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GLOBE LIFE INC. - Quarter Report: 2017 September (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 September 30, 2017
 
 
¨
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
torchmarklogocolora01rgba18.jpg
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”, “smaller reporting company” and "emerging growth 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
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
¨
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 October 31, 2017
 
 
Common Stock,
$1.00 Par Value
 
115,446,832
 


Table of Contents




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


Table of Contents




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

TORCHMARK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollar amounts in thousands)
 
September 30,
2017
 
December 31,
2016
Assets:

 
 
Investments:
 
 
 
Fixed maturities—available for sale, at fair value (amortized cost: 2017—$14,914,580; 2016—$14,188,050)
$
16,652,913

 
$
15,245,861

Policy loans
523,318

 
507,975

Other long-term investments
70,096

 
53,852

Short-term investments
65,482

 
72,040

Total investments
17,311,809

 
15,879,728

Cash
88,462

 
76,163

Accrued investment income
238,278

 
223,148

Other receivables
389,084

 
384,454

Deferred acquisition costs
3,911,800

 
3,783,158

Goodwill
441,591

 
441,591

Other assets
544,011

 
520,313

Assets related to discontinued operations
68,572

 
127,532

Total assets
$
22,993,607

 
$
21,436,087

Liabilities:
 
 
 
Future policy benefits
$
13,298,069

 
$
12,825,837

Unearned and advance premiums
61,536

 
64,017

Policy claims and other benefits payable
318,832

 
299,565

Other policyholders' funds
97,016

 
96,993

Total policy liabilities
13,775,453

 
13,286,412

Current and deferred income taxes payable
2,069,158

 
1,743,990

Other liabilities
492,175

 
413,760

Short-term debt
309,002

 
264,475

Long-term debt (estimated fair value: 2017—$1,243,232; 2016—$1,233,019)
1,130,806

 
1,133,165

Liabilities related to discontinued operations
49,328

 
27,424

Total liabilities
17,825,922

 
16,869,226

Commitments and Contingencies (Note 6)

 

Shareholders’ equity:
 
 
 
Preferred stock, par value $1 per share—Authorized 5,000,000 shares; outstanding: -0- in 2017 and 2016

 

Common stock, par value $1 per share—Authorized 320,000,000 shares; outstanding: (2017—127,218,183 issued, less 11,859,162 held in treasury and 2016—127,218,183 issued, less 9,187,075 held in treasury)
127,218

 
127,218

Additional paid-in capital
508,386

 
490,421

Accumulated other comprehensive income
1,039,302

 
577,574

Retained earnings
4,239,582

 
3,890,798

Treasury stock, at cost
(746,803
)
 
(519,150
)
Total shareholders’ equity
5,167,685

 
4,566,861

Total liabilities and shareholders’ equity
$
22,993,607

 
$
21,436,087


See accompanying Notes to Condensed Consolidated Financial Statements.

1

Table of Contents




TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollar amounts in thousands, except per share data)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Life premium
$
576,223

 
$
546,415

 
$
1,725,896

 
$
1,639,156

Health premium
242,991

 
236,987

 
730,557

 
709,936

Other premium
3

 
9

 
9

 
34

Total premium
819,217

 
783,411

 
2,456,462

 
2,349,126

Net investment income
213,872

 
202,720

 
634,930

 
601,415

Realized investment gains (losses)
12,595

 
3,482

 
6,142

 
7,780

Other income
331

 
160

 
1,140

 
963

Total revenue
1,046,015

 
989,773

 
3,098,674

 
2,959,284

 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
Life policyholder benefits
386,445

 
369,546

 
1,168,383

 
1,101,748

Health policyholder benefits
155,774

 
153,351

 
470,104

 
459,387

Other policyholder benefits
9,000

 
9,255

 
26,923

 
27,475

Total policyholder benefits
551,219

 
532,152

 
1,665,410

 
1,588,610

Amortization of deferred acquisition costs
122,334

 
116,821

 
370,363

 
352,872

Commissions, premium taxes, and non-deferred acquisition costs
67,863

 
61,153

 
198,011

 
185,609

Other operating expense
63,019

 
57,805

 
187,788

 
173,080

Interest expense
20,970

 
20,381

 
62,825

 
62,860

Total benefits and expenses
825,405

 
788,312

 
2,484,397

 
2,363,031

 
 
 
 
 
 
 
 
Income before income taxes
220,610

 
201,461

 
614,277

 
596,253

Income taxes
(67,264
)
 
(59,551
)
 
