GLOBE LIFE INC. - Quarter Report: 2016 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one) | |
ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2016 | |
¨ | 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 1-8052
TORCHMARK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE | 63-0780404 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
3700 South Stonebridge Drive, McKinney, Texas | 75070 | |
(Address of principal executive offices) | (Zip Code) |
NONE
Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ý | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý
Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the last practicable date.
CLASS | OUTSTANDING AT July 29, 2016 | |||
Common Stock, $1.00 Par Value | 119,768,489 |
INDEX
Page | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 6. |
PART I–FINANCIAL INFORMATION
Item 1. | Condensed Consolidated Financial Statements |
TORCHMARK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
June 30, 2016 | December 31, 2015 | ||||||
Assets | |||||||
Investments: | |||||||
Fixed maturities—available for sale, at fair value (amortized cost: 2016—$13,778,254 ;2015–$13,251,871) | $ | 15,440,090 | $ | 13,758,024 | |||
Policy loans | 501,555 | 492,462 | |||||
Other long-term investments | 58,377 | 38,438 | |||||
Short-term investments | 48,581 | 54,766 | |||||
Total investments | 16,048,603 | 14,343,690 | |||||
Cash | 49,678 | 61,383 | |||||
Accrued investment income | 216,443 | 209,915 | |||||
Other receivables | 358,686 | 344,552 | |||||
Deferred acquisition costs | 3,698,449 | 3,617,135 | |||||
Goodwill | 441,591 | 441,591 | |||||
Other assets | 509,790 | 522,104 | |||||
Assets related to discontinued operations | 250,800 | 312,843 | |||||
Total assets | $ | 21,574,040 | $ | 19,853,213 | |||
Liabilities and Shareholders’ Equity | |||||||
Liabilities: | |||||||
Future policy benefits | $ | 12,544,683 | $ | 12,245,811 | |||
Unearned and advance premiums | 72,649 | 67,021 | |||||
Policy claims and other benefits payable | 265,712 | 272,898 | |||||
Other policyholders’ funds | 96,184 | 95,988 | |||||
Total policy liabilities | 12,979,228 | 12,681,718 | |||||
Current and deferred income taxes payable | 1,887,091 | 1,450,888 | |||||
Other liabilities | 349,631 | 380,158 | |||||
Short-term debt | 286,011 | 490,129 | |||||
Long-term debt (estimated fair value: 2016–$1,278,375; 2015–$856,291) | 1,133,928 | 743,733 | |||||
Liabilities related to discontinued operations | 60,393 | 51,035 | |||||
Total liabilities | 16,696,282 | 15,797,661 | |||||
Commitments and Contingencies | |||||||
Preferred stock, par value $1 per share–Authorized 5,000,000 shares; outstanding: -0- in 2016 and in 2015 | — | — | |||||
Common stock, par value $1 per share–Authorized 320,000,000 shares; outstanding: (2016–130,218,183 issued, less 10,365,271 held in treasury and 2015–130,218,183 issued, less 7,848,231 held in treasury) | 130,218 | 130,218 | |||||
Additional paid-in capital | 489,726 | 482,284 | |||||
Accumulated other comprehensive income | 989,157 | 231,947 | |||||
Retained earnings | 3,817,666 | 3,614,369 | |||||
Treasury stock, at cost | (549,009 | ) | (403,266 | ) | |||
Total shareholders’ equity | 4,877,758 | 4,055,552 | |||||
Total liabilities and shareholders’ equity | $ | 21,574,040 | $ | 19,853,213 |
See accompanying Notes to Condensed Consolidated Financial Statements.
1
TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands except per share data)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016(1) | 2015(2) | 2016(1) | 2015(2) | ||||||||||||
Revenue: | |||||||||||||||
Life premium | $ | 548,590 | $ | 520,038 | $ | 1,092,741 | $ | 1,033,380 | |||||||
Health premium | 237,252 | 232,409 | 472,949 | 461,082 | |||||||||||
Other premium | 13 | 37 | 25 | 78 | |||||||||||
Total premium | 785,855 | 752,484 | 1,565,715 | 1,494,540 | |||||||||||
Net investment income | 201,642 | 194,823 | 398,695 | 386,419 | |||||||||||
Realized investment gains | 4,005 | 2,613 | 4,298 | 2,732 | |||||||||||
Other income | 382 | 691 | 803 | 1,360 | |||||||||||
Total revenue | 991,884 | 950,611 | 1,969,511 | 1,885,051 | |||||||||||
Benefits and expenses: | |||||||||||||||
Life policyholder benefits | 369,342 | 347,364 | 732,202 | 687,065 | |||||||||||
Health policyholder benefits | 153,261 | 151,198 | 306,036 | 299,227 | |||||||||||
Other policyholder benefits | 8,882 | 9,754 | 18,220 | 19,799 | |||||||||||
Total policyholder benefits | 531,485 | 508,316 | 1,056,458 | 1,006,091 | |||||||||||
Amortization of deferred acquisition costs | 117,245 | 111,738 | 236,051 | 222,398 | |||||||||||
Commissions, premium taxes, and non-deferred acquisition costs | 62,854 | 59,132 | 124,456 | 116,237 | |||||||||||
Other operating expense | 57,846 | 55,588 | 115,275 | 110,951 | |||||||||||
Interest expense | 23,110 | 19,114 | 42,479 | 38,174 | |||||||||||
Total benefits and expenses | 792,540 | 753,888 | 1,574,719 | 1,493,851 | |||||||||||
Income before income taxes | 199,344 | 196,723 | 394,792 | 391,200 | |||||||||||
Income taxes | (60,050 | ) | (64,196 | ) | (121,924 | ) | (127,895 | ) | |||||||
Income from continuing operations | 139,294 | 132,527 | 272,868 | 263,305 | |||||||||||
Discontinued operations: | |||||||||||||||
Income (loss) from discontinued operations, net of tax | (865 | ) | (5,417 | ) | (10,406 | ) | (14,547 | ) | |||||||
Net income | $ | 138,429 | $ | 127,110 | $ | 262,462 | $ | 248,758 | |||||||
Basic net income per share: | |||||||||||||||
Continuing operations | $ | 1.16 | $ | 1.05 | $ | 2.26 | $ | 2.08 | |||||||
Discontinued operations | (0.01 | ) | (0.04 | ) | (0.09 | ) | (0.11 | ) | |||||||
Total basic net income per common share | $ | 1.15 | $ | 1.01 | $ | 2.17 | $ | 1.97 | |||||||
Diluted net income per share: | |||||||||||||||
Continuing operations | $ | 1.13 | $ | 1.04 | $ | 2.22 | $ | 2.06 | |||||||
Discontinued operations | — | (0.04 | ) | (0.09 | ) | (0.12 | ) | ||||||||
Total diluted net income per common share | $ | 1.13 | $ | 1.00 | $ | 2.13 | $ | 1.94 | |||||||
Dividends declared per common share | $ | 0.14 | $ | 0.14 | $ | 0.28 | $ | 0.27 |
(1) Due to the adoption of ASU 2016-09, certain balances related to excess tax benefits from stock compensation were adjusted prospectively as described in Note 2—New Accounting Standards.
(2) Certain prior year balances were adjusted to give effect to discontinued operations as described in Note 5—Discontinued Operations.
See accompanying Notes to Condensed Consolidated Financial Statements.
