ratings are indicators of a debt issuer’s ability to meet the terms of debt obligations in a timely manner. These ratings are important to our overall ability to access certain types of liquidity. Actual or anticipated downgrades in our credit ratings, or an announcement that our ratings are under further review for a downgrade, could potentially have a negative effect on our operations, by limiting our access to capital markets, increasing the cost of debt, or impairing our ability to raise capital to refinance maturing debt obligations, thereby potentially limiting our capacity to support growth at our insurance subsidiaries or making it more difficult to maintain or improve the current financial strength ratings of our insurance subsidiaries.

Ratings reflect only the rating agency’s views and are not recommendations to buy, sell or hold our securities. Rating agencies assign ratings based upon several factors. While most of the factors relate to the rated company, some of the factors relate to the views of the rating agency, general economic conditions and circumstances outside the rated company’s control. In addition, rating agencies use various models and formulas to assess the strength of a rated

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company, and from time to time rating agencies have, in their discretion, altered the models. Changes to the models could impact the rating agencies’ judgment of the rating to be assigned to the rated company. There can be no assurance that current credit ratings will remain in effect for any given period of time or that such ratings will not be lowered, suspended or withdrawn entirely by the rating agencies, if in each rating agency’s judgment, circumstances so warrant. We cannot predict what actions the rating agencies may take, or what actions we may take in response to the actions of the rating agencies, which could negatively affect our business, financial condition and results of operations.
 
Life Insurance Marketplace Risk:

Our life products are sold in selected niche markets. We are at risk should any of these markets diminish. We have several life distribution channels that focus on distinct market niches, two of which are labor union members and sales via Globe Life Direct Response solicitation. Deterioration of our relationships with organized labor or adverse changes in the public’s receptivity to direct response marketing initiatives could negatively affect this business.
 
Health Insurance Marketplace Risks:

The health insurance market is subject to substantial regulatory scrutiny. Regulatory changes could impact our Medicare Supplement and other supplemental health businesses. The nature and timing of any such changes cannot be predicted and could have a material adverse effect on that business.
 
Competition in the health insurance market can be significant. Sales of our health insurance products are subject to competition from other health insurance companies and alternative healthcare providers, such as those that provide alternatives to traditional Medicare to seniors. In addition, some insurers may be willing to significantly reduce their profit margins or underprice new sales in order to gain market share. We choose not to compete for market share based on these terms. Accordingly, changes in the competitive landscape, including the pricing strategies employed by our competitors, could negatively impact the future sales of our health insurance products.
 
Obtaining timely and appropriate premium rate increases for certain health insurance policies is critical. A significant percentage of the health insurance premiums that our insurance subsidiaries earn is from Medicare Supplement insurance. Medicare Supplement insurance and the terms under which the premiums for such policies may be increased are highly regulated at both the state and federal level. As a result, it is characterized by lower profit margins than life insurance and requires strict administrative discipline and economies of scale for success. Because Medicare Supplement policies are coordinated with the federal Medicare program, which experiences health care inflation every year, annual premium rate increases for the Medicare Supplement policies are necessary. Obtaining timely rate increases is of critical importance to our success in this market. Accordingly, the inability of our insurance subsidiaries to obtain approval of premium rate increases in a timely manner from state insurance regulatory authorities in the future could adversely impact their profitability and thus our results of operations and financial condition.

Information Security and Technology Risks:
 
The failure to maintain effective and efficient information systems at the Company could compromise secure data thereby adversely affecting our financial condition and results of operations.

Our business operations are highly dependent upon information technology systems to provide efficient and resilient business operations. Malicious actors, employee errors or disasters affecting these information systems could impair our business operations, regulatory compliance and financial condition. To the extent our information systems may be breached by malicious actors, employee malfeasance or technological attacks, an attacker could circumvent security measures in order to alter or delete customer or proprietary information from our systems. In addition, we may not become aware of sophisticated or advanced cyber attacks for some time after they occur, thereby increasing the Company's exposure.

Employee errors in the handling of our information or technology systems may inadvertently result in unauthorized access to customer or proprietary information, or an inability to use our information technology systems to efficiently support business operations.

In addition, an increasing number of states require that customers be notified of unauthorized access, use or disclosure of their confidential information. Any such breach of confidential information could damage our reputation in the

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marketplace, deter potential customers from purchasing our products, result in the loss of existing customers, subject us to significant civil and criminal liability, or require us to incur significant technical, legal or other expenses.

In the event of a disaster, such as a natural catastrophe, an industrial accident, a blackout, or a terrorist attack or war, our computer systems may be inaccessible to our employees or customers for a period of time. A disaster or natural catastrophe, an industrial accident, terror attack or war may make our information systems unavailable to support business operations for a period of time, affecting our systems, physical business operations, and financial condition. Even if our employees are able to report to work, they may be unable to perform their duties for an extended period of time if our data or systems are disabled or destroyed and if existing contingency plans cannot function as designed.

Reputational Risk:
 
Damage to the reputation of Torchmark or its subsidiaries could affect our ability to conduct business. Negative publicity through traditional media, internet, social media, and other public forums could damage our reputation and adversely impact our agent recruiting efforts, the ability to market our products, and the persistency of our block of inforce policies. As discussed above in Information Security and Technology Risks, the Company could be subjected to adverse publicity as a result of a significant security breach.

Investment Risks:
 
Our investments are subject to market and credit risks. Significant downgrades, delinquencies and defaults in our investment portfolio could potentially result in lower net investment income and increased realized and unrealized investment losses. Our invested assets are subject to the customary risks of defaults, downgrades and changes in market values. Our investment portfolio consists, almost exclusively, of fixed maturity and short-term investments. A significant portion of our fixed maturity investments is comprised of corporate bonds, exposing us to the risk that individual corporate issuers will not have the ability to make required interest or principal payments on the investment. Factors that may affect both market and credit risks include interest rate levels, financial market performance, disruptions in credit markets, general economic conditions, legislative changes, particular circumstances affecting the businesses or industries of each issuer and other factors beyond our control.

Additionally, as the majority of our investments are longer-term fixed maturities that we typically hold until maturity, significant increases in interest rates, widening of credit spreads or inactive markets associated with market downturns could cause a material temporary decline in the fair value of our fixed investment portfolio, even with regard to performing assets. These declines could cause a material increase in unrealized losses in our investment portfolio. Significant unrealized losses can substantially reduce our capital position and shareholders’ equity. It is possible that our investment in certain of these securities with unrealized losses may experience a default event and that a portion or all of that unrealized loss may not be recoverable. In that case, the unrealized loss will be realized, at which point we would take an impairment charge, reducing our net income.
 
We cannot be assured that any particular issuer, regardless of industry, will be able to make required interest and principal payments, on a timely basis or at all. Significant downgrades of issuers could negatively impact our risk-based capital ratios, leading to potential downgrades by our rating agencies, potential reduction in future dividend capacity, and/or higher financing costs at the holding company should additional statutory capital be required.
 
Changes in interest rates could negatively affect income. Declines in interest rates expose insurance companies to the risk that they will fail to earn the level of interest on investments assumed in pricing products and in setting discount rates used to calculate the net policy liabilities. While we attempt to manage our investments to earn an excess investment income spread, we provide no assurance that a significant and persistent decline in interest rates will not materially affect such spreads. Significant decreases in interest rates could result in calls by issuers of investments, where such features are available to issuers. These calls could result in a decline in our investment income, as reinvestment of the proceeds would likely be at lower rates.

Increases in interest rates could cause the fair value of securities within our bond portfolio to decline. A rise in interest rates could also result in certain policyholders surrendering their annuity policies for cash thereby potentially requiring our insurance subsidiaries to liquidate bonds if other sources of liquidity are not available to meet their obligations. In such a case, realized losses could result from such sales and could adversely affect our statutory income and results of operations.

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Liquidity Risks:
 
Our ability to fund operations is substantially dependent on funds available, primarily dividends, from our insurance subsidiaries. As a holding company with no direct operations, our principal asset is the capital stock of our insurance subsidiaries, which periodically declare and distribute dividends on their capital stock. Moreover, our liquidity, including our ability to pay our operating expenses and to make principal and interest payments on debt securities or other indebtedness owed by us, as well as our ability to pay dividends on our common stock or any preferred stock, depends significantly upon the surplus and earnings of our insurance subsidiaries and the ability of these subsidiaries to pay dividends or to advance or repay funds to us. Other sources of liquidity include a variety of short-term and long-term instruments, including our credit facility, commercial paper, long-term debt, intercompany financing, and reinsurance.

The principal sources of our insurance subsidiaries’ liquidity are insurance premiums, as well as investment income, maturities, repayments and other cash flow from our investment portfolio. Our insurance subsidiaries are subject to various state statutory and regulatory restrictions applicable to insurance companies that limit the amount of cash dividends, loans and advances that those subsidiaries may pay to us, including laws establishing minimum solvency and liquidity thresholds. For example, in the states where our companies are domiciled, an insurance company generally may pay dividends only out of its unassigned surplus as reflected in its statutory financial statements filed in that state. Additionally, dividends paid by insurance subsidiaries are restricted based on regulations by their state of domicile. Accordingly, impairments in invested assets or a disruption in our insurance subsidiaries’ operations that reduces their capital or cash flow could limit or disallow payment of dividends to us, a principal source of our cash flow.
 
We can give no assurance that more stringent restrictions will not be adopted from time to time by states in which our insurance subsidiaries are domiciled, which could, under certain circumstances, significantly reduce dividends or other amounts paid to us by our subsidiaries. Although we do not anticipate changes, changes in these laws could constrain the ability of our subsidiaries to pay dividends or to advance or repay funds to us in sufficient amounts and at times necessary to meet our debt obligations and corporate expenses. Additionally, if our insurance subsidiaries were unable to obtain approval of premium rate increases in a timely manner from state insurance regulatory authorities, their profitability, and their ability to declare and distribute dividends to us could be negatively impacted. Limitations on the flow of dividends from our subsidiaries could limit our ability to service and repay debt or to pay dividends on our capital stock.

 
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs or access capital, as well as affect our cost of capital. Should treasury rates increase or credit spreads widen in the future, the interest rate on any new debt obligation we may issue could increase, and our net income could be reduced. In addition, if the credit and capital markets were to experience significant disruption, uncertainty, and instability, these conditions could adversely affect our access to capital. Such market conditions may limit our ability to replace maturing liabilities (in a timely manner or at all) and/or access the capital necessary to grow our business.
 