(183,390
)
 
(181,475
)
Income from continuing operations
153,346

 
141,910

 
430,887

 
414,778

 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of tax
(12
)
 
9,959

 
(3,739
)
 
(447
)
Net income
$
153,334

 
$
151,869

 
$
427,148

 
$
414,331

 
 
 
 
 
 
 
 
Basic net income (loss) per common share:
 
 
 

 
 
 
Continuing operations
$
1.32

 
$
1.19

 
$
3.69

 
$
3.44

Discontinued operations

 
0.08

 
(0.03
)
 

Total basic net income per common share
$
1.32

 
$
1.27

 
$
3.66

 
$
3.44

 
 
 
 
 
 
 
 
Diluted net income (loss) per common share:
 
 
 

 
 
 
Continuing operations
$
1.29

 
$
1.16

 
$
3.61

 
$
3.38

Discontinued operations

 
0.09

 
(0.03
)
 

Total diluted net income per common share
$
1.29

 
$
1.25

 
$
3.58

 
$
3.38

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.15

 
$
0.14

 
$
0.45

 
$
0.42






See accompanying Notes to Condensed Consolidated Financial Statements.

2

Table of Contents




TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollar amounts in thousands)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
153,334

 
$
151,869

 
$
427,148

 
$
414,331

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized investment gains (losses):
 
 
 
 
 
 
 
Unrealized gains (losses) on securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during period
83,216

 
236,040

 
692,747

 
1,397,181

Reclassification adjustment for (gains) losses on securities included in net income
(12,910
)
 
(3,513
)
 
(13,264
)
 
(7,809
)
Reclassification adjustment for amortization of (discount) and premium
119

 
(927
)
 
(379
)
 
(3,495
)
Foreign exchange adjustment on securities recorded at fair value
1,173

 
(199
)
 
1,418

 
849

Unrealized gains (losses) on securities
71,598

 
231,401

 
680,522

 
1,386,726

Unrealized gains (losses) on other investments
473

 
1,685

 
3,544

 
3,568

Total unrealized investment gains (losses)
72,071

 
233,086


684,066


1,390,294

Less applicable tax (expense) benefit
(25,225
)
 
(81,583
)
 
(239,479
)
 
(486,573
)
Unrealized investment gains (losses), net of tax
46,846

 
151,503

 
444,587

 
903,721

 
 
 
 
 
 
 
 
Unrealized gains (losses) attributable to deferred acquisition costs
505

 
621

 
(992
)
 
(4,829
)
Less applicable tax (expense) benefit
(177
)
 
(216
)
 
347

 
1,691

Unrealized gains (losses) attributable to deferred acquisition costs, net of tax
328

 
405

 
(645
)
 
(3,138
)
 
 
 
 
 
 
 
 
Foreign exchange translation adjustments, other than securities
8,533

 
120

 
16,049

 
7,262

Less applicable tax (expense) benefit
(2,986
)
 
(16
)
 
(4,567
)
 
(2,454
)
Foreign exchange translation adjustments, other than securities, net of tax
5,547

 
104

 
11,482

 
4,808

 
 
 
 
 
 
 
 
Pension adjustments:
 
 
 
 
 
 
 
Amortization of pension costs
3,108

 
2,551

 
9,326

 
7,654

Experience gain (loss)

 

 
371

 
791

Pension adjustments
3,108

 
2,551

 
9,697

 
8,445

Less applicable tax (expense) benefit
(1,087
)
 
(894
)
 
(3,393
)
 
(2,957
)
Pension adjustments, net of tax
2,021

 
1,657

 
6,304

 
5,488

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
54,742

 
153,669

 
461,728

 
910,879

Comprehensive income (loss)
$
208,076

 
$
305,538

 
$
888,876

 
$
1,325,210


See accompanying Notes to Condensed Consolidated Financial Statements.