2
TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Net income | $ | 138,429 | $ | 127,110 | $ | 262,462 | $ | 248,758 | |||||||
Other comprehensive income (loss): | |||||||||||||||
Unrealized gains (losses) on securities: | |||||||||||||||
Unrealized holding gains (losses) arising during period | 695,984 | (935,288 | ) | 1,161,141 | (668,706 | ) | |||||||||
Reclassification adjustment for (gains) losses on securities included in net income | (3,983 | ) | (1,479 | ) | (4,296 | ) | (1,598 | ) | |||||||
Reclassification adjustment for amortization of (discount) and premium | (1,204 | ) | (1,599 | ) | (2,568 | ) | (3,271 | ) | |||||||
Foreign exchange adjustment on securities recorded at fair value | 593 | 1,295 | 1,048 | (1,263 | ) | ||||||||||
Unrealized gains (losses) on securities | 691,390 | (937,071 | ) | 1,155,325 | (674,838 | ) | |||||||||
Unrealized gains (losses) on other investments | 1,225 | (3,470 | ) | 1,883 | (2,327 | ) | |||||||||
Total unrealized investment gains (losses) | 692,615 | (940,541 | ) | 1,157,208 | (677,165 | ) | |||||||||
Less applicable (taxes) benefits | (242,401 | ) | 328,996 | (404,990 | ) | 236,865 | |||||||||
Unrealized investment gains (losses), net of tax | 450,214 | (611,545 | ) | 752,218 | (440,300 | ) | |||||||||
Unrealized gains (losses) attributable to deferred acquisition costs | (2,681 | ) | 2,953 | (5,450 | ) | 3,605 | |||||||||
Less applicable (taxes) benefits | 938 | (1,034 | ) | 1,907 | (1,262 | ) | |||||||||
Unrealized gains (losses) attributable to deferred acquisition costs, net of tax | (1,743 | ) | 1,919 | (3,543 | ) | 2,343 | |||||||||
Foreign exchange translation adjustments, other than securities | 5,382 | (4,845 | ) | 7,142 | (13,536 | ) | |||||||||
Less applicable (taxes) benefits | (1,898 | ) | 1,774 | (2,438 | ) | 4,503 | |||||||||
Foreign exchange translation adjustments, other than securities, net of tax | 3,484 | (3,071 | ) | 4,704 | (9,033 | ) | |||||||||
Pension adjustments | 2,656 | 3,653 | 5,894 | 7,472 | |||||||||||
Less applicable (taxes) benefits | (929 | ) | (1,278 | ) | (2,063 | ) | (2,615 | ) | |||||||
Pension adjustments, net of tax | 1,727 | 2,375 | 3,831 | 4,857 | |||||||||||
Other comprehensive income (loss) | 453,682 | (610,322 | ) | 757,210 | (442,133 | ) | |||||||||
Comprehensive income (loss) | $ | 592,111 | $ | (483,212 | ) | $ | 1,019,672 | $ | (193,375 | ) |
See accompanying Notes to Condensed Consolidated Financial Statements.
3
TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(Amounts in thousands except per share data)
Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Total Shareholders’ Equity | ||||||||||||||||||||||
Balance at January 1, 2015 | $ | — | $ | 134,218 | $ | 457,613 | $ | 997,452 | $ | 3,376,846 | $ | (268,663 | ) | $ | 4,697,466 | |||||||||||||
Other Comprehensive income (loss) | (442,133 | ) | 248,758 | (193,375 | ) | |||||||||||||||||||||||
Common dividends declared ($0.27 per share) | (34,004 | ) | (34,004 | ) | ||||||||||||||||||||||||
Acquisition of treasury stock | (211,567 | ) | (211,567 | ) | ||||||||||||||||||||||||
Stock-based compensation | 8,189 | (2,132 | ) | 8,983 | 15,040 | |||||||||||||||||||||||
Exercise of stock options | 10,989 | (20,753 | ) | 42,260 | 32,496 | |||||||||||||||||||||||
Balance at June 30, 2015 | $ | — | $ | 134,218 | $ | 476,791 | $ | 555,319 | $ | 3,568,715 | $ | (428,987 | ) | $ | 4,306,056 | |||||||||||||
Balance at January 1, 2016 | $ | — | $ | 130,218 | $ | 482,284 | $ | 231,947 | $ | 3,614,369 | $ | (403,266 | ) | $ | 4,055,552 | |||||||||||||
Other Comprehensive income (loss) | 757,210 | 262,462 | 1,019,672 | |||||||||||||||||||||||||
Common dividends declared ($0.28 per share) | (33,766 | ) | (33,766 | ) | ||||||||||||||||||||||||
Acquisition of treasury stock | (202,975 | ) | (202,975 | ) | ||||||||||||||||||||||||
Stock-based compensation | 7,442 | (2,224 | ) | 8,771 | 13,989 | |||||||||||||||||||||||
Exercise of stock options | (23,175 | ) | 48,461 | 25,286 | ||||||||||||||||||||||||
Balance at June 30, 2016 | $ | — | $ | 130,218 | $ | 489,726 | $ | 989,157 | $ | 3,817,666 | $ | (549,009 | ) | $ | 4,877,758 |
4
TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Six Months Ended June 30, | |||||||
2016 | 2015 | ||||||
Cash provided from operating activities | $ | 604,935 | $ | 454,121 | |||
Cash provided from (used for) investing activities: | |||||||
Investments sold or matured: | |||||||
Fixed maturities available for sale—sold | 51,299 | 14,287 | |||||
Fixed maturities available for sale—matured, called, and repaid | 92,475 | 213,989 | |||||
Other long-term investments | 1,394 | 431 | |||||
Total long-term investments sold or matured | 145,168 | 228,707 | |||||
Acquisition of investments: | |||||||
Fixed maturities—available for sale | (651,267 | ) | (541,875 | ) | |||
Other long-term investments | (21,762 | ) | (1,886 | ) | |||
Total investments acquired | (673,029 | ) | (543,761 | ) | |||
Net (increase) in policy loans | (9,093 | ) | (7,844 | ) | |||
Net (increase) decrease in short-term investments | 6,185 | (12,813 | ) | ||||
Net change in payable or receivable for securities | (711 | ) | 4,980 | ||||
Additions to property and equipment | (6,740 | ) | (13,949 | ) | |||
Investment in low-income housing interests | (9,260 | ) | (11,954 | ) | |||
Cash from (used for) investing activities | (547,480 | ) | (356,634 | ) | |||
Cash provided from (used for) financing activities: | |||||||
Issuance of common stock | 25,286 | 21,507 | |||||
Cash dividends paid to shareholders | (33,478 | ) | (33,306 | ) | |||
Repayment of 6.375% Notes | (250,000 | ) | — | ||||
Issuance of Term Loan | 100,000 | — | |||||
Issuance of 6.125% Junior Subordinated Debentures | 300,000 | — | |||||
Issue expenses of debt offering | (9,638 | ) | — | ||||
Net borrowing (repayment) of commercial paper | 45,010 | 148,970 | |||||
Excess tax benefit from stock option exercises(1) | — | 10,989 | |||||
Acquisition of treasury stock | (202,975 | ) | (211,567 | ) | |||
Net receipts (payments) from deposit-type product | (38,193 | ) | (42,815 | ) | |||
Cash provided from (used for) financing activities | (63,988 | ) | (106,222 | ) | |||
Effect of foreign exchange rate changes on cash | (5,172 | ) | 5,565 | ||||
Net increase (decrease) in cash | (11,705 | ) | (3,170 | ) | |||
Cash at beginning of year | 61,383 | 66,019 | |||||
Cash at end of period | $ | 49,678 | $ | 62,849 |
(1) Due to the prospective adoption of ASU 2016-09, the excess tax benefits from stock option exercises of $7 million at June 30, 2016 were presented as a component of operating activities in the same manner as other cash flows related to income taxes. The 2015 balance of $11 million, under the previous guidance, remains in the financing activities section. See further discussion at Note 2—New Accounting Standards.