In the unlikely event that current sources of liquidity do not satisfy our needs, we may have to seek additional financing or raise capital. The availability and cost of additional financing or capital will depend on a variety of factors such as market conditions, the general availability of credit or capital, the volume of trading activities, the overall availability of credit to the insurance industry and our credit ratings and credit capacity. Additionally, customers, lenders, or investors could develop a negative perception of our long- or short-term financial prospects if we were to incur large investment losses or if the level of our business activity decreases due to a market downturn. Our access to funds may also be impaired if regulatory authorities or rating agencies take negative actions against us. If our internal sources of liquidity prove to be insufficient, we may not be able to successfully obtain additional financing on favorable terms, or at all. As such, we may be forced to delay raising capital, issue shorter term securities than we prefer or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility. As a result, our results of operations, financial condition and cash flows could be materially negatively affected.

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Regulatory Risks:
 
Our businesses are heavily regulated, and changes in regulation may reduce our profitability and growth. Insurance companies, including our insurance subsidiaries, are subject to extensive supervision and regulation in the states in which they do business. The primary purpose of this supervision and regulation is the protection of our policyholders, not our investors. State agencies have broad administrative power over numerous aspects of our business, including premium rates and other terms and conditions that we can include in the insurance policies offered by our insurance subsidiaries, marketing practices, advertising, licensing of agents, policy forms, capital adequacy, solvency, reserves, and permitted investments. Also, regulatory authorities have relatively broad discretion to grant, renew or initiate procedures to revoke licenses or approvals. The insurance laws, regulations and policies currently affecting Torchmark and its insurance subsidiaries may change at any time, possibly having an adverse effect on our business. Should these changes to our business occur, we may be unable to maintain all required licenses and approvals, and our business may not fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of such laws and regulations, which may change from time to time. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities and/or impose substantial fines.
 
We cannot predict the timing or substance of any future regulatory initiatives. In recent years, there has been increased scrutiny of insurance companies, including our insurance subsidiaries, by insurance regulatory authorities, which has included more extensive examinations and more detailed review of disclosure documents. These regulatory authorities may bring regulatory or other legal actions against us if, in their view, our practices, or those of our agents or employees, are improper. Such actions could result in substantial fines, penalties, or prohibitions or restrictions on our business activities and could have a material adverse effect on our business, results of operations, or financial condition. Additionally, changes in the overall legal or regulatory environment may, even absent any particular regulatory authority’s interpretation of an issue changing, cause us to change our views regarding the actions that we need to take from a legal or regulatory risk management perspective, thus necessitating changes to our practices that may, in some cases, limit our ability to grow, impact regulatory capital requirements, or otherwise negatively impact the profitability of our business.
 
Currently, the U.S. federal government does not directly regulate the business of insurance. However, the Dodd-Frank Wall Street Record and Consumer Protection Act of 2010 established a Federal Insurance Office (FIO) within the Department of the Treasury, and the Affordable Care Act and a Financial Stability Oversight Council (FSOC) created the Center for Consumer Information and Insurance Oversight (CCIIO), originally established under the Department of Health and Human Services and subsequently transferred to the Centers for Medicare and Medicaid Services (CMS). The creation of these insurance regulatory offices may indicate that the federal government intends to play a larger role in the direct oversight or regulation of the insurance industry. We cannot predict what impact, if any, the FIO, FSOC and CCIIO, as well as any other proposals for federal oversight or regulation of insurance could have on our business, results of operations, or financial condition.
 
Changes in U.S. federal income tax law could increase our tax costs. Changes to the Internal Revenue Code, administrative rulings, or court decisions affecting the insurance industry, including the products it offers, could increase our effective tax rate and lower our net income, or negatively affect our ability to sell some of our products.
 
Changes in accounting standards issued by accounting standard-setting bodies may affect our financial statements, reduce our reported profitability, and change the timing of profit recognition. Our financial statements are subject to the application of GAAP and accounting practices as promulgated by the National Association of Insurance Commissioners’ statutory accounting practices (NAIC SAP), which principles are periodically revised and/or expanded. Accordingly, from time to time, we are required to adopt new or revised accounting standards or guidance issued by recognized authoritative bodies. It is possible that future accounting standards that we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse effect on our financial condition and results of operations. Further, standard setters have a full agenda of unissued topics under review at any given time, many of which have the potential to negatively impact our profitability.


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Non-compliance with restrictions on patient privacy and information security, including taking steps to ensure that our business associates who obtain access to sensitive patient information maintain its confidentiality, could materially adversely affect our reputation and business operations. The collection, maintenance, use, disclosure and disposal of individually identifiable data by our insurance subsidiaries are regulated at the international, federal and state levels. These laws and rules are subject to change by legislation or administrative or judicial interpretation. Various state laws address the use and disclosure of individually identifiable health data to the extent they are more restrictive than those contained in the privacy and security provisions in the federal Gramm-Leach-Bliley Act of 1999 (GLBA) and in the Health Insurance Portability and Accountability Act of 1996 (HIPAA). HIPAA also requires that we impose privacy and security requirements on our business associates (as that term is defined in the HIPAA regulations). Noncompliance with any privacy laws or any security breach involving the misappropriation, loss or other unauthorized disclosure of sensitive or confidential information, whether by us or by one of our business associates, could have a material adverse effect on our business, reputation and results of operations and could include material fines and penalties, various forms of damages, consent orders regarding our privacy and security practices, adverse actions against our licenses to do business and injunctive relief.
 
Litigation Risk:
 
Litigation could result in substantial judgments against us or our subsidiaries. We are, and in the future may be, subject to litigation in the ordinary course of business. Some of these proceedings have been brought on behalf of various alleged classes of complainants, and, in certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. Members of our management and legal teams review litigation on a quarterly and annual basis. However, the outcome of any such litigation cannot be predicted with certainty. A number of civil jury verdicts have been returned against insurers in the jurisdictions in which Torchmark and its insurance subsidiaries do business involving the insurers’ sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. These lawsuits have resulted in the award of substantial judgments against insurers that are disproportionate to the actual damages, including material amounts of punitive damages. In some states in which we operate, juries have substantial discretion in awarding punitive damages. This discretion creates the potential for unpredictable material adverse judgments in any given punitive damages suit.
 
Our pending and future litigation could adversely affect us because of the costs of defending these cases, the costs of settlement or judgments against us, or changes in our operations that could result from litigation. Substantial legal liability in these or future legal actions could also have a material financial effect or cause significant harm to our reputation, which, in turn, could materially harm our business and our business prospects.
 
Catastrophic Event Risk:
 
Our business is subject to the risk of the occurrence of catastrophic events. Our insurance policies are issued to and held by a large number of policyholders throughout the United States in relatively low-face amounts. Accordingly, it is unlikely that a large portion of our policyholder base would be affected by a single natural disaster. However, our insurance operations could be exposed to the risk of catastrophic mortality or morbidity, caused by events such as a pandemic, hurricane, earthquake, or man-made catastrophes, including acts of terrorism or war, which may produce significant claims in larger areas, especially those that are heavily populated. Claims resulting from natural or man-made catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or harm our financial condition.
 
 

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Item 1B. Unresolved Staff Comments
 
As of December 31, 2016, Torchmark had no unresolved staff comments.
 
Item 2. Properties
 
Torchmark, through its subsidiaries, owns or leases buildings that are used in the normal course of business. Torchmark owns and occupies a 300,000 square foot facility in McKinney, Texas. This facility is Torchmark’s corporate headquarters and also houses the operations of a subsidiary, United American, as well as many operations of other subsidiaries. In addition, United American leases 5,000 square feet of space in Omaha, Nebraska and, through a subsidiary, leases 2,500 square feet of office space in Syracuse, New York.
 
Liberty National, also in McKinney, Texas, leases a 24,000 square foot facility in Hoover, Alabama (a Birmingham suburb). An 8,000 square foot facility is leased for storage in Pelham, Alabama.
 
Globe leases 34,000 square feet of office area in the Cotter Tower building located in downtown Oklahoma City, Oklahoma. Globe also leases 11,000 square feet at a nearby facility used for storage. Globe Marketing Services, a subsidiary of Globe, owns a 133,000 square foot facility in Oklahoma City which houses the Globe Life Direct Response operation.
 
American Income owns and occupies two buildings located in Waco, Texas: 70,000 square foot building for corporate operations and a 43,000 square foot printing facility. American Income also leases 10,800 square feet in a building across the street from the main office building. American Income also leases office space throughout the United States to support its marketing operations.
 
Family Heritage owns 50% of a partnership that owns a 66,000 square foot building in Broadview Heights, Ohio (a suburb of Cleveland), serving as Family Heritage’s headquarters. The partnership also leases a portion of the building to unrelated tenants.

Item 3. Legal Proceedings
 
Torchmark and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including claims involving tax matters, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of Torchmark’s subsidiaries, employment discrimination, and miscellaneous other causes of action. Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, management does not believe that such litigation will have a material adverse effect on Torchmark’s financial condition, future operating results or liquidity; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future. This bespeaks caution, particularly in states with reputations for high punitive damage verdicts. Torchmark’s management recognizes that large punitive damage awards bearing little or no relation to actual damages continue to be awarded by juries in jurisdictions in which Torchmark and its subsidiaries have substantial business, creating the potential for unpredictable material adverse judgments in any given punitive damage suit.
See further discussion of litigation and unclaimed property audits in Note 15—Commitments and Contingencies.


Item 4. Mine Safety Disclosures.
 
Not Applicable.

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PART II
 
Item 5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters
The principal market in which Torchmark’s common stock is traded is the New York Stock Exchange. There were 2,808 shareholders of record on December 31, 2016, excluding shareholder accounts held in nominee form. The market prices and cash dividends paid by calendar quarter for the past two years are presented in the following table.
 
