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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)
Registrant’s telephone number, including area code (972) 569-4000
NONE
Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes    ý            No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes   ý            No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   ¨              No   ý
Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the last practicable date.
 
CLASS
 
OUTSTANDING AT July 29, 2016
 
 
Common Stock,
$1.00 Par Value
 
119,768,489
 

Table of Contents

INDEX
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.

Table of Contents

PART I–FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Financial Statements

TORCHMARK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(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
Table of Contents

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
Table of Contents

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
Table of Contents

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
Table of Contents

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
Table of Contents
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
Table of Contents
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
Table of Contents
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
Table of Contents
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
Table of Contents
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
Table of Contents
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
Table of Contents
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
Table of Contents
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
Table of Contents
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
Table of Contents
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
Table of Contents
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
Table of Contents
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
Table of Contents
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
Table of Contents
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
Table of Contents
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