See accompanying Notes to Condensed Consolidated Financial Statements.
5
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies
Basis of Presentation: The accompanying condensed consolidated financial statements of Torchmark Corporation (Torchmark or alternatively, the Company) have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all of the annual disclosures required by accounting principles generally accepted in the United States of America (GAAP). However, in the opinion of management, these statements include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the condensed consolidated financial position at June 30, 2016, and the condensed consolidated results of operations, comprehensive income, and cash flows for the periods ended June 30, 2016 and 2015. The interim period condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements that are included in the Form 10-K filed with the Securities Exchange Commission (SEC) on February 26, 2016.
Note 2—New Accounting Standards
Accounting Pronouncements Adopted
ASU 2014-15: In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (ASU 2014-15). This accounting standard requires management to perform interim and annual assessments of the entity's ability to continue its business operations within one year of the date of issuance of its financial statements. The Company must then provide certain disclosure if there is substantial doubt about its ability to continue as a going concern. As of January 1, 2016, the Company adopted this standard with no impact to the financial statements.
ASU 2016-09: In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09) to simplify certain aspects of accounting for share-based payment award transactions including: (a) income tax consequences; (b) classification in the statement of cash flows; and (c) accounting for forfeitures. Torchmark elected to early adopt this standard as of January 1, 2016, as permitted. This new accounting standard primarily affects Torchmark's computations of net income and diluted shares outstanding and thus earnings per share.
While the intent of the adoption of this guidance is simplification, inherent changes in future share prices and volume of stock option exercises are expected to result in increased volatility in net income and earnings per share in future periods. As provided by the new standard, the adoption is prospective and thus will impact only 2016 and future periods.
Below is a listing of the effects of the adoption of this guidance:
• | Condensed consolidated statement of operations: For the three months ended June 30, 2016, the Company recorded $5 million in excess tax benefits as a component of income taxes, which resulted in an increase in net income as compared with the three months ended June 30, 2015 when the excess tax benefits of $6 million were recorded as a component of additional paid-in capital on the balance sheet. For the six months ended June 30, 2016, the Company recorded $7 million in excess tax benefits as a component of income taxes as compared with $11 million recorded as a component of additional paid-in-capital on the balance sheet for the same period in the prior year. |
• | Weighted average diluted shares: The weighted average diluted shares outstanding were adjusted to exclude excess tax benefits from the assumed proceeds in the diluted shares calculation. This change resulted in diluted weighted average shares outstanding of 122.7 million for the quarter ended June 30, 2016, as compared with 121.9 million under the previous guidance. For the six months ended June 30, 2016, the weighted average diluted shares outstanding were 123.0 million as compared with 122.3 million under the previous guidance. |
• | Earnings per share: The adoption resulted in a $0.03 increase in earnings per share for the three months ended June 30, 2016 and a $0.04 increase for the six months ended June 30, 2016. |
• | Condensed consolidated statement of cash flows: The excess tax benefits related to share-based payments of $7 million were presented as a component of operating activities in the same manner as other cash flows |
6
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 2—New Accounting Standards (continued)
related to income taxes. In prior years, the excess tax benefits were reclassified from operating activities to financing activities. The prior period amounts were not adjusted.
Accounting Pronouncements Not Yet Adopted
ASU 2016-02: In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842), (ASU 2016-02) which requires all lessees to report a right-of-use asset and a lease liability for most leases. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. The standard will become effective for the Company beginning January 1, 2019 and will require recognizing and measuring leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the standard to determine its impact.
ASU 2016-13: In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments as well as to change the loss impairment methodology for available-for-sale debt securities. The standard will become effective on January 1, 2020. The applicable section of the standard related to debt securities requires a prospective transition. The Company does not expect the adoption to have a significant impact on the financial statements.
Note 3—Supplemental Information about Changes to Accumulated Other Comprehensive Income
An analysis of the change in balance by component of Accumulated Other Comprehensive Income is as follows for the three and six month periods ended June 30, 2016 and 2015.
Components of Accumulated Other Comprehensive Income
Three Months Ended June 30, 2016 | ||||||||||||||||||||
Available for Sale Assets | Deferred Acquisition Costs | Foreign Exchange | Pension Adjustments | Total | ||||||||||||||||
Balance at April 1, 2016 | $ | 634,337 | $ | (6,915 | ) | $ | 4,847 | $ | (96,794 | ) | $ | 535,475 | ||||||||
Other comprehensive income (loss) before reclassifications, net of tax | 453,586 | (1,743 | ) | 3,484 | 69 | 455,396 | ||||||||||||||
Reclassifications, net of tax | (3,372 | ) | — | — | 1,658 | (1,714 | ) | |||||||||||||
Other comprehensive income (loss) | 450,214 | (1,743 | ) | 3,484 | 1,727 | 453,682 | ||||||||||||||
Balance at June 30, 2016 | $ | 1,084,551 | $ | (8,658 | ) | $ | 8,331 | $ | (95,067 | ) | $ | 989,157 | ||||||||
Three Months Ended June 30, 2015 | ||||||||||||||||||||
Available for Sale Assets | Deferred Acquisition Costs | Foreign Exchange | Pension Adjustments | Total | ||||||||||||||||
Balance at April 1, 2015 | $ | 1,261,518 | $ | (10,334 | ) | $ | 11,424 | $ | (96,967 | ) | $ | 1,165,641 | ||||||||
Other comprehensive income (loss) before reclassifications, net of tax | (609,544 | ) | 1,919 | (3,071 | ) | — | (610,696 | ) | ||||||||||||
Reclassifications, net of tax | (2,001 | ) | — | — | 2,375 | 374 | ||||||||||||||
Other comprehensive income (loss) | (611,545 | ) | 1,919 | (3,071 | ) | 2,375 | (610,322 | ) | ||||||||||||
Balance at June 30, 2015 | $ | 649,973 | $ | (8,415 | ) | $ | 8,353 | $ | (94,592 | ) | $ | 555,319 |
7
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 3—Supplemental Information about Changes to Accumulated Other Comprehensive Income (continued)
Components of Accumulated Other Comprehensive Income
Six Months Ended June 30, 2016 | ||||||||||||||||||||
Available for Sale Assets | Deferred Acquisition Costs | Foreign Exchange | Pension Adjustments | Total | ||||||||||||||||
Balance at January 1, 2016 | $ | 332,333 | $ | (5,115 | ) | $ | 3,627 | $ | (98,898 | ) | $ | 231,947 | ||||||||
Other comprehensive income (loss) before reclassifications, net of tax | 756,680 | (3,543 | ) | 4,704 | 514 | 758,355 | ||||||||||||||
Reclassifications, net of tax | (4,462 | ) | — | — | 3,317 | (1,145 | ) | |||||||||||||
Other comprehensive income (loss) | 752,218 | (3,543 | ) | 4,704 | 3,831 | 757,210 | ||||||||||||||
Balance at June 30, 2016 | $ | 1,084,551 | $ | (8,658 | ) | $ | 8,331 | $ | (95,067 | ) | $ | 989,157 | ||||||||
Six Months Ended June 30, 2015 | ||||||||||||||||||||
Available for Sale Assets | Deferred Acquisition Costs | Foreign Exchange | Pension Adjustments | Total | ||||||||||||||||
Balance at January 1, 2015 | $ | 1,090,273 | $ | (10,758 | ) | $ | 17,386 | $ | (99,449 | ) | $ | 997,452 | ||||||||
Other comprehensive income (loss) before reclassifications, net of tax | (437,135 | ) | 2,343 | (9,033 | ) | 117 | (443,708 | ) | ||||||||||||
Reclassifications, net of tax | (3,165 | ) | — | — | 4,740 | 1,575 | ||||||||||||||
Other comprehensive income (loss) | (440,300 | ) | 2,343 | (9,033 | ) | 4,857 | (442,133 | ) | ||||||||||||
Balance at June 30, 2015 | $ | 649,973 | $ | (8,415 | ) | $ | 8,353 | $ | (94,592 | ) | $ | 555,319 |
Reclassifications out of Accumulated Other Comprehensive Income are presented below for the three and six month periods ended June 30, 2016 and 2015.