 
 
 
2016
Market Price
 
Dividends
Per Share
Quarter
 
 
High
 
Low
 
1
 
 
$
57.01

 
$
48.58

 
$
0.1350

2
 
 
62.39

 
52.83

 
0.1400

3
 
 
65.21

 
60.38

 
0.1400

4
 
 
74.83

 
63.17

 
0.1400

Year-end closing price
$
73.76

 

 

 

 
 
 
2015
Market Price
 
Dividends
Per Share
Quarter
 
 
High
 
Low
 
1
 
 
$
55.66

 
$
50.07

 
$
0.1267

2
 
 
59.15

 
54.98

 
0.1350

3
 
 
63.12

 
55.62

 
0.1350

4
 
 
61.19

 
55.36

 
0.1350

Year-end closing price
$
57.16

 

 

 


The line graph shown below compares Torchmark’s cumulative total return on its common stock with the cumulative total returns of the Standard and Poor’s 500 Stock Index (S&P 500) and the Standard and Poor’s Life & Health Insurance Index (S&P Life & Health Insurance). Torchmark is one of the companies whose stock is included within both the S&P 500 and the S&P Life & Health Insurance Index.
tmk201510-k_chartx20933a04.jpg
*100 invested on 12/31/11 in stock or index, including reinvestment of dividends. Fiscal year ended December 31st.
(Copyright © 2017 Standard & Poor's, a division of S&P Global. All rights reserved.) 

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Purchases of Certain Equity Securities by the Issuer and Others for the Fourth Quarter 2016
Period
(a) Total Number
of Shares
Purchased

(b) Average
Price Paid
Per Share

(c) Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

(d) Maximum Number
of Shares (or
Approximate Dollar
Amount) that May
Yet Be Purchased
Under the Plans or
Programs
October 1-31, 2016
411,933

 
$
64.36

 
411,933

 

November 1-30, 2016
175,770

 
62.40

 
175,770

 

December 1-31, 2016
757,089

 
73.90

 
757,089

 

 
On August 4, 2016, Torchmark’s Board reaffirmed its continued authorization of the Company’s stock repurchase program in amounts and with timing that management, in consultation with the Board, determined to be in the best interest of the Company. The program has no defined expiration date or maximum number of shares to be purchased.


 
 


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Item 6. Selected Financial Data
The following information should be read in conjunction with Torchmark’s Consolidated Financial Statements and related notes reported elsewhere in this Form 10-K:
(Amounts in thousands except per share and percentage data)
Year ended December 31,
2016
 
2015
 
2014
 
2013
 
2012
Premium revenue:
 
 
 
 
 
 
 
 
 
Life
$
2,189,333

 
$
2,073,065

 
$
1,966,300

 
$
1,885,332

 
$
1,808,524

Health
947,663

 
925,520

 
869,440

 
863,818

 
730,019

Other
38

 
135

 
400

 
532

 
559

Total
3,137,034

 
2,998,720

 
2,836,140

 
2,749,682

 
2,539,102

Net investment income
806,903

 
773,951

 
758,286

 
734,650

 
716,132

Realized investment gains (losses)
(10,683
)
 
(8,791
)
 
23,548

 
7,990

 
37,833

Total revenue
3,934,629

 
3,766,065

 
3,620,095

 
3,494,253

 
3,294,644

Income from continuing operations, net of tax(1)
539,590

 
516,293

 
528,074

 
507,205

 
509,297

Income from discontinued operations, net of tax
10,189

 
10,807

 
14,865

 
21,267

 
20,027

Net income(1)
549,779

 
527,100

 
542,939

 
528,472

 
529,324

Per common share:
 
 
 
 
 
 
 
 
 
Basic earnings:
 
 
 
 
 
 
 
 
 
Income from continuing operations
4.50

 
4.13

 
4.04

 
3.68

 
3.51

Income from discontinued operations
0.08

 
0.08

 
0.11

 
0.16

 
0.14

Net income
4.58

 
4.21

 
4.15

 
3.84

 
3.65

Diluted earnings:(1)
 
 
 
 
 
 
 
 
 
Income from continuing operations
4.41

 
4.07

 
3.98

 
3.63

 
3.47

Income from discontinued operations
0.08

 
0.09

 
0.11

 
0.16

 
0.13

Net income
4.49

 
4.16

 
4.09

 
3.79

 
3.60

Cash dividends declared
0.56

 
0.54

 
0.51

 
0.45

 
0.40

Cash dividends paid
0.56

 
0.53

 
0.49

 
0.44

 
0.38

Basic average shares outstanding
120,001

 
125,095

 
130,722

 
137,647

 
144,921

Diluted average shares outstanding(1)
122,368

 
126,757

 
132,640

 
139,564

 
146,848

 
 
 
 
 
 
 
 
 
 
As of December 31,
2016
 
2015
 
2014
 
2013
 
2012
Cash and invested assets
$
15,955,891

 
$
14,405,073

 
$
15,058,996

 
$
13,456,944

 
$
14,155,919

Total assets
21,436,087

 
19,853,213

 
20,272,259

 
18,217,757

 
18,810,132

Short-term debt
264,475

 
490,129

 
238,398

 
229,070

 
319,043

Long-term debt
1,133,165

 
743,733

 
992,130

 
990,865

 
989,686

Shareholders' equity
4,566,861

 
4,055,552

 
4,697,466

 
3,776,342

 
4,361,786

Per diluted share(1)
37.76

 
32.71

 
36.19

 
27.66

 
30.56

Effect of fixed maturity revaluation on diluted equity per share(1,2)
5.63

 
2.62

 
8.28

 
1.81

 
7.07

Annualized premium in force:
 
 
 
 
 
 
 
 
 
Life
2,262,736

 
2,150,498

 
2,044,545

 
1,955,401

 
1,895,017

Health
998,634

 
973,042

 
947,323

 
887,444

 
902,753

Total
3,261,370

 
3,123,540

 
2,991,868

 
2,842,845

 
2,797,770

Basic shares outstanding
118,031

 
122,370

 
127,930

 
134,252

 
141,353

Diluted shares outstanding(1)
120,958

 
123,996

 
129,812

 
136,537

 
142,707


(1)
Certain current year amounts were prospectively adjusted to give effect to the adoption of ASU 2016-09 related to excess tax benefits from stock compensation as described in Note 1—Significant Accounting Policies under "Accounting Pronouncements Adopted in the Current Year."
(2)
There is accounting guidance (ASC 320-10-35-1, Investments- Debt and Equity Securities) requiring available-for-sale fixed maturities to be recorded at fair value each period. The effect of this rule on diluted equity per share reflects the amount added or (deducted) under this rule to produce GAAP Shareholders’ equity per share. See discussion under the caption Capital Resources in Management’s Discussion and Analysis in this report concerning the effect this rule has on Torchmark’s equity.



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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the Selected Financial Data and Torchmark’s Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.
 
RESULTS OF OPERATIONS
 
How Torchmark Views Its Operations: Torchmark is the holding company for a group of insurance companies which market primarily individual life, and supplemental health insurance to middle income households throughout the United States. We view our operations by segments, which are the insurance product lines of life, health, and annuities, and the investment segment that supports the product lines. Segments are aligned based on their common characteristics, comparability of the profit margins, and management techniques used to operate each segment.
 
Insurance Product Line Segments. As fully explained in Note 14—Business Segments in the Notes to the Consolidated Financial Statements, the insurance product line segments involve the marketing, underwriting, and the administration of policies. Each product line is further segmented by the various distribution units that market the insurance policies. Each distribution unit operates in a niche market offering insurance products designed for that particular market. Whether analyzing profitability of a segment as a whole, or the individual distribution units within the segment, the measure of profitability used by management is the underwriting margin, which is:
 
Premium revenue
Less:
Policy obligations
Policy acquisition costs and commissions
 
Investment Segment. The investment segment involves the management of our capital resources, including investments and the management of corporate debt and liquidity. Our measure of profitability for the investment segment is excess investment income, which is:
 
Net investment income
Less:
Required interest on net policy liabilities
Financing costs
 
The tables in Note 14—Business Segments in the Notes to the Consolidated Financial Statements reconcile Torchmark’s revenues and expenses by segment to its major income statement line items for each of the years in the three-year period ended December 31, 2016. Additionally, this Note provides a summary of the profitability measures that demonstrate year-to-year comparability and which reconciles to net income. That summary is reproduced below from the Consolidated Financial Statements to present our overall operations in the manner that we use to manage the business.
 

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Analysis of Profitability by Segment
(Dollar amounts in thousands)
 
2016
 
2015
 
2014
 
2016
Change
 
%
 
2015
Change
 
%
Life insurance underwriting margin
$
573,762

 
$
569,402

 
$
556,489

 
$
4,360

 
1

 
$
12,913

 
2

Health insurance underwriting margin
210,056

 
204,377

 
199,319

 
5,679

 
3

 
5,058

 
3

Annuity underwriting margin
9,394

 
4,568

 
4,312

 
4,826

 
106

 
256

 
6

Excess investment income
224,031

 
219,504

 
224,364

 
4,527

 
2

 
(4,860
)
 
(2
)
Other insurance:
 
 
 
 
 
 

 
 
 

 
 
Other income
1,534

 
2,379

 
2,354

 
(845
)
 
(36
)
 
25

 
1

Administrative expense
(196,598
)
 
(186,191
)
 
(174,832
)
 
(10,407
)
 
6

 
(11,359
)
 
6

Corporate and adjustments
(34,913
)
 
(37,667
)
 
(40,362
)
 
2,754

 
(7
)
 
2,695

 
(7
)
Pre-tax total
787,266

 
776,372

 
771,644

 
10,894

 
1

 
4,728

 
1

Applicable taxes(1)
(237,906
)
 
(253,459
)
 
(252,041
)
 
15,553

 
(6
)
 
(1,418
)
 
1

Net operating income from continuing operations(2)
549,360

 
522,913

 
519,603

 
26,447

 
5

 
3,310

 
1

Discontinued operations (after tax)(3)
10,189

 
10,807

 
14,865

 
(618
)
 
(6
)
 
(4,058
)
 
(27
)
Total
559,549

 
533,720

 
534,468

 
25,829

 
5

 
(748
)
 

Realized gains (losses)—investments (after tax)
(6,944
)
 
(5,714
)
 
15,306

 
(1,230
)
 
 
 
(21,020
)
 
 
Legal settlement expenses (after tax)

 

 
(1,519
)
 

 
 
 
1,519

 
 
Administrative settlements (after tax)
(2,467
)
 
(906
)
 
(5,316
)
 
(1,561
)
 
 
 
4,410

 
 
Non-operating fees (after tax)
(359
)
 

 

 
(359
)
 
 
 

 
 
Net income
$
549,779

 
$
527,100

 
$
542,939

 
$
22,679

 
4

 
$
(15,839
)
 
(3
)
(1) Certain current year amounts were prospectively adjusted to give effect to the adoption of ASU 2016-09 related to excess tax benefits from stock compensation as described in Note 1—Significant Accounting Policies under "Accounting Pronouncements Adopted in the Current Year."
(2) Net operating income from continuing operations is the consolidated total of segment profits after tax and as such is considered a Non-GAAP measure. See Note 14—Business Segments for reconciliation to the most directly comparable GAAP measure and for discussion of the usefulness and purpose of this measure.
(3) Income from discontinued operations (after tax) is included for purposes of reconciling to net income.