3

Table of Contents




TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(Dollar 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, 2016
 
$

 
$
130,218

 
$
482,284

 
$
231,947

 
$
3,614,369

 
$
(403,266
)
 
$
4,055,552

Comprehensive income (loss)
 

 

 

 
910,879

 
414,331

 

 
1,325,210

Common dividends declared ($0.42 per share)
 

 

 

 

 
(50,410
)
 

 
(50,410
)
Acquisition of treasury stock
 

 

 

 

 

 
(311,356
)
 
(311,356
)
Stock-based compensation
 

 

 
13,787

 

 
(2,224
)
 
8,771

 
20,334

Exercise of stock options
 

 

 


 

 
(42,040
)
 
89,093

 
47,053

Balance at September 30, 2016
 
$

 
$
130,218

 
$
496,071

 
$
1,142,826

 
$
3,934,026

 
$
(616,758
)
 
$
5,086,383

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
 
$

 
$
127,218

 
$
490,421

 
$
577,574

 
$
3,890,798

 
$
(519,150
)
 
$
4,566,861

Comprehensive income (loss)
 

 

 

 
461,728

 
427,148

 

 
888,876

Common dividends declared ($0.45 per share)
 

 

 

 

 
(52,304
)
 

 
(52,304
)
Acquisition of treasury stock
 

 

 

 

 

 
(301,448
)
 
(301,448
)
Stock-based compensation
 

 

 
17,965

 

 
(606
)
 
7,450

 
24,809

Exercise of stock options
 

 

 


 

 
(25,454
)
 
66,345

 
40,891

Balance at September 30, 2017
 
$

 
$
127,218

 
$
508,386

 
$
1,039,302

 
$
4,239,582

 
$
(746,803
)
 
$
5,167,685















See accompanying Notes to Condensed Consolidated Financial Statements.

4

Table of Contents




TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollar amounts in thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash provided from operating activities
$
1,085,842

 
$
971,926

 
 
 
 
Cash provided from (used for) investing activities:
 
 
 
Investments sold or matured:
 
 
 
Fixed maturities available for sale—sold
52,951

 
75,299

Fixed maturities available for sale—matured, called, and repaid
306,132

 
178,873

Other long-term investments
3,523

 
466

Total long-term investments sold or matured
362,606

 
254,638

Acquisition of investments:
 
 
 
Fixed maturities—available for sale
(1,042,705
)
 
(910,090
)
Other long-term investments
(16,775
)
 
(20,404
)
Total investments acquired
(1,059,480
)
 
(930,494
)
Net increase in policy loans
(15,343
)
 
(6,623
)
Net (increase) decrease in short-term investments
6,556

 
(11,138
)
Net change in payable or receivable for securities

 
94

Additions to property and equipment
(13,451
)
 
(10,138
)
Sale of other assets
18

 
767

Investment in low-income housing interests
(13,852
)
 
(16,126
)
Cash provided from (used for) investing activities
(732,946
)
 
(719,020
)
 
 
 
 
Cash provided from (used for) financing activities:
 
 
 
Issuance of common stock
40,891

 
47,053

Cash dividends paid to shareholders
(51,532
)
 
(50,258
)
Proceeds from issuance of debt

 
400,000

Payment for debt issuance costs

 
(9,638
)
Repayment of debt
(1,250
)
 
(250,000
)
Net borrowing (repayment) of commercial paper
42,652

 
25,266

Acquisition of treasury stock
(301,448
)
 
(311,356
)
Net receipts (payments) from deposit-type product
(65,912
)
 
(57,188
)
Cash provided from (used for) financing activities
(336,599
)
 
(206,121
)
 
 
 
 
Effect of foreign exchange rate changes on cash
(3,998
)
 
(3,268
)
Net increase (decrease) in cash
12,299

 
43,517

Cash at beginning of year
76,163

 
61,383

Cash at end of period
$
88,462

 
$
104,900










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 September 30, 2017, and the condensed consolidated results of operations, comprehensive income, and cash flows for the periods ended September 30, 2017 and 2016. 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 27, 2017.
Note 2—New Accounting Standards
Accounting Pronouncements Not Yet Adopted
ASU 2016-01: In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which primarily revises the classification and measurement of certain equity investments such that they will be measured at fair value through net income. Additionally, it eliminates the cost method for partnerships and joint ventures and requires these types of investments to be accounted for under the fair value through net income method or equity method. Lastly, the guidance will require certain disclosures associated with fair value of financial instruments. This standard will become effective for the Company beginning January 1, 2018. The adoption will not have a significant impact on the financial statements as we have limited ownership in equity investments and partnerships, representing less than 1% of total invested assets.
ASU 2016-02: In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires all lessees to report a right-of-use asset and a lease liability for leases with a term life greater than 12 months. Operating and financing leases will be recognized on the balance sheet going forward. Additional qualitative and quantitative disclosures will be required. This 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 does not expect the adoption to have a significant impact on the financial statements. Refer to the 2016 Form 10-K Note 15—Commitments and Contingencies for consideration of the noncancellable operating lease commitments. The Company does not have any lessor commitments.
ASU 2016-13: In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments 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. This 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 as we have limited credit losses with respect to our available-for-sale portfolio.
ASU 2016-15: In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments to provide uniformity in the classification of cash receipts and payments recorded in the statement of cash flows including debt prepayment or debt extinguishment costs, settlement of zero-coupon bonds, and proceeds from the settlement of insurance claims. This standard will become effective on January 1, 2018 and will not have a significant impact on the financial statements.
ASU 2016-16: In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other Than Inventory. This guidance was issued to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory by allowing the immediate recognition of the current and deferred income tax effects. Current guidance prohibits the recognition of current and deferred income taxes for an intra-entity transfer until the asset has been sold to an outside party. This new guidance should be applied on a modified retrospective