Reclassification Adjustments
Three Months Ended June 30, | Six Months Ended June 30, | Affected line items in the Statement of Operations | ||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||
Unrealized investment gains (losses) on available for sale assets: | ||||||||||||||||||
Realized (gains) losses | $ | (3,983 | ) | $ | (1,479 | ) | $ | (4,296 | ) | $ | (1,598 | ) | Realized investment gains (losses) | |||||
Amortization of (discount) premium | (1,204 | ) | (1,599 | ) | (2,568 | ) | (3,271 | ) | Net investment income | |||||||||
Total before tax | (5,187 | ) | (3,078 | ) | (6,864 | ) | (4,869 | ) | ||||||||||
Tax | 1,815 | 1,077 | 2,402 | 1,704 | Income Taxes | |||||||||||||
Total after tax | (3,372 | ) | (2,001 | ) | (4,462 | ) | (3,165 | ) | ||||||||||
Pension adjustments: | ||||||||||||||||||
Amortization of prior service cost | 120 | 82 | 240 | 163 | Other operating expenses | |||||||||||||
Amortization of actuarial gain (loss) | 2,431 | 3,571 | 4,863 | 7,128 | Other operating expenses | |||||||||||||
Total before tax | 2,551 | 3,653 | 5,103 | 7,291 | ||||||||||||||
Tax | (893 | ) | (1,278 | ) | (1,786 | ) | (2,551 | ) | Income Taxes | |||||||||
Total after tax | 1,658 | 2,375 | 3,317 | 4,740 | ||||||||||||||
Total reclassifications (after tax) | $ | (1,714 | ) | $ | 374 | $ | (1,145 | ) | $ | 1,575 |
8
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 4—Investments
Portfolio Composition:
A summary of fixed maturities available for sale by cost or amortized cost and estimated fair value at June 30, 2016 is as follows:
Portfolio Composition as of June 30, 2016
Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value(1) | % of Total Fixed Maturities(2) | |||||||||||||
Bonds: | |||||||||||||||||
U.S. Government direct, guaranteed, and government-sponsored enterprises | $ | 380,528 | $ | 33,040 | $ | (432 | ) | $ | 413,136 | 3 | |||||||
States, municipalities, and political subdivisions | 1,277,303 | 184,320 | (199 | ) | 1,461,424 | 10 | |||||||||||
Foreign governments | 22,468 | 2,773 | — | 25,241 | — | ||||||||||||
Corporates, by sector: | |||||||||||||||||
Financial | 2,800,108 | 388,055 | (48,336 | ) | 3,139,827 | 20 | |||||||||||
Utilities | 1,950,172 | 377,501 | (7,370 | ) | 2,320,303 | 15 | |||||||||||
Energy | 1,566,871 | 114,956 | (83,315 | ) | 1,598,512 | 10 | |||||||||||
Other corporate sectors | 5,250,898 | 701,948 | (55,123 | ) | 5,897,723 | 39 | |||||||||||
Total corporates | 11,568,049 | 1,582,460 | (194,144 | ) | 12,956,365 | 84 | |||||||||||
Collateralized debt obligations | 62,174 | 13,617 | (11,728 | ) | 64,063 | — | |||||||||||
Other asset-backed securities | 56,914 | 1,989 | — | 58,903 | — | ||||||||||||
Redeemable preferred stocks, by sector: | |||||||||||||||||
Financial | 382,195 | 52,900 | (4,754 | ) | 430,341 | 3 | |||||||||||
Utilities | 28,623 | 1,994 | — | 30,617 | — | ||||||||||||
Total redeemable preferred stocks | 410,818 | 54,894 | (4,754 | ) | 460,958 | 3 | |||||||||||
Total fixed maturities | $ | 13,778,254 | $ | 1,873,093 | $ | (211,257 | ) | $ | 15,440,090 | 100 |
(1) Amounts reported on the balance sheet.
(2) At fair value.
9
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
A schedule of fixed maturities available for sale by contractual maturity date at June 30, 2016 is shown below on an amortized cost basis and on a fair value basis. Actual maturity dates could differ from contractual maturities due to call or prepayment provisions.
Amortized Cost | Fair Value | ||||||
Fixed maturities available for sale: | |||||||
Due in one year or less | $ | 48,012 | $ | 48,366 | |||
Due from one to five years | 612,267 | 666,057 | |||||
Due from five to ten years | 1,047,056 | 1,175,885 | |||||
Due from ten to twenty years | 4,027,521 | 4,622,554 | |||||
Due after twenty years | 7,922,723 | 8,802,523 | |||||
Mortgage-backed and asset-backed securities | 120,675 | 124,705 | |||||
$ | 13,778,254 | $ | 15,440,090 |
Selected information about sales of fixed maturities available for sale is as follows.
Six Months Ended June 30, | |||||||
2016 | 2015 | ||||||
Proceeds from sales | $ | 51,299 | $ | 14,287 | |||
Gross realized gains | 3,556 | 82 | |||||
Gross realized losses | (214 | ) | (104 | ) |
10
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Fair Value Measurements:
The following table represents the fair value of fixed maturities available for sale measured on a recurring basis.
Fair Value Measurements at June 30, 2016 Using: | ||||||||||||||||
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | ||||||||||||
Bonds: | ||||||||||||||||
U.S. Government direct, guaranteed, and government-sponsored enterprises | $ | 18 | $ | 413,118 | $ | — | $ | 413,136 | ||||||||
States, municipalities, and political subdivisions | — | 1,461,424 | — | 1,461,424 | ||||||||||||
Foreign governments | — | 25,241 | — | 25,241 | ||||||||||||
Corporates, by sector: | ||||||||||||||||
Financial | — | 3,076,036 | 63,791 | 3,139,827 | ||||||||||||
Utilities | 12,008 | 2,168,991 | 139,304 | 2,320,303 | ||||||||||||
Energy | — | 1,569,212 | 29,300 | 1,598,512 | ||||||||||||
Other corporate sectors | — | 5,560,953 | 336,770 | 5,897,723 | ||||||||||||
Total corporates | 12,008 | 12,375,192 | 569,165 | 12,956,365 | ||||||||||||
Collateralized debt obligations | — | — | 64,063 | 64,063 | ||||||||||||
Other asset-backed securities | — | 58,903 | — | 58,903 | ||||||||||||
Redeemable preferred stocks, by sector: | ||||||||||||||||
Financial | 10,168 | 420,173 | — | 430,341 | ||||||||||||
Utilities | — | 30,617 | — | 30,617 | ||||||||||||
Total redeemable preferred stocks | 10,168 | 450,790 | — | 460,958 | ||||||||||||
Total fixed maturities | $ | 22,194 | $ | 14,784,668 | $ | 633,228 | $ | 15,440,090 | ||||||||
Percent of total | 0.1 | % | 95.8 | % | 4.1 | % | 100 | % |
11
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
The following table represents an analysis of changes in fair value measurements using significant unobservable inputs (Level 3).