Torchmark’s operations on a segment-by-segment basis are discussed in depth under the appropriate captions following in this report.
 
Summary of Operations: As shown in the above chart, net income was $550 million in 2016, compared with $527 million in 2015. Net income decreased in 2015 from $543 million in 2014. On a diluted per share basis, 2016 net income rose 8% to $4.49 after a 2% increase in 2015. Net income per diluted share in 2015 rose to $4.16 from $4.09 in 2014. The per share results have exceeded the growth in dollar amounts due to our share repurchase program. Each year’s per share net income was affected by realized investment gains (losses), which were $(0.06), $(0.05), and $0.12, in 2016, 2015 and 2014, respectively. More information concerning realized investment gains and losses can be found under the caption Realized Gains and Losses in this report.

Net operating income from continuing operations rose each year over the prior year from $520 million in 2014 to $523 million in 2015 to $549 million in 2016. Also, as explained in Note 14—Business Segments in the Notes to the Consolidated Financial Statements, we do not consider realized gains and losses to be a component of our core insurance operations or operating segments. Additionally, net income was affected by certain significant and unusual non-operating items in each of the years 2014 through 2016. We do not view these items as components of core operating results because they are not indicative of past performance or future prospects of the insurance operations. Accordingly, as described in Note 14—Business Segments in the Notes to the Consolidated Financial Statements, we remove items such as these that relate to prior periods or are non-operating items when evaluating the results of current operations, and therefore exclude such matters from our segment analysis for current periods.

Effective July 1, 2016, Torchmark sold its Medicare Part D Prescription Drug Plan business to an unaffiliated third party. Torchmark decided to exit its Medicare Part D business due to declining margins, increased risks, higher drug costs, and increased administrative and compliance costs. This sale allows the Company to better focus on its core protection life and health insurance businesses and provides additional capital to invest. The financial results of this business are

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excluded from Torchmark's continuing operations including the Notes to the Consolidated Financial Statements, other than Note 2—Statutory Accounting and Note 6—Discontinued Operations.
 
The life insurance segment is our strongest segment and is the largest contributor to earnings in each year presented. This segment contributed $4 million in 2016 and $13 million in 2015 to the growth in our underwriting margin. Also contributing to growth in income in both years was our health insurance segment, which provided $6 million of additional margin in 2016 and $5 million in 2015.
 
Excess investment income, the measure of profitability of our investment segment, increased to $224 million or 2% from the prior year amount of $220 million. In 2015, excess investment income decreased 2%. Investment yields continue to be pressured by reinvesting proceeds from dispositions at lower rates relative to the fixed maturity assets being disposed of and spreads related to required interest on net policy liabilities throughout the three-year period. Excess investment income has also been hampered by a lag in government reimbursements of Medicare Part D costs. The impact of the lost investment income from delayed receipt of reimbursements is reflected in income from continuing operations rather than discontinued operations in accordance with applicable accounting rules. As noted previously, the Medicare Part D business has been classified as discontinued operations.
 
Total revenues rose 4% in 2016 to $3.9 billion, or $169 million over the prior year total of $3.8 billion. Life premium rose 6% or $116 million in 2016 to $2.2 billion. Life premium increased $107 million in 2015 to $2.1 billion. Net investment income rose $16 million or 2% in 2015, and rose 4% or $33 million in 2016. Health premium increased 2% to $948 million in 2016 and contributed $22 million to 2016 revenue growth, after having gained 6% to $926 million in 2015. Health premium contributed $56 million to 2015 revenue growth.
 
Life insurance premium and underwriting margins have grown steadily in each of the last three years ended December 31, 2016. The increase in life premium was driven by sales growth and improvements in persistency. While premium and underwriting margins grew, margin as a percent of premium declined in 2016 to 26%, after decreasing from 28% to 27% from 2014 to 2015. These declines were due primarily to higher than expected Globe Life Direct Response policy obligations. Net life sales were flat in 2016 at $412 million after increasing 9% in 2015. The life insurance segment is discussed further in this report under the caption Life Insurance.
 
Health insurance premium income increased 2% to $948 million in 2016. Health net sales fell 7% to $145 million during 2016, as a result of a 20% decrease in Medicare Supplement sales. The decrease in 2016 Medicare Supplement net sales was expected due to group sales returning to a more normal level after unusually high sales in 2014. Group sales vary significantly from period to period due to the impact of large groups that are sold from time to time. First-year collected health premium fell 11% to $140 million from the prior year total of $157 million as a result of a high level of group sales in the third and fourth quarters of 2014 that positively affected the 2015 first-year collected premium. Health margins were flat at 22%, with underwriting income increasing to $210 million for 2016 due to the growth in premium income. Underwriting income was $204 million for the same period in 2015 compared with $199 million in 2014.
 
We do not currently market annuities. See the caption Annuities for discussion of the Annuity segment.
 
The investment segment’s pretax profitability, or excess investment income, is based on three major components: net investment income, required interest on net policy liabilities (interest applicable to insurance products), and financing costs. In 2016, net investment income rose 4%, compared with 2% in 2015. At the same time, our investment portfolio grew 6% in 2016 and 3%, on an amortized cost basis, in 2015. In recent years, net investment income has not grown as fast as the portfolio due primarily to new investments being made at yield rates lower than the yield rates earned on securities that matured or were otherwise disposed. The growth rate of net investment income is sometimes impacted by a lag between the time when proceeds from maturities and dispositions are received and when the proceeds are reinvested, during which the funds are held in cash. In addition, Torchmark’s share repurchase program (described later under this caption) has diverted cash that could have otherwise been used to acquire investments and increase net investment income. Net investment income was negatively impacted during 2014 through 2016 by our Medicare Part D business. Under the program, we were required to cover certain costs in the current period that are the federal government’s responsibility, but are not reimbursed until late in the next calendar year. This delay in reimbursement reduced our funds available for investment in each year, resulting in reduced investment income.
 
The interest required on net policy liabilities is deducted from net investment income, and generally grows in conjunction with the net policy liabilities that are supported by the invested assets. The lower new-money yields resulting from the

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low interest rate environment noted above have compressed excess investment income as required interest has continued to grow at approximately the same rate that net policy liabilities have grown. Financing costs, which consist of the interest required for debt service on our long and short-term debt, are also deducted from net investment income. Financing costs in 2016 increased 9% to $83 million from $77 million in 2015. The additional interest expense resulted primarily from the issuance of our new 6.125% Junior Subordinated Debt security seventy days before the maturity and repayment of our 6.375% Senior Notes.
 
Torchmark’s current investment policy regarding fixed maturities limits new fixed maturity acquisitions to investment-grade securities generally with longer maturities (often exceeding twenty years) that meet our quality and yield objectives. Approximately 96% of our invested assets at fair value are fixed maturities, of which 95% were investment grade at December 31, 2016. The average quality rating of the portfolio was BBB+. The portfolio contains no securities backed by subprime or Alt-A mortgages, no direct investment in residential mortgages, no credit default swaps, or other derivative contracts. See the analysis of excess investment income and investment activities under the caption Investments in this report and Note 4—Investments in the Notes to the Consolidated Financial Statements for a more detailed discussion of this segment.

Insurance administrative expenses were up 5.6% in 2016 when compared with the prior year period, and increased to 6.3% as a percentage of premium from 6.2% in 2015 and 2014. The increase in administrative expenses is primarily due to investments in information technology that will enhance our customer experience, improve our data analytic capabilities, improve our ability to adapt to future changes and bolster our information security programs. Stock compensation expense declined $2 million in 2016 to $26.3 million compared with a decrease of $4 million in 2015 to $28.7 million. The decline in stock compensation expense in 2016 and 2015 resulted primarily from lower expense associated with performance shares as well as lower option values on 2016 and 2015 option awards.

 
Share Purchases
Torchmark has in place an ongoing share repurchase program which began in 1986. With no specified authorization amount, we determine the amount of repurchases based on the amount of the excess cash flow at the Parent Company, general market conditions, and other alternative uses. The majority of these purchases are made from excess cash flow. Excess cash flow at the Parent Company is primarily comprised of dividends received from the insurance subsidiaries less interest expense paid on its debt, dividends paid to Torchmark shareholders, and other limited operating activities. Additionally, when stock options are exercised, proceeds from these exercises and the tax benefit are used to repurchase additional shares on the open market to minimize dilution as a result of the option exercises. The Board of Directors has authorized the Company’s share repurchase program in amounts and with timing that management, in consultation with the Board, determines to be in the best interest of the Company and its shareholders. The following chart summarizes share purchase activity for each of the last three years.
 
Analysis of Share Purchases
(Amounts in thousands)
 
2016
 
2015
 
2014
Purchases
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
Excess cash flow at the Parent Company
5,208

 
$
311,332

 
6,292

 
$
358,552

 
7,155

 
$
375,042

Option proceeds
1,487

 
93,452

 
1,049

 
59,974

 
1,394

 
74,266

Total
6,695

 
$
404,784

 
7,341

 
$
418,526

 
8,549

 
$
449,308


Throughout the remainder of this discussion, share purchases refer only to those made from excess cash flow at the Parent Company and borrowings.
 
A discussion of each of Torchmark’s segments follows. The following discussions are presented in the manner we view our operations, as described in Note 14—Business Segments in the Notes to the Consolidated Financial Statements.

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Life Insurance
Life insurance is our largest insurance segment, with 2016 life premium representing 70% of total premium. Life underwriting income before other income and administrative expense represented 72% of the total in 2016. Additionally, investments supporting the reserves for life products produce the majority of excess investment income attributable to the investment segment.
 