6

Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 2—New Accounting Standards (continued)


approach and will become effective on January 1, 2018. This adoption will not have a significant impact on the financial statements.
ASU 2017-04: In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance was issued to simplify the subsequent measurement of goodwill through the elimination of Step 2 from the goodwill impairment test which required a hypothetical purchase price allocation. It will become effective on January 1, 2020 and should be applied on a prospective basis. This adoption will not have a significant impact on the financial statements.
ASU 2017-07: In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This guidance was issued to simplify the reporting of pension costs by disaggregating the service-cost component from the other components of net benefit costs and reporting it separately on the income statement. The service-cost component is the only component of net benefit cost that will be eligible for capitalization. The guidance will become effective on January 1, 2018 with a retrospective transition method for separation of net benefit costs and a prospective transition method for the capitalization of service costs. The Company does not expect the adoption to have a significant impact on the financial statements as the change in pension capitalization should be less than 1% of Total Benefits and Expenses on the Consolidated Statement of Operations for the year.
ASU 2017-08: In March 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities. This guidance was issued to shorten the amortization period for certain callable debt securities held at a premium. The guidance requires the premium to be amortized to the earliest call date. It will become effective on January 1, 2019 with early adoption permitted, including during interim periods. The adoption is to be applied on a modified retrospective basis through an adjustment to retained earnings. This adoption will not have a significant impact on the financial statements.
ASU 2017-09: In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. This guidance was issued to provide clarity and guidance regarding changes to the terms or conditions of a share-based payment award that requires an entity to apply modification accounting. It will become effective on January 1, 2018 with early adoption permitted, including adoption in any interim periods. The Company does not expect the adoption to have a significant impact on the financial statements as modifications to stock compensation are infrequent.



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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

An analysis of the change in balance by component of Accumulated Other Comprehensive Income is as follows for the three and nine month periods ended September 30, 2017 and 2016.

Components of Accumulated Other Comprehensive Income
 
 
Three Months Ended September 30, 2017
 
 
Available
for Sale
Assets
 
Deferred
Acquisition
Costs
 
Foreign
Exchange
 
Pension
Adjustments
 
Total
Balance at July 1, 2017
 
$
1,090,055

 
$
(7,655
)
 
$
10,902

 
$
(108,742
)
 
$
984,560

Other comprehensive income (loss) before reclassifications, net of tax
 
55,160

 
328

 
5,547

 

 
61,035

Reclassifications, net of tax
 
(8,314
)
 

 

 
2,021

 
(6,293
)
Other comprehensive income (loss)
 
46,846

 
328

 
5,547

 
2,021

 
54,742

Balance at September 30, 2017
 
$
1,136,901

 
$
(7,327
)
 
$
16,449

 
$
(106,721
)
 
$
1,039,302

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
Available
for Sale
Assets
 
Deferred
Acquisition
Costs
 
Foreign
Exchange
 
Pension
Adjustments
 
Total
Balance at July 1, 2016
 
$
1,084,551

 
$
(8,658
)
 
$
8,331

 
$
(95,067
)
 
$
989,157

Other comprehensive income (loss) before reclassifications, net of tax
 
154,389

 
405

 
104

 

 
154,898

Reclassifications, net of tax
 
(2,886
)
 

 

 
1,657

 
(1,229
)
Other comprehensive income (loss)
 
151,503

 
405

 
104

 
1,657

 
153,669

Balance at September 30, 2016
 
$
1,236,054

 
$
(8,253
)
 
$
8,435

 
$
(93,410
)
 
$
1,142,826


 

8

Table of Contents
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
 
 
Nine Months Ended September 30, 2017
 
 
Available
for Sale
Assets
 
Deferred
Acquisition
Costs
 
Foreign
Exchange
 
Pension
Adjustments