Analysis of Changes in Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
Six Months Ended June 30, 2016 | |||||||||||
Collateralized Debt Obligations | Corporates(1) | Total | |||||||||
Balance at January 1, 2016 | $ | 70,382 | $ | 530,806 | $ | 601,188 | |||||
Total gains or losses: | |||||||||||
Included in realized gains/losses | — | — | — | ||||||||
Included in other comprehensive income | (4,831 | ) | 24,291 | 19,460 | |||||||
Acquisitions | — | 15,800 | 15,800 | ||||||||
Sales | — | — | — | ||||||||
Amortization | 2,639 | 8 | 2,647 | ||||||||
Other(2) | (4,127 | ) | (1,740 | ) | (5,867 | ) | |||||
Transfers in and/or out of Level 3(3) | — | — | — | ||||||||
Balance at June 30, 2016 | $ | 64,063 | $ | 569,165 | $ | 633,228 | |||||
Percent of total fixed maturities | 0.4 | % | 3.7 | % | 4.1 | % | |||||
Six Months Ended June 30, 2015 | |||||||||||
Collateralized Debt Obligations | Corporates(1) | Total | |||||||||
Balance at January 1, 2015 | $ | 63,232 | $ | 512,714 | $ | 575,946 | |||||
Total gains or losses: | |||||||||||
Included in realized gains/losses | — | — | — | ||||||||
Included in other comprehensive income | 13,531 | (8,426 | ) | 5,105 | |||||||
Acquisitions | — | 19,400 | 19,400 | ||||||||
Sales | — | — | — | ||||||||
Amortization | 2,810 | 7 | 2,817 | ||||||||
Other(2) | (5,905 | ) | (1,666 | ) | (7,571 | ) | |||||
Transfers in and/or out of Level 3(3) | — | — | — | ||||||||
Balance at June 30, 2015 | $ | 73,668 | $ | 522,029 | $ | 595,697 | |||||
Percent of total fixed maturities | 0.5 | % | 3.7 | % | 4.2 | % |
(1) Includes redeemable preferred stocks.
(2) Includes capitalized interest, foreign exchange adjustments, and principal repayments.
(3) Considered to be transferred at the end of the period. Transfers into Level 3 occur when observable inputs are no longer available. Transfers out of Level 3 occur when observable inputs become available.
12
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Other-Than-Temporary Impairments:
Based on the Company's evaluation of its fixed maturities available for sale in an unrealized loss position in accordance with the other-than-temporary impairment (OTTI) policy, the Company concluded that there were no other-than-temporary impairments during the three or six month periods ended June 30, 2016 and 2015, respectively.
As of quarter end, previously written down securities remaining in the portfolio were carried at a fair value of $56 million, or less than 1% of the fair value of the fixed maturity available for sale portfolio. Torchmark is continuously monitoring the market conditions impacting its portfolio. Additionally, Torchmark has the ability and intent to hold these investments to recovery, and does not expect to be required to sell any of its securities.
Unrealized Loss Analysis:
The following table discloses information about fixed maturities available for sale in an unrealized loss position.
Less than Twelve Months | Twelve Months or Longer | Total | |||||||
Number of issues (CUSIP numbers) held: | |||||||||
As of June 30, 2016 | 43 | 126 | 169 | ||||||
As of December 31, 2015 | 480 | 75 | 555 |
Torchmark’s entire fixed maturity portfolio consisted of 1,573 issues at June 30, 2016 and 1,565 issues at December 31, 2015. The weighted average quality rating of all unrealized loss positions as of June 30, 2016 was BB+.
13
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
The following table discloses unrealized investment losses by class and major sector of fixed maturities available for sale at June 30, 2016 for the period of time in a loss position. Torchmark considers these investments to be only temporarily impaired.
Analysis of Gross Unrealized Investment Losses
At June 30, 2016
Less than Twelve Months | Twelve Months or Longer | Total | ||||||||||||||||||||||
Description of Securities | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||
Investment grade securities: | ||||||||||||||||||||||||
Bonds: | ||||||||||||||||||||||||
U.S. Government direct, guaranteed, and government-sponsored enterprises | $ | 39 | $ | — | $ | 1,543 | $ | (432 | ) | $ | 1,582 | $ | (432 | ) | ||||||||||
States, municipalities and political subdivisions | — | — | 699 | (9 | ) | 699 | (9 | ) | ||||||||||||||||
Corporates, by sector: | ||||||||||||||||||||||||
Financial | 67,965 | (6,462 | ) | 80,657 | (4,848 | ) | 148,622 | (11,310 | ) | |||||||||||||||
Utilities | — | — | 101,395 | (7,370 | ) | 101,395 | (7,370 | ) | ||||||||||||||||
Energy | 141,343 | (4,750 | ) | 336,085 | (40,163 | ) | 477,428 | (44,913 | ) | |||||||||||||||
Other corporate sectors | 70,799 | (3,130 | ) | 194,464 | (11,226 | ) | 265,263 | (14,356 | ) | |||||||||||||||
Total corporates | 280,107 | (14,342 | ) | 712,601 | (63,607 | ) | 992,708 | (77,949 | ) | |||||||||||||||
Redeemable preferred stocks, by sector: | ||||||||||||||||||||||||
Financial | 3,995 | (5 | ) | — | — | 3,995 | (5 | ) | ||||||||||||||||
Total redeemable preferred stocks | 3,995 | (5 | ) | — | — | 3,995 | (5 | ) | ||||||||||||||||
Total investment grade securities | 284,141 | (14,347 | ) | 714,843 | (64,048 | ) | 998,984 | (78,395 | ) | |||||||||||||||
Below investment grade securities: | ||||||||||||||||||||||||
Bonds: | ||||||||||||||||||||||||
States, municipalities and political subdivisions | — | — | 363 | (190 | ) | 363 | (190 | ) | ||||||||||||||||
Corporates, by sector: | ||||||||||||||||||||||||
Financial | — | — | 68,751 | (37,026 | ) | 68,751 | (37,026 | ) | ||||||||||||||||
Energy | 22,465 | (1,337 | ) | 98,134 | (37,065 | ) | 120,599 | (38,402 | ) | |||||||||||||||
Other corporate sectors | 77,363 | (11,922 | ) | 159,670 | (28,845 | ) | 237,033 | (40,767 | ) | |||||||||||||||
Total corporates | 99,828 | (13,259 | ) | 326,555 | (102,936 | ) | 426,383 | (116,195 | ) | |||||||||||||||
Collateralized debt obligations | — | — | 8,272 | (11,728 | ) | 8,272 | (11,728 | ) | ||||||||||||||||
Redeemable preferred stocks, by sector: | ||||||||||||||||||||||||
Financial | — | — | 22,394 | (4,749 | ) | 22,394 | (4,749 | ) | ||||||||||||||||
Total redeemable preferred stocks | — | — | 22,394 | (4,749 | ) | 22,394 | (4,749 | ) | ||||||||||||||||
Total below investment grade securities | 99,828 | (13,259 | ) | 357,584 | (119,603 | ) | 457,412 | (132,862 | ) | |||||||||||||||
Total fixed maturities | $ | 383,969 | $ | (27,606 | ) | $ | 1,072,427 | $ | (183,651 | ) | $ | 1,456,396 | $ | (211,257 | ) |
14
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 5—Discontinued Operations
At December 31, 2015, Torchmark met the criteria to account for its Medicare Part D Prescription Drug Plan business as a discontinued operation. Historically, the business was a reportable segment. Subsequent to the end of the quarter and effective July 1, 2016, Torchmark entered into an agreement to sell its Medicare Part D Prescription Drug Plan business to SilverScript Insurance Company, a subsidiary of CVS Health Corporation (collectively, the "Buyer"). Management believes this sale will allow the Company to better focus on its core protection life and health insurance businesses, and provide additional capital.