We use three statistical measures as indicators of premium growth and sales over the near term: “annualized premium in force,” “net sales,” and “first-year collected premium.” Annualized premium in force is defined as the premium income that would be received over the following twelve months at any given date on all active policies if those policies remain in force throughout the twelve-month period. Annualized premium in force is an indicator of potential growth in premium revenue. Net sales is annualized premium issued, net of cancellations in the first thirty days after issue, except in the case of Globe Life Direct Response where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer period has expired. We believe that net sales is a better indicator of the rate of premium growth as compared to annualized premium issued. First-year collected premium is defined as the premium collected during the reporting period for all policies in their first policy year. First-year collected premium takes lapses into account in the first year when lapses are more likely to occur, and thus is a useful indicator of how much new premium is expected to be added to premium income in the future.

Life insurance premium rose 6% to $2.2 billion in 2016 after having increased 5% in 2015 to $2.1 billion. Life insurance products are marketed through several distribution channels. Premium income by channel for each of the last three years is as follows:
 
LIFE INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
 
2016
 
2015
 
2014
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
American Income Exclusive Agency
$
913,355

 
42
 
$
830,903

 
40
 
$
766,458

 
39
Globe Life Direct Response
782,765

 
36
 
746,693

 
36
 
702,023

 
36
Liberty National Exclusive Agency
270,476

 
12
 
271,113

 
13
 
272,265

 
14
Other Agencies
222,737

 
10
 
224,356

 
11
 
225,554

 
11
 
$
2,189,333

 
100
 
$
2,073,065

 
100
 
$
1,966,300

 
100
 
Annualized life premium in force was $2.26 billion at December 31, 2016, an increase of 5.2% over $2.15 billion a year earlier. Annualized life premium in force was $2.04 billion at December 31, 2014.
 
The following table shows net sales information for each of the last three years by distribution method.
 
LIFE INSURANCE
Net Sales by Distribution Method
(Dollar amounts in thousands)
 
 
2016
 
2015
 
2014
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
American Income Exclusive Agency
$
209,856

 
51
 
$
198,046

 
48
 
$
172,271

 
45
Globe Life Direct Response
150,267

 
36
 
164,348

 
40
 
158,089

 
42
Liberty National Exclusive Agency
40,159

 
10
 
35,782

 
9
 
34,402

 
9
Other Agencies
11,673

 
3
 
13,705

 
3
 
13,492

 
4
 
$
411,955

 
100
 
$
411,881

 
100
 
$
378,254

 
100


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The table below discloses first-year collected life premium by distribution channel.
 
LIFE INSURANCE
First-Year Collected Premium by Distribution Method
(Dollar amounts in thousands)
 
 
2016
 
2015
 
2014
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
American Income Exclusive Agency
$
173,573

 
56
 
$
156,206

 
52
 
$
134,202

 
50
Globe Life Direct Response
98,496

 
31
 
106,417

 
35
 
100,287

 
37
Liberty National Exclusive Agency
29,103

 
9
 
27,554

 
9
 
25,777

 
9
Other Agencies
11,458

 
4
 
12,036

 
4
 
10,473

 
4
 
$
312,630

 
100
 
$
302,213

 
100
 
$
270,739

 
100
 
The American Income Exclusive Agency has historically marketed primarily to members of labor unions. While labor unions are still the core market for this agency, American Income has diversified in recent years by focusing heavily on other affinity groups and referrals to help ensure sustainable growth. This agency is Torchmark’s largest contributor to life premium of any distribution channel at 42% of Torchmark’s 2016 total. This group produced premium income of $913 million, an increase of 10% over the prior year total of $831 million, after having risen 8% in 2015. First-year collected premium was $174 million compared to $156 million in 2015, an increase of 11%. First-year collected premium rose 16% in 2015. Net sales increased 6% to $210 million in 2016 over the 2015 total of $198 million. Net sales increased 15% in 2015 over the 2014 total of $172 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 2% to 6,671 for the year ended December 31, 2016 compared with 6,529 for the same period in 2015. The average producing agent count is based on the actual count at the end of each week during the period. The American Income Exclusive Agency has been focusing on growing and strengthening middle management to support sustainable growth of the agency force. To accomplish this, the agency has placed an increased emphasis on agent training programs and financial incentives that appropriately reward agents at all levels for helping develop and train its agents, including 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 their level of experience and responsibility. We are also making considerable investments in information technology in support of the agency, including the launching of a lead mapping and management tool to the agency force in 2017. We anticipate this tool will enhance overall productivity of agents and improve agent retention.
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 5% to $783 million, representing 36% of Torchmark’s total life premium during 2016. Life premium in this channel increased 6% in 2015 to $747 million over the 2014 total of $702 million. Net sales of $150 million for this group decreased 9% from $164 million in 2015, after a 4% increase in 2015. The sales decline was expected as we have shifted our marketing efforts away from certain segments that no longer meet our profit objectives. First-year collected premium decreased 7% to $98 million in 2016 after having risen 6% in 2015.

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The Liberty National Exclusive Agency markets individual and group life insurance to middle-income customers. Life premium income for this agency was $270 million in 2016, a slight decline from $271 million in 2015. Life premium income in 2014 totaled $272 million. Net sales increased 12% during 2016 to $40 million over the 2015 total of $36 million. Net sales in 2015 increased 4%. The increase in net sales during 2015 marked the first increase in several years, reflecting changes in structure of the agency that management has put in place in recent years. First-year collected premium increased 6% to $29 million during 2016 and increased 7% in 2015 to $28 million.
The Liberty average producing agent count increased 12% to 1,715 for the year ended December 31, 2016 compared with 1,535 for the same period in 2015. 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, the agency's prospecting training program has helped to improve the ability of agents to develop new work site marketing business.
The Other Agencies distribution channels offering life insurance include the Military Agency, the UA Independent Agency (which predominantly writes health insurance), and various smaller distribution channels. The Other Agencies contributed $223 million of life premium income, or 10% of Torchmark’s total in 2016, but contributed only 3% of net sales for the year.
 
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
 
2016
 
2015
 
2014
 
Amount
 
% of
Premium
 
Amount
 
% of
Premium
 
Amount
 
% of
Premium
Premium and policy charges
$
2,189,333

 
100

 
$
2,073,065

 
100

 
$
1,966,300

 
100

 
 
 
 
 
 
 
 
 
 
 
 
Policy obligations
1,475,477

 
67

 
1,374,608

 
67

 
1,293,384

 
66

Required interest on reserves
(577,827
)
 
(26
)
 
(552,298
)
 
(27
)
 
(530,192
)
 
(27
)
Net policy obligations
897,650

 
41

 
822,310

 
40

 
763,192

 
39

Commissions, premium taxes, and non-deferred acquisition expenses
164,476

 
8

 
154,811

 
8

 
143,174

 
7

Amortization of acquisition costs
553,445

 
25

 
526,542

 
25

 
503,445

 
26

Total expense
1,615,571

 
74

 
1,503,663

 
73

 
1,409,811

 
72

Insurance underwriting margin before other income and administrative expenses
$
573,762

 
26

 
$
569,402

 
27

 
$
556,489

 
28

 
Life insurance underwriting income before insurance administrative expense was $574 million in 2016 compared with $569 million in 2015 and $556 million in 2014. As a percentage of premium, underwriting margins declined to 26% in 2016 from 27% in 2015. The decrease in underwriting margin as a percentage of premium in 2016 and 2015 was due to higher Globe Life Direct Response net policy obligations. The higher than anticipated net policy obligations in the Globe Life Direct Response Unit primarily relate to policies issued in calendar years 2011 through 2015. The increase is primarily attributed to a spike in claims in certain blocks of policies as well as policies where additional prescription drug information was used in the underwriting process with an expectation of improved mortality. To date, improvements in actual mortality have been less than expected, causing higher than expected net policy obligations.



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Health Insurance
Health insurance sold by Torchmark includes primarily Medicare Supplement insurance, critical illness coverage, accident coverage, and other limited-benefit supplemental health products. In this analysis, all health coverage plans other than Medicare Supplement are classified as limited-benefit plans.
Health premium accounted for 30% of our total premium in 2016, while the health underwriting margin accounted for 26% of total underwriting margin, reflective of the lower underwriting margin as a percent of premium for health compared with life insurance. As noted under the caption Life Insurance, we have emphasized life insurance sales relative to health, due to life’s superior profitability and its greater contribution to excess investment income.
 
HEALTH INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
 
 
2016
 
2015
 
2014
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
United American Independent Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
$
12,704

 
 
 
$
15,260

 
 
 
$
19,028

 
 
Medicare Supplement
342,311

 
 
 
330,070

 
 
 
286,340

 
 
 
355,015

 
38
 
345,330

 
37
 
305,368

 
35
Family Heritage Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
236,075

 
 
 
221,091

 
 
 
204,667

 
 
Medicare Supplement

 
 
 

 
 
 

 
 
 
236,075

 
25
 
221,091

 
24
 
204,667

 
24
Liberty National Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
142,026

 
 
 
142,130

 
 
 
143,722

 
 
Medicare Supplement
59,772

 
 
 
67,020

 
 
 
78,295

 
 
 
201,798

 
21
 
209,150

 
23
 
222,017

 
25
American Income Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
84,064

 
 
 
79,984

 
 
 
78,244

 
 
Medicare Supplement
318

 
 
 
355

 
 
 
478

 
 
 
84,382

 
9
 
80,339

 
9
 
78,722

 
9
Direct Response
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
552

 
 
 
869

 
 
 
805

 
 
Medicare Supplement
69,841

 
 
 
68,741

 
 
 
57,861

 
 
 
70,393

 
7
 
69,610

 
7
 
58,666

 
7
Total Premium
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
475,421

 
50
 
459,334

 
50
 
446,466

 
51
Medicare Supplement
472,242

 
50
 
466,186

 
50
 
422,974

 
49
 
$
947,663

 
100
 
$
925,520

 
100
 
$
869,440

 
100


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We market supplemental health insurance products through a number of distribution channels. The following table presents net sales by distribution method for the last three years.
 