The initial purchase price was based on the number of enrollees as of the end of the second quarter and will be adjusted based on the number of enrollees as of January 1, 2017 as determined by Center for Medicare Services (CMS) in March 2017. The net proceeds from the sale, including selling costs, are expected to approximate the $17 million of deferred acquisition costs related to the Medicare Part D business as of June 30, 2016. Accordingly, the net impact of the sale on Torchmark’s financial statements is expected to be insignificant.
Torchmark will retain certain assets and liabilities related to the Medicare Part D business including all corresponding profits or losses for the 2016 plan year. The Buyer will assume the rights and obligations related to the business for all subsequent plan years. To ensure an orderly transition, Torchmark will administer the plans for the remainder of 2016, and the Buyer will be responsible for administration of the plans beginning in 2017. The remaining assets and liabilities reflected on the Torchmark balance sheet related to discontinued operations are receivables and payables that are expected to be settled in the ordinary course of business during 2016 and 2017.
At June 30, 2016, Torchmark recorded the business as a discontinued operation. The net assets related to discontinued operations at June 30, 2016 and December 31, 2015 were as follows:
June 30, 2016 | December 31, 2015 | ||||||
Assets: | |||||||
Due premiums | $ | 8,107 | $ | 8,041 | |||
Risk sharing receivable | 301 | — | |||||
Other receivables(1) | 225,708 | 287,765 | |||||
Deferred acquisition costs | 16,684 | 17,037 | |||||
Total assets related to discontinued operations | 250,800 | 312,843 | |||||
Liabilities: | |||||||
Unearned and advance premiums | 3,150 | 806 | |||||
Policy claims and other benefits payable | 12,751 | 12,309 | |||||
Risk sharing payable | 23,536 | 23,837 | |||||
Current and deferred income taxes payable | 18,155 | 13,604 | |||||
Other | 2,801 | 479 | |||||
Total liabilities related to discontinued operations | 60,393 | 51,035 | |||||
Net assets | $ | 190,407 | $ | 261,808 |
(1) At June 30, 2016, receivables included $201 million from Centers for Medicare and Medicaid Services (CMS) and $25 million from drug manufacturer rebates. At December 31, 2015, the comparable amounts were $193 million and $95 million, respectively.
15
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 5—Discontinued Operations (continued)
Income from discontinued operations for the three and six months ended June 30, 2016 and 2015 was as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenue: | |||||||||||||||
Health premium | $ | 56,774 | $ | 83,083 | $ | 111,473 | $ | 171,175 | |||||||
Benefits and expenses: | |||||||||||||||
Health policyholder benefits | 51,871 | 83,977 | 113,352 | 178,099 | |||||||||||
Amortization of deferred acquisition costs | 932 | 1,166 | 1,940 | 1,769 | |||||||||||
Commissions, premium taxes, and non-deferred acquisition expenses | 3,792 | 4,886 | 8,901 | 11,049 | |||||||||||
Other operating expense | 1,510 | 1,389 | 3,290 | 2,638 | |||||||||||
Total benefits and expenses | 58,105 | 91,418 | 127,483 | 193,555 | |||||||||||
Income (loss) before income taxes for discontinued operations | (1,331 | ) | (8,335 | ) | (16,010 | ) | (22,380 | ) | |||||||
Income taxes | 466 | 2,918 | 5,604 | 7,833 | |||||||||||
Income (loss) from discontinued operations | $ | (865 | ) | $ | (5,417 | ) | $ | (10,406 | ) | $ | (14,547 | ) |
Operating cash flows of the discontinued operations for the six months ended June 30, 2016 and 2015 were as follows:
Six Months Ended June 30, | |||||||
2016 | 2015 | ||||||
Net cash provided from (used for) discontinued operations | $ | 60,995 | $ | (86,112 | ) |
16
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 6—Income Taxes
The effective income tax differed from the expected 35% rate as shown below:
Three Months Ended June 30, | |||||||||||||
2016 | % | 2015 | % | ||||||||||
Expected income taxes | $ | 69,770 | 35.0 | $ | 68,853 | 35.0 | |||||||
Increase (reduction) in income taxes resulting from: | |||||||||||||
Low income housing investments | (4,829 | ) | (2.4 | ) | (4,724 | ) | (2.4 | ) | |||||
Share-based awards | (4,194 | ) | (2.2 | ) | — | — | |||||||
Other | (697 | ) | (0.4 | ) | 67 | — | |||||||
Income tax expense from continuing operations | $ | 60,050 | 30.0 | $ | 64,196 | 32.6 | |||||||
Six Months Ended June 30, | |||||||||||||
2016 | % | 2015 | % | ||||||||||
Expected income taxes | $ | 138,177 | 35.0 | $ | 136,920 | 35.0 | |||||||
Increase (reduction) in income taxes resulting from: | |||||||||||||
Low income housing investments | (9,657 | ) | (2.4 | ) | (9,447 | ) | (2.4 | ) | |||||
Share-based awards | (6,166 | ) | (1.6 | ) | — | — | |||||||
Other | (430 | ) | (0.1 | ) | 422 | 0.1 | |||||||
Income tax expense from continuing operations | $ | 121,924 | 30.9 | $ | 127,895 | 32.7 |
The effective income tax rates for the three and six months ended June 30, 2016 differed from the effective income tax rates for the same periods ended June 30, 2015 primarily as a result of the Company adopting ASU 2016-09 as of January 1, 2016. As a result of the adoption, the excess tax benefits related to share-based awards are now recorded through income tax expense rather than additional paid-in capital. See Note 2—New Accounting Standards for further discussion.
17
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 7—Debt Transactions
Issuance of long term debt. On April 5, 2016, Torchmark completed the issuance and sale of $300 million in aggregate principal of Torchmark’s 6.125% Junior Subordinated Debentures due 2056. The debentures were sold pursuant to Torchmark’s shelf registration statement on Form S-3, filed September 25, 2015. The net proceeds from the sale of the debentures were $290 million, after giving effect to the underwriting discount and estimated expenses of the offering of the debentures. Torchmark used the net proceeds from the offering of the debentures to repay the $250 million outstanding principal, plus accrued interest of $8 million, on the 6.375% Senior Notes that were due June 15, 2016. The remaining proceeds will be used for general corporate purposes, including capital or other financing at our insurance subsidiaries, if necessary.
Term loan agreement. On May 17, 2016, Torchmark amended its credit facility to include, as a part of the facility, the issuance of a $100 million term loan and to extend the maturity date of the entire credit facility to May 2021. The term loan will be repaid on a redemption schedule which provides for quarterly installments that escalate each annual period with a balloon payment of $75 million due in May 2021. Interest is computed and paid monthly at 125 basis points plus 1 month LIBOR. In accordance with the agreement, Torchmark is subject to certain covenants regarding capitalization. As of June 30, 2016, the Company was in full compliance with these covenants.
Note 8—Postretirement Benefit Plans
The following tables present a summary of post-retirement benefit costs by component.
Components of Post-Retirement Benefit Costs
Three Months Ended June 30, | |||||||||||||||
Pension Benefits | Other Benefits | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Service cost | $ | 3,894 | $ | 3,991 | $ | — | $ | — | |||||||
Interest cost | 5,432 | 5,004 | 212 | 204 | |||||||||||
Expected return on assets | (5,782 | ) | (5,323 | ) | — | — | |||||||||
Amortization: | |||||||||||||||
Prior service cost | 120 | 82 | — | — | |||||||||||
Actuarial (gain) loss | 2,423 | 3,534 | 8 | 37 | |||||||||||
Direct recognition of expense | — | — | 20 | 151 | |||||||||||
Net periodic benefit cost | $ | 6,087 | $ | 7,288 | $ | 240 | $ | 392 | |||||||
Six Months Ended June 30, | |||||||||||||||
Pension Benefits | Other Benefits | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Service cost | $ | 7,788 | $ | 7,981 | $ | — | $ | — | |||||||
Interest cost | 10,864 | 10,006 | 424 | 407 | |||||||||||
Expected return on assets | (11,564 | ) | (10,646 | ) | — | — | |||||||||
Amortization: | |||||||||||||||
Prior service cost | 240 | 163 | — | — | |||||||||||
Actuarial (gain)/loss | 4,847 | 7,068 | 16 | 60 | |||||||||||
Direct recognition of expense | — | — | 54 | 327 | |||||||||||
Net periodic benefit cost | $ | 12,175 | $ | 14,572 | $ | 494 | $ | 794 |
18
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 8—Postretirement Benefits (continued)
The following table presents assets at fair value for the defined-benefit pension plans at June 30, 2016 and the prior-year end.
Pension Assets by Component
June 30, 2016 | December 31, 2015 | ||||||||||
Amount | % | Amount | % | ||||||||
Corporate debt | $ | 156,603 | 48 | $ | 146,381 | 47 | |||||
Other fixed maturities | 281 | — | 270 | — | |||||||
Equity securities | 124,419 | 38 | 123,428 | 40 | |||||||
Short-term investments | 22,540 | 7 | 15,593 | 5 | |||||||
Guaranteed annuity contract | 17,313 | 5 | 17,082 | 6 | |||||||
Other | 5,593 | 2 | 4,842 | 2 | |||||||
Total | $ | 326,749 | 100 | $ | 307,596 | 100 |
The liability for the funded defined-benefit pension plans was $412 million at June 30, 2016 and $406 million at December 31, 2015. During the six months ended June 30, 2016, the Company made $12 million in cash contributions to the qualified pension plans. Torchmark expects to make total cash contributions to these plans during 2016 in an amount not to exceed $20 million. With respect to the Company’s non-qualified supplemental retirement plan, life insurance policies on the lives of plan participants have been established with an unaffiliated carrier to fund a portion of the Company’s obligations under the plan. These policies, as well as investments deposited with an unaffiliated trustee, were previously placed in a Rabbi Trust to provide for payment of the plan obligations. At June 30, 2016, the combined value of the insurance policies and investments in the Rabbi Trust to support plan liabilities were $84 million, compared with $79 million at year end 2015. Since this plan is non-qualified, the values of the insurance policies and investments are recorded as Other assets in the Condensed Consolidated Balance Sheets and are not included in the chart of plan assets above. The liability for the non-qualified pension plan was $69 million at June 30, 2016 and $67 million at December 31, 2015.
Note 9—Earnings Per Share
A reconciliation of basic and diluted weighted-average shares outstanding is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||
Basic weighted average shares outstanding | 120,479,938 | 125,816,943 | 120,980,372 | 126,465,420 | |||||||
Weighted average dilutive options outstanding | 2,267,910 | 1,622,698 | 2,055,407 | 1,553,309 | |||||||
Diluted weighted average shares outstanding | 122,747,848 | 127,439,641 | 123,035,779 | 128,018,729 | |||||||
Antidilutive shares | — | — | 18,158 | — |
As discussed earlier in Note 2—New Accounting Standards, the Company adopted ASU 2016-09 on January 1, 2016. The adoption resulted in an adjustment to the weighted average diluted shares outstanding to exclude excess tax benefits from the assumed proceeds in the diluted shares calculation. This change has been applied prospectively and resulted in diluted weighted average shares outstanding of 122.7 million for the quarter ended June 30, 2016, as compared with 121.9 million under the previous guidance. For the six months ended June 30, 2016, the diluted weighted average shares outstanding were 123.0 million as compared with 122.3 million under the previous guidance.
19
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 10—Business Segments
Torchmark's reportable segments are based on the insurance product lines it markets and administers: life insurance, health insurance, and annuities. These major product lines are set out as reportable segments because of the common characteristics of products within these categories, comparability of margins, and the similarity in regulatory environment and management techniques. Torchmark's chief operating decision makers evaluate the overall performance of the operations of the Company in accordance with these segments.
Annuity revenue is classified as “Other premium.” Management’s measure of profitability for each insurance segment is insurance underwriting margin, which is underwriting income before other income and insurance administrative expenses. It represents the profit margin on insurance products before administrative expenses, and is calculated by deducting net policy obligations (claims incurred and change in reserves), commissions and other acquisition expenses from premium revenue. Torchmark further views the profitability of each insurance product segment by the marketing groups that distribute the products of that segment: direct response, independent agencies, or captive agencies.
Torchmark’s management prefers to evaluate the performance of its underwriting and investment activities separately, rather than allocating investment income to the underwriting results. As such, the investment function is presented as a stand-alone segment. The investment segment includes the management of the investment portfolio, debt, and cash flow. Management’s measure of profitability for this segment is excess investment income, which is the income earned on the investment portfolio less the required interest on net policy liabilities and financing costs. Financing costs include the interest on Torchmark’s debt. Other income and insurance administrative expense are classified in a separate Other segment.
The majority of the Company’s required interest on net policy liabilities (benefit reserves less the deferred acquisition cost asset) is not credited to policyholder accounts. Instead, it is an actuarial assumption for discounting cash flows in the computation of benefit reserves and the amortization of the deferred acquisition cost asset. Investment income required to fund the required interest on net policy liabilities is removed from the investment segment and applied to the insurance segments to eliminate the effect of the required interest from the insurance segments. As a result, the investment segment measures net investment income against the required interest on net policy liabilities and financing costs, while the insurance segments simply measure premiums against benefits and expenses. We believe this presentation facilitates a more meaningful analysis of the Company’s underwriting and investment performance as the underwriting results are based on premiums, claims, and expenses and are not affected by unanticipated fluctuations in investment yields.
As noted, Torchmark’s “core operations” are insurance and investment management. The insurance segments issue policies for which premiums are collected for the eventual payment of policy benefits. In addition to policy benefits, operating expenses are incurred including acquisition costs, administrative expenses, and taxes. Because life and health contracts can be long term, premium receipts in excess of current expenses are invested. Investment activities, conducted by the investment segment, focus on seeking quality investments with a yield and term appropriate to support the insurance product obligations. These investments generally consist of fixed maturities, and, over the long term, the expected yields are taken into account when setting insurance premium rates and product profitability expectations. As a result, fixed maturities are generally held for long periods to support the liabilities, and Torchmark generally expects to hold investments until maturity. Dispositions of investments occur from time to time, generally for reasons such as credit concerns, calls by issuers, or other factors.
Dispositions are sometimes required in order to maintain the Company’s investment policies and objectives. Investments are also occasionally written down as a result of other-than-temporary impairment, as discussed in Note 4—Investments. Torchmark does not actively trade investments. As a result, realized gains and losses from the disposition and write down of investments are generally incidental to operations and are not considered a material factor in insurance pricing or product profitability. While from time to time these realized gains and losses could be significant to net income in the period in which they occur, they generally have a limited effect on the yield of the total investment portfolio. Further, because the proceeds of the disposals are reinvested in the portfolio, the disposals have little effect on the size of the portfolio and the income from the reinvestments is included in net investment income. Therefore, management removes realized investment gains and losses from results of core operations when evaluating
20
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 10—Business Segments (continued)
the performance of the Company. For this reason, these gains and losses are excluded from Torchmark’s operating segments.