HEALTH INSURANCE
Net Sales by Distribution Method
(Dollar amounts in thousands)
 
 
2016
 
2015
 
2014
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
United American Independent Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
$
558

 
 
 
$
734

 
 
 
$
873

 
 
Medicare Supplement
55,451

 
 
 
70,891

 
 
 
82,971

 
 
 
56,009

 
39
 
71,625

 
46
 
83,844

 
46
Family Heritage Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
51,349

 
 
 
50,266

 
 
 
47,102

 
 
Medicare Supplement

 
 
 

 
 
 

 
 
 
51,349

 
35
 
50,266

 
32
 
47,102

 
26
Liberty National Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
19,513

 
 
 
18,021

 
 
 
17,084

 
 
Medicare Supplement
9

 
 
 
41

 
 
 
299

 
 
 
19,522

 
13
 
18,062

 
12
 
17,383

 
10
American Income Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
12,666

 
 
 
11,501

 
 
 
9,162

 
 
Medicare Supplement

 
 
 

 
 
 

 
 
 
12,666

 
9
 
11,501

 
7
 
9,162

 
5
Direct Response
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans

 
 
 

 
 
 
6

 
 
Medicare Supplement
5,560

 
 
 
5,003

 
 
 
23,099

 
 
 
5,560

 
4
 
5,003

 
3
 
23,105

 
13
Total Net Sales
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
84,086

 
58
 
80,522

 
51
 
74,227

 
41
Medicare Supplement
61,020

 
42
 
75,935

 
49
 
106,369

 
59
 
$
145,106

 
100
 
$
156,457


100
 
$
180,596

 
100


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The following table discloses first-year collected health premium by distribution method.
 
HEALTH INSURANCE
First-Year Collected Premium by Distribution Method
(Dollar amounts in thousands)
 
 
2016
 
2015
 
2014
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
United American Independent Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
$
547

 
 
 
$
660

 
 
 
$
710

 
 
Medicare Supplement
64,848

 
 
 
76,575

 
 
 
49,519

 
 
 
65,395

 
47
 
77,235

 
49
 
50,229

 
42
Family Heritage Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
40,822

 
 
 
39,196

 
 
 
36,392

 
 
Medicare Supplement

 
 
 

 
 
 

 
 
 
40,822

 
29
 
39,196

 
25
 
36,392

 
31
Liberty National Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
16,103

 
 
 
14,690

 
 
 
13,132

 
 
Medicare Supplement
6

 
 
 
168

 
 
 
306

 
 
 
16,109

 
11
 
14,858

 
9
 
13,438

 
11
American Income Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
13,710

 
 
 
12,041

 
 
 
9,500

 
 
Medicare Supplement

 
 
 

 
 
 

 
 
 
13,710

 
10
 
12,041

 
8
 
9,500

 
8
Direct Response
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans

 
 
 
(2
)
 
 
 
143

 
 
Medicare Supplement
4,457

 
 
 
13,843

 
 
 
9,196

 
 
 
4,457

 
3
 
13,841

 
9
 
9,339

 
8
Total First-Year Collected Premium
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
71,182

 
51
 
66,585

 
42
 
59,877

 
50
Medicare Supplement
69,311

 
49
 
90,586

 
58
 
59,021

 
50
 
$
140,493

 
100
 
$
157,171

 
100
 
$
118,898

 
100
 
Health premium increased 2% to $948 million in 2016 compared with $926 million in 2015 after an increase of 6% in 2015 over the 2014 total of $869 million. Medicare Supplement premium increased 1% to $472 million in 2016 compared with $466 million in 2015. Medicare Supplement premium totaled $423 million in 2014. Other limited-benefit health premium increased 4% to $475 million over the prior year total of $459 million. Other limited-benefit premium totaled $446 million in 2014.
Health net sales declined 7% to $145 million in 2016 from $156 million in 2015. Health net sales in 2014 totaled $181 million. Medicare Supplement net sales decreased 20% to $61 million in 2016, after declining 29% to $76 million in 2015. Limited-benefit net sales increased 4% to $84 million in 2016 compared with an increase of 8% in 2015 to $81 million.
Health first-year collected premium fell 11% to $140 million. Health first-year collected premium rose 32% during 2015. First year Medicare Supplement premium was down 23% in 2016 to $69 million from the prior year total of $91 million compared with an increase of $32 million or 53% in 2015 over 2014 total of $59 million. First year limited-benefit premium increased 7% to $71 million in 2016 compared with an increase of 11% in 2015 over the 2014 total of $60 million.

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The decline in Medicare Supplement net sales and first-year premium was primarily due to group sales returning to a normal level after unusually high sales in late 2014 that positively affected the 2015 first-year collected premium.  Group sales vary significantly from period to period due to the impact of large groups that are sold from time to time which in turn impact premium income. First year limited-benefit premium increased 7% to $71 million in 2016 compared with an increase of 11% in 2015 over the 2014 total of $60 million.
Health care reform activity is not expected to have a significant impact on our operations, and we are continuing to monitor future developments. The Affordable Care Act (ACA) imposes an annual fee to health insurance issuers offering commercial health insurance as well as another fee for premium stabilization. These taxes totaled $621 thousand, $1.2 million and $1.8 million in 2016, 2015 and 2014, respectively.
The UA Independent Agency consists of independent agencies appointed with Torchmark who may also sell for other companies. The UA Independent Agency was Torchmark’s largest health agency in terms of health premium income. In 2016, premium income was $355 million, representing 38% of Torchmark’s total health premium. Net sales were $56 million, or 39% of Torchmark’s health sales. This agency is also Torchmark’s largest producer of Medicare Supplement insurance, with Medicare Supplement premium income of $342 million. The UA Independent Agency represents 72% of all Torchmark Medicare Supplement premium and 91% of Medicare Supplement net sales. Medicare Supplement premium in this agency rose 4% in 2016. Total health premium increased 3% in 2016 and 13% in 2015. Medicare Supplement net sales decreased 22% in 2016 from the prior year, primarily due to a decline in group sales. As noted earlier, Group Medicare Supplement sales have historically fluctuated from period to period.
The Family Heritage Exclusive Agency primarily markets limited-benefit supplemental health insurance in non-urban areas. Most of their policies include a cash-back feature, such as a return of premium whereby any excess of premiums over claims paid is returned to the policyholder at the end of a specified period stated within the insurance policy. Management expects to grow this agency through geographic expansion and continuing incorporation of Torchmark’s recruiting programs. The Family Heritage Agency contributed $51 million in net sales in 2016, compared with $50 million in 2015 and $47 million in 2014. Health premium income was $236 million in 2016, representing 25% of Torchmark’s health premium. This compared with $221 million or 24% of health premium in 2015 and $205 million or 24% in 2014. The average producing agent count was 923 for the year ended December 31, 2016, compared with 882 for the same period in 2015, an increase of 5%.
The Liberty National Exclusive Agency represented 21% of all Torchmark health premium income at $202 million in 2016. The Liberty Agency markets limited-benefit supplemental health products consisting primarily of critical illness insurance. Much of Liberty’s health business is now generated through work site marketing targeting small businesses of 10 to 25 employees. In 2016, health premium income in the Agency declined 4% from prior year premium of $209 million after declining 6% during 2015. Liberty’s health premium decline has been due primarily to its declining Medicare Supplement block. Liberty's first-year collected premium increased 8% to $16 million in 2016 compared with an increase of 11% to $15 million in 2015, reflecting the steady increase in net sales of limited-benefit plans in the agency.
Other distribution. Certain of our other distribution channels market health products, although their main emphasis is on life insurance. On a combined basis, they accounted for 16% of health premium in 2016 and 2015. The American Income Exclusive Agency primarily markets accident plans. The Direct Response group markets primarily Medicare Supplements to employer or union-sponsored groups. Direct Response added $6 million of Medicare Supplement net sales in 2016 compared with $5 million in 2015 and $23 million in 2014. The higher net sales in 2014 were due to the addition of a large new group in the third quarter of 2014.

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As presented in the following table, Torchmark’s health insurance underwriting income before other income and administrative expense increased 3% to $210 million in 2016, after an increase of 3% to $204 million in 2015. As a percentage of health premium, margins were flat at 22% in 2016 and were down slightly to 22% in 2015 from 23% in 2014.

 HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
 
 
2016
 
2015
 
2014
 
Amount
 
% of
Premium
 
Amount
 
% of
Premium
 
Amount
 
% of
Premium
Premium
$
947,663

 
100

 
$
925,520

 
100

 
$
869,440

 
100

 
 
 
 
 
 
 
 
 
 
 
 
Policy obligations
612,725

 
65

 
602,610

 
65

 
559,817

 
64

Required interest on reserves
(73,382
)
 
(8
)
 
(69,057
)
 
(7
)
 
(64,401
)
 
(7
)
Net policy obligations
539,343

 
57

 
533,553

 
58

 
495,416

 
57

Commissions, premium taxes, and non-deferred acquisition expenses
84,819

 
9

 
81,489

 
9

 
79,475

 
9

Amortization of acquisition costs
113,445

 
12

 
106,101

 
11

 
95,230

 
11

Total expense
737,607

 
78

 
721,143

 
78

 
670,121

 
77

Insurance underwriting income before other income and administrative expense
$
210,056

 
22

 
$
204,377

 
22

 
$
199,319

 
23



Annuities. Our fixed annuity balances at the end of 2016, 2015, and 2014 were $1.24 billion, $1.32 billion, and $1.36 billion, respectively. Underwriting income was $9.4 million, $4.6 million, and $4.3 million in each of the respective years.
While the fixed annuity account balance has been declining slightly year over year, underwriting income has increased each year over the prior year. The significant increase in underwriting income in 2016 was primarily due to a slowdown in amortization as assumptions were adjusted to reflect longer retention of the annuity block than previously estimated as a result of the continuing low interest rate environment. Policy charges have actually declined slightly in each successive year. The majority of policy charges consist of surrender charges which are based on a function of account size and time lapsed since deposit. A considerable portion of fixed annuity profitability is derived from the spread of investment income exceeding contractual interest requirements, which can result in negative net policy obligations. In the three-year period, however, spreads tended to level as crediting rates reached guaranteed minimums. We do not currently market annuity products, favoring instead protection-oriented life and health insurance products. Therefore, we do not expect that annuities will be a significant portion of our business or marketing strategy going forward.



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Administrative expenses. Operating expenses are included in the Other and Corporate Segments and are classified into two categories: insurance administrative expenses and expenses of the parent company. The following table is an analysis of operating expenses for the three years ended December 31, 2016.
 