Torchmark accounts for its stock options and restricted stock under current accounting guidance requiring stock options and stock grants to be expensed based on fair value at the time of grant. Management considers stock compensation expense to be an expense of the Parent Company. Therefore, stock compensation expense is treated as a corporate expense in Torchmark’s segment analysis.
The following tables set forth a reconciliation of Torchmark’s revenues and operations by segment to its pretax income and each significant line item in its Condensed Consolidated Statements of Operations.
Reconciliation of Segment Operating Information to the Consolidated Statement of Operations
Three Months Ended June 30, 2016 | ||||||||||||||||||||||||||||
Life | Health | Annuity | Investment | Other & Corporate | Adjustments | Consolidated | ||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Premium | $ | 548,590 | $ | 237,252 | $ | 13 | $ | 785,855 | ||||||||||||||||||||
Net investment income | $ | 201,642 | 201,642 | |||||||||||||||||||||||||
Other income | $ | 422 | $ | (40 | ) | (2) | 382 | |||||||||||||||||||||
Total revenue | 548,590 | 237,252 | 13 | 201,642 | 422 | (40 | ) | 987,879 | ||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||
Policy benefits | 369,342 | 153,261 | 8,882 | 531,485 | ||||||||||||||||||||||||
Required interest on reserves | (143,625 | ) | (18,251 | ) | (12,506 | ) | 174,382 | — | ||||||||||||||||||||
Required interest on DAC | 44,476 | 5,766 | 205 | (50,447 | ) | — | ||||||||||||||||||||||
Amortization of acquisition costs | 93,663 | 22,102 | 1,480 | 117,245 | ||||||||||||||||||||||||
Commissions, premium taxes, and non-deferred acquisition costs | 41,130 | 21,753 | 11 | (40 | ) | (2) | 62,854 | |||||||||||||||||||||
Insurance administrative expense (1) | 48,413 | 48,413 | ||||||||||||||||||||||||||
Parent expense | 2,379 | 2,379 | ||||||||||||||||||||||||||
Stock compensation expense | 7,054 | 7,054 | ||||||||||||||||||||||||||
Interest expense | 23,110 | 23,110 | ||||||||||||||||||||||||||
Total expenses | 404,986 | 184,631 | (1,928 | ) | 147,045 | 57,846 | (40 | ) | 792,540 | |||||||||||||||||||
Subtotal | 143,604 | 52,621 | 1,941 | 54,597 | (57,424 | ) | — | 195,339 | ||||||||||||||||||||
Nonoperating items | — | — | ||||||||||||||||||||||||||
Measure of segment profitability (pretax) | $ | 143,604 | $ | 52,621 | $ | 1,941 | $ | 54,597 | $ | (57,424 | ) | $ | — | 195,339 | ||||||||||||||
Deduct applicable income taxes | (58,649 | ) | ||||||||||||||||||||||||||
Segment profits after tax | 136,690 | |||||||||||||||||||||||||||
Add back income taxes applicable to segment profitability | 58,649 | |||||||||||||||||||||||||||
Add (deduct) realized investment gains (losses) | 4,005 | |||||||||||||||||||||||||||
Pretax income per Consolidated Statements of Operations | $ | 199,344 |
(1) Administrative expense is not allocated to insurance segments.
(2) Elimination of intersegment commission.
21
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 10—Business Segments (continued)
Three Months Ended June 30, 2015 (3) | ||||||||||||||||||||||||||||
Life | Health | Annuity | Investment | Other & Corporate | Adjustments | Consolidated | ||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Premium | $ | 520,038 | $ | 232,409 | $ | 37 | $ | 752,484 | ||||||||||||||||||||
Net investment income | $ | 194,823 | 194,823 | |||||||||||||||||||||||||
Other income | $ | 742 | $ | (51 | ) | (2) | 691 | |||||||||||||||||||||
Total revenue | 520,038 | 232,409 | 37 | 194,823 | 742 | (51 | ) | 947,998 | ||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||
Policy benefits | 347,364 | 151,198 | 9,754 | 508,316 | ||||||||||||||||||||||||
Required interest on reserves | (137,430 | ) | (17,151 | ) | (13,387 | ) | 167,968 | — | ||||||||||||||||||||
Required interest on DAC | 43,139 | 5,690 | 294 | (49,123 | ) | — | ||||||||||||||||||||||
Amortization of acquisition costs | 88,737 | 20,740 | 2,261 | 111,738 | ||||||||||||||||||||||||
Commissions, premium taxes, and non-deferred acquisition costs | 38,851 | 20,320 | 12 | (51 | ) | (2) | 59,132 | |||||||||||||||||||||
Insurance administrative expense (1) | 45,474 | 45,474 | ||||||||||||||||||||||||||
Parent expense | 2,312 | 2,312 | ||||||||||||||||||||||||||
Stock compensation expense | 7,802 | 7,802 | ||||||||||||||||||||||||||
Interest expense | 19,114 | 19,114 | ||||||||||||||||||||||||||
Total expenses | 380,661 | 180,797 | (1,066 | ) | 137,959 | 55,588 | (51 | ) | 753,888 | |||||||||||||||||||
Subtotal | 139,377 | 51,612 | 1,103 | 56,864 | (54,846 | ) | — | 194,110 | ||||||||||||||||||||
Nonoperating items | — | — | ||||||||||||||||||||||||||
Measure of segment profitability (pretax) | $ | 139,377 | $ | 51,612 | $ | 1,103 | $ | 56,864 | $ | (54,846 | ) | $ | — | 194,110 | ||||||||||||||
Deduct applicable income taxes | (63,282 | ) | ||||||||||||||||||||||||||
Segment profits after tax | 130,828 | |||||||||||||||||||||||||||
Add back income taxes applicable to segment profitability | 63,282 | |||||||||||||||||||||||||||
Add (deduct) realized investment gains (losses) | 2,613 | |||||||||||||||||||||||||||
Pretax income per Consolidated Statements of Operations | $ | 196,723 |
(1) Administrative expense is not allocated to insurance segments.
(2) Elimination of intersegment commission.
(3) Certain prior year balances were adjusted to give effect to discontinued operations as described in Note 5—Discontinued Operations.
22
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note 10—Business Segments (continued)
Six Months Ended June 30, 2016 | ||||||||||||||||||||||||||||
Life | Health | Annuity | Investment | Other & Corporate | Adjustments | Consolidated | ||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Premium | $ | 1,092,741 | $ | 472,949 | $ | 25 | $ | 1,565,715 | ||||||||||||||||||||
Net investment income | $ | 398,695 | 398,695 | |||||||||||||||||||||||||
Other income | $ | 887 | $ | (84 | ) | (2) | 803 | |||||||||||||||||||||
Total revenue | 1,092,741 | 472,949 | 25 | 398,695 | 887 | (84 | ) | 1,965,213 | ||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||
Policy benefits | 732,202 | 306,036 | 18,220 | 1,056,458 | ||||||||||||||||||||||||
Required interest on reserves | (285,636 | ) | (36,327 | ) | (25,598 | ) | 347,561 | — | ||||||||||||||||||||
Required interest on DAC | 88,678 | 11,508 | 429 | (100,615 | ) | — | ||||||||||||||||||||||
Amortization of acquisition costs | 188,202 | 44,467 | 3,382 | 236,051 | ||||||||||||||||||||||||
Commissions, premium taxes, and non-deferred acquisition costs | 81,391 | 43,129 | 20 | (84 | ) | (2) | 124,456 | |||||||||||||||||||||
Insurance administrative expense (1) | 96,881 | 96,881 | ||||||||||||||||||||||||||
Parent expense | 4,405 | 4,405 | ||||||||||||||||||||||||||
Stock compensation expense | 13,989 |