Operating Expenses Selected Information
(Dollar amounts in thousands)
 
 
2016
 
2015
 
2014
 
Amount
 
% of
Premium
 
Amount
 
% of
Premium
 
Amount
 
% of
Premium
Insurance administrative expenses:
 
 
 
 
 
 
 
 
 
 
 
Salaries
$
91,415

 
2.9
 
$
87,262

 
2.9
 
$
81,227

 
2.9
Non-salary employee costs
29,852

 
1.0
 
30,683

 
1.0
 
27,471

 
1.0
Information technology costs
23,303

 
0.7
 
17,307

 
0.6
 
14,465

 
0.5
Other administrative expense
43,727

 
1.4
 
43,694

 
1.4
 
41,704

 
1.5
Legal expense—insurance
8,301

 
0.3
 
7,245

 
0.3
 
9,965

 
0.3
Total insurance administrative expenses
196,598

 
6.3
 
186,191

 
6.2
 
174,832

 
6.2
Parent company expense
8,587

 
 
 
9,003

 
 
 
8,159

 
 
Stock compensation expense
26,326

 
 
 
28,664

 
 
 
32,203

 
 
Litigation settlements

 
 
 

 
 
 
2,337

 
 
Non-operating fees
553

 
 
 

 
 
 

 
 
Total operating expenses, per Consolidated Statements of Operations
$
232,064

 
 
 
$
223,858

 
 
 
$
217,531

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance administrative expenses:
 
 
 
 
 
 
 
 
 
 
 
Increase (decrease) over prior year
5.6
%
 
 
 
6.5
%
 
 
 
(0.5
)%
 
 
Total operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Increase (decrease) over prior year
3.7
%
 
 
 
2.9
%
 
 
 
2.9
 %
 
 
 
Insurance administrative expenses were up 5.6% in 2016 when compared with the prior year after increasing 6.5% during 2015. As a percentage of total premium, insurance administrative expenses increased to 6.3% in 2016 from 6.2% in 2015 and 2014. Total operating expenses increased 3.7% in 2016, after increasing 2.9% in 2015. The primary reason for the increase in administrative expenses are higher information technology costs. The decline in stock compensation expense is primarily due to lower expense associated with performance share awards and lower option values on the 2016 and 2015 grants.


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Investments. We manage our capital resources including investments, debt, and cash flow through the investment segment. Excess investment income represents the profit margin attributable to investment operations. It is the measure that we use to evaluate the performance of the investment segment as described in Note 14—Business Segments in the Notes to the Consolidated Financial Statements. It is defined as net investment income less both the required interest attributable to net policy liabilities and the interest cost associated with capital funding or “financing costs.”
We also view excess investment income per diluted share as an important and useful measure to evaluate the performance of the investment segment. It is defined as excess investment income divided by the total diluted weighted average shares outstanding, representing the contribution by the investment segment to the consolidated earnings per share of the Company. Since implementing our share repurchase program in 1986, we have used $6.8 billion of excess cash flow at the Parent Company to repurchase Torchmark shares after determining that the repurchases provided a greater return than other investment alternatives. Share repurchases reduce excess investment income because of the foregone earnings on the cash that would otherwise have been invested in interest-bearing assets, but they also reduce the number of shares outstanding. In order to put all capital resource uses on a comparable basis, we believe that excess investment income per diluted share is an appropriate measure of the investment segment.
 
Excess Investment Income. The following table summarizes Torchmark’s investment income and excess investment income.
 
Analysis of Excess Investment Income
(Dollar amounts in thousands except for per share data)
 
 
2016
 
2015
 
2014
Net investment income
$
806,903

 
$
773,951

 
$
758,286

Interest on net insurance policy liabilities:
 
 
 
 
 
Interest on reserves
(702,340
)
 
(674,650
)
 
(649,848
)
Interest on deferred acquisition costs
202,813

 
196,845

 
192,052

Net required interest
(499,527
)
 
(477,805
)
 
(457,796
)
Financing costs
(83,345
)
 
(76,642
)
 
(76,126
)
Excess investment income
$
224,031

 
$
219,504

 
$
224,364

 
 
 
 
 
 
Excess investment income per diluted share(1)
$
1.83

 
$
1.73

 
$
1.69

 
 
 
 
 
 
Mean invested assets (at amortized cost)
$
14,461,502

 
$
13,697,129

 
$
13,278,028

Average net insurance policy liabilities(2)
8,945,850

 
8,574,699

 
8,240,435

Average debt and preferred securities (at amortized cost)
1,379,933

 
1,343,663

 
1,287,740


(1)
Certain current year amounts were prospectively adjusted to give effect to the adoption of ASU 2016-09 related to excess tax benefits from stock compensation as described in Note 1—Significant Accounting Policies under "Accounting Pronouncements Adopted in the Current Year."
(2)
Net of deferred acquisition costs, excluding the associated unrealized gains and losses thereon.

Excess investment income increased $5 million or 2% in 2016 over the prior year. Excess investment income decreased $5 million or 2% in 2015. On a per diluted share basis, excess investment income increased 6% to $1.83 in 2016. Excess investment income increased 2% to $1.73 per share in 2015, after having increased 8% in the prior year. The higher percentage increase in the excess investment income per diluted share amount over the percentage increase in the dollar amount of excess investment income for those same periods is a result of our share repurchase program.

Presented in the following chart is the growth in net investment income and the growth in mean invested assets.
 
2016
 
2015
 
2014
Growth in net investment income
4.3
%
 
2.1
%
 
3.2
%
Growth in mean invested assets (at amortized cost)
5.6
%
 
3.2
%
 
3.4
%


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The largest component of excess investment income is net investment income, which rose 4% to $807 million in 2016. It increased 2% to $774 million in 2015 from $758 million in 2014. In 2016, fixed maturity yields averaged 5.78% on a tax-equivalent and effective-yield basis, compared with 5.84% in 2015 and 5.91% in 2014.Growth in net investment income has been slower than the growth in mean invested assets in recent years as a result of the decline in the average yields. The decrease in the overall portfolio yield from 2014 to 2016 was due primarily to reinvesting proceeds from calls and maturities at yield rates lower than the bonds earned before it was called or matured.

Net investment income has also been negatively affected in the calendar years 2014 through 2016 by the CMS requirement for us to pay certain Medicare Part D claims costs during the current period that are ultimately the responsibility of the government, but are not reimbursed until the following year. Because of the overall design of the program and higher Part D claims due to higher overall drug costs, we have incurred extensive upfront costs that are not reimbursed by CMS until late in the following respective year. We also experience delays from the time certain claims are paid until related drug rebates are received from various pharmaceutical companies. These delays in reimbursements cause a lag in the timing of investable cash flows that result in lower investment income than would have been earned absent the delays. We estimate the delays resulted in a loss of approximately $5 million, $8 million and $9 million of pre-tax net investment income in 2014, 2015 and 2016, respectively. As we have exited this business, the negative impact is expected to be approximately $2 million to $3 million in 2017 and negligible in 2018.

While net investment income in recent years has been negatively impacted by the factors discussed above, we would expect to see only modest declines in the average portfolio yield rate over the next few years. We anticipate that approximately 2% of fixed maturities on average are expected to run off each year over the next five years. Accordingly, we believe it is unlikely that dispositions will have a significant negative impact on net investment income and the growth rate of net investment income in the next few years.

Should interest rates rise, especially long-term rates, Torchmark's net investment income would benefit due to higher interest rates on new purchases. We could withstand an increase in interest rates of approximately 60 to 65 basis points before the net unrealized gains on our fixed maturity portfolio as of December 31, 2016 would be eliminated (assuming there were no credit related valuation declines). Should interest rates increase further than that, we would not be concerned with potential interest rate driven unrealized losses in our fixed maturity portfolio because we have the intent and, more importantly, the ability to hold our fixed maturities to maturity.
 
Required interest on net insurance policy liabilities reduces net investment income as it is the amount of net investment income considered by management necessary to “fund” the required interest included in the insurance segments. As such, it is removed from the investment segment and applied to the insurance segments to offset the effect of the required interest from the insurance segments. As discussed in Note 14-Business Segments in the Notes to the Consolidated Financial Statements, management believes this provides a more meaningful analysis of the investment and insurance segments. Required interest is based on the actuarial interest assumptions used in discounting the benefit reserve liability and the amortization of deferred acquisition costs for our insurance policies in force. The great majority of our life and health insurance policies are fixed interest-rate protection policies, not investment products, and are accounted for under current accounting guidance for long-duration insurance products which mandates that interest rate assumptions for a particular block of business be “locked in” for the life of that block of business. Each calendar year, we set the discount rate to be used to calculate the benefit reserve liability and the amortization of the deferred acquisition cost asset for all insurance policies issued that year. That rate is based on the new money yields that we expect to earn on cash flow received in the future from policies of that issue year, and cannot be changed. The discount rate used for policies issued in the current year has no impact on the in force policies issued in prior years as the rates of all prior issue years are also locked in. As such, the overall discount rate for the entire in force block is a weighted average of the discount rates being used from all issue years. Changes in the overall weighted-average discount rate over time are caused by changes in the mix of the reserves and the deferred acquisition cost asset by issue year on the entire block of in force business. Business issued in the current year has very little impact on the overall weighted-average discount rate due to the size of our in force business.

Because actuarial discount rates are locked in for life on essentially all of our business, benefit reserves and deferred acquisition costs are not affected by interest rate fluctuations unless a loss recognition event occurs. Due to the strength of our underwriting margins and the current positive spread between the yield on our investment portfolio and the weighted-average discount rate of our in force block, we don’t expect an extended low-interest-rate environment to cause a loss recognition event.
 

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Information about interest on net policy liabilities is shown in the following table.

Required Interest on Net Insurance Policy Liabilities
(Dollar amounts in thousands)
 
Required
Interest
 
Average Net
Insurance
Policy  Liabilities
 
Average
Discount
Rate
2016
 
 
 
 
 
Life and Health
$
442,021

 
$
7,658,639

 
5.77
%
Annuity
57,506

 
1,287,211

 
4.47

Total
$
499,527

 
$
8,945,850

 
5.58

Increase in 2016
4.55
%
 
4.33
%
 
 
2015
 
 
 
 
 
Life and Health
$
418,432

 
$
7,256,732

 
5.77
%
Annuity
59,373

 
1,317,967

 
4.50

Total
$
477,805

 
$
8,574,699

 
5.57

Increase in 2015
4.37
%
 
4.06
%
 


2014
 
 
 
 
 
Life and Health
$
396,658

 
$
6,901,566

 
5.75
%
Annuity
61,138

 
1,338,869

 
4.57

Total
$
457,796

 
$
8,240,435

 
5.56

Increase in 2014
4.99
%
 
4.95
%
 


 
Excess investment income is also impacted by financing costs. Financing costs for the investment segment primarily consist of interest on our various debt instruments and are deducted from excess investment income. The table below presents the components of financing costs and reconciles interest expense per the Consolidated Statements of Operations.
 
Analysis of Financing Costs
(Amounts in thousands)
 
 
2016
 
2015
 
2014
Interest on funded debt
$
75,988

 
$
71,180

 
$
71,072

Interest on term loan
993

 

 

Interest on short-term debt
6,360

 
5,457

 
5,013

Other
4

 
5

 
41

Financing costs
$
83,345

 
$
76,642

 
$
76,126

 
Financing costs increased $7 million or 9% from 2015 to 2016. The additional interest expense on our funded debt resulted from the issuance of our new 6.125% Junior Subordinated Debt security seventy days before the maturity and repayment of our 6.375% Senior Notes. In 2016, interest on short-term debt increased because of the increase in the weighted-average interest rate. Financing costs also increased slightly from 2014 to 2015. More information on our debt transactions are disclosed in the Financial Condition section of this report and in Note 11—Debt in the Notes to Consolidated Financial Statements.
 
As previously noted, growth rates in our excess investment income decline when growth in income from the portfolio is less than that of the interest required by policy liabilities and financing costs, as has been the case in recent years. In an extended low-interest-rate environment, the portfolio yield will tend to decline as we invest new money at lower long-term rates.
 
Excess investment income benefits from increases in long-term rates available on new investments and decreases in short-term borrowing rates. Of these two factors, higher investment rates have the greater impact because the amount

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of cash that we invest is significantly greater than the amount that we borrow at short-term rates. Therefore, Torchmark would benefit if rates, especially long-term rates, were to rise.

Investment Acquisitions. Torchmark’s investment policy calls for investing in fixed maturities that are investment grade and meet our quality and yield objectives. We generally prefer to invest in securities with longer maturities because they more closely match the long-term nature of our policy liabilities. We believe this strategy is appropriate because our cash flows are generally stable and predictable. If longer-term securities that meet our quality and yield objectives are not available, we do not relax our quality objectives, but instead, consider investing in shorter term or lower yielding securities, taking into consideration the slope of the yield curve and other factors.

During calendar years 2014 through 2016, Torchmark invested almost exclusively in fixed maturity securities, primarily in corporate bonds with longer-term maturities. The following table summarizes selected information for fixed maturity purchases for the last three years. The effective annual yield shown is the yield calculated to the potential termination date that produces the lowest yield, commonly referred to as the “worst call date.” For non-callable bonds, the worst-call date is always the maturity date. For callable bonds, the worst-call date is the call date that produces the lowest yield, typically the first call date.

Fixed Maturity Acquisitions Selected Information
(Dollar amounts in thousands)
 
Year Ended December 31,
 
2016
 
2015
 
2014
Cost of acquisitions: (1)
 
 
 
 
 
Investment-grade corporate securities
$
1,505,135

 
$
1,026,520

 
$
696,264

Taxable municipal securities
13,023

 
29,092

 

Other investment-grade securities
14,727

 
15,296

 
8,729

Total fixed maturity acquisitions
$
1,532,885

 
$
1,070,908

 
$
704,993

 
 
 
 
 
 
Effective annual yield (one year compounded) (2)
4.67
%
 
4.79
%
 
4.77
%
Average life (in years, to next call)
24.6

 
27.2

 
22.9

Average life (in years to maturity)
25.4

 
27.9

 
23.4

Average rating
BBB+

 
BBB+

 
BBB+

(1)
Includes unsettled trades of $3 million for 2016.
(2)
Tax-equivalent basis, where the yield on tax-exempt securities, is adjusted to produce a yield equivalent to the pretax yield on taxable securities.
We prefer to invest primarily in bonds that are not callable (on other than a make-whole basis) prior to maturity, but we periodically invest some funds in callable bonds when the incremental yield available on such bonds warrants doing so. For investments in callable bonds, the actual life of the investment will depend on whether the issuer calls the investment prior to the maturity date. Given our investments in callable bonds, the actual average life of our investments cannot be known at the time of the investment. However absent sales, the average life will not be less than the average life to next call and will not exceed the average life to maturity. Data for both of these average life measures is provided in the above chart.
 
During the three years 2014 through 2016, acquisitions consisted of securities spanning a diversified range of issuers, industry sectors, and geographical regions. All of the acquired securities were investment grade. In addition to the fixed maturity acquisitions, Torchmark invested $30 million in a limited partnership in 2015 with an additional investment in the partnership of $19 million in 2016. The limited partnership is a diversified investment fund that currently invests opportunistically in global credit assets with the potential for attractive returns relative to risk. It is classified within long-term investments.

New cash flow available for investment has been primarily provided through our insurance operations and interest received on existing investments. In some years, a significant amount of new investments can be derived from proceeds from dispositions including issuer calls. Issuer calls, as a result of the low-interest environment experienced during the past three years, were an important factor. Calls increase funds available for investment, but as noted earlier in this discussion, they can have a negative impact on investment income if the proceeds from the calls are reinvested in

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bonds that have lower yields than those of the bonds that were called. Issuer calls were $182 million in 2016, $178 million in 2015, and $160 million in 2014.

Portfolio Composition. The composition of the investment portfolio at book value on December 31, 2016 was as follows:
 
Invested Assets
(Dollar amounts in thousands)
 
2016
 
2015

Amount
 
% of Total
 
Amount
 
% of Total
Fixed maturities (at amortized cost)
$
14,188,050

 
96
 
$
13,251,871

 
96
Policy loans
507,975

 
3
 
492,462

 
4
Other long-term investments(1)
53,355

 
 
37,579

 
Short-term investments
72,040

 
1
 
38,438

 
Total
$
14,821,420

 
100
 
$
13,820,350

 
100
(1)
Includes equities available for sale at amortized cost.
Approximately 96% of our investments at book value are in a diversified fixed maturity portfolio. Policy loans, which are secured by policy cash values, make up 3% of our investments. We also have insignificant investments in equity securities and other long-term investments. Because fixed maturities represent such a significant portion of our investment portfolio, the remainder of the discussion of portfolio composition will focus on fixed maturities.

Selected information concerning the fixed maturity portfolio is as follows:
Fixed Maturities
Fixed Maturity Portfolio Selected Information
 
 
At December 31,
 
2016
 
2015
Average annual effective yield (1)
5.74
%
 
5.83
%
Average life, in years, to:

 

Next call (2)
17.6

 
17.8

Maturity (2)
19.8

 
20.3

Effective duration to:

 

Next call (2, 3)
10.4

 
10.2

Maturity (2, 3)
11.3

 
11.2

(1)
Tax-equivalent basis, where the yield on tax-exempt securities is adjusted to produce a yield equivalent to the pretax yield on taxable securities.
(2)
Torchmark calculates the average life and duration of the fixed maturity portfolio two ways:
(a)
based on the next call date which is the next call date for callable bonds and the maturity date for noncallable bonds, and
(b)
based on the maturity date of all bonds, whether callable or not.
(3)
Effective duration is a measure of the price sensitivity of a fixed-income security to a particular change in interest rates.


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Credit Risk Sensitivity. The following tables summarize certain information about the major corporate sectors and security types held in our fixed maturity portfolio at December 31, 2016 and 2015.

Fixed Maturities by Sector
At December 31, 2016
(Dollar amounts in thousands)
 

Below Investment Grade
 
Total Fixed Maturities
 
% of Total Fixed Maturities
 
 
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 
At Amortized Cost
At Fair Value
 
 
Corporates:
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance - life, health, P&C
$
58,400

$
1,760

$
(4,003
)
$
56,157

 
$
2,030,188

$
217,377

$
(16,783
)
$
2,230,782

 
15
15
 
Banks
41,558

512

(7,218
)
34,852

 
681,422

71,828

(11,692
)
741,558

 
5
5
 
Other financial
74,955


(18,589
)
56,366

 
623,836

39,215

(24,628
)
638,423

 
4
4
 
Total financial
174,913

2,272

(29,810
)
147,375

 
3,335,446

328,420

(53,103
)
3,610,763

 
24
24
 
Utilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Electric
21,300

486


21,786

 
1,433,742

219,154

(9,384
)
1,643,512

 
10
11
 
Gas and water




 
470,804

31,345

(3,464
)
498,685

 
3
3
 
Total utilities
21,300

486


21,786

 
1,904,546

250,499

(12,848
)
2,142,197

 
13
14
 
Industrial - Energy
 
 
 
 
 
 
 
 
 
 
 
 
 
Pipelines
45,394

87

(3,297
)
42,184

 
809,300

67,313

(11,431
)
865,182

 
6
6
 
Exploration and production
28,954

182

(744
)
28,392

 
531,754

43,009

(11,806
)
562,957

 
4
4
 
Oil field services
33,880


(6,483
)
27,397

 
83,753

7,624

(6,483
)
84,894

 
1
1
 
Refiner




 
62,977

9,721

(7
)
72,691

 
 
Driller
54,642

322

(14,597
)
40,367

 
54,642

322

(14,597
)
40,367

 
 
Total energy
162,870

591

(25,121
)
138,340

 
1,542,426

127,989

(44,324
)
1,626,091

 
11
11
 
Industrial - Basic materials
 
 
 
 
 
 
 
 
 
 
 
 
 
Chemicals




 
481,127

21,538

(10,204
)
492,461

 
3
3
 
Metals and mining
107,102

491

(2,195
)
105,398

 
389,908

25,247

(2,613
)
412,542

 
3
3
 
Forestry products and paper




 
112,702

10,270

(415
)
122,557

 
1
1
 
Total basic materials
107,102

491

(2,195
)
105,398

 
983,737

57,055

(13,232
)
1,027,560

 
7
7
 
Industrial - Consumer, non-cyclical




 
1,629,706

101,254

(31,938
)
1,699,022

 
11
11
 
Other industrials
80,311

4,066

(1,327
)
83,050

 
1,282,000

115,119

(14,412
)
1,382,707

 
9
9
 
Industrial - Transportation
26,675


(2,918
)
23,757

 
494,527

59,067

(4,709
)
548,885

 
4
4
 
Other corporate sectors
116,696

1,076

(6,063
)
111,709

 
1,211,166

91,526

(20,256
)
1,282,436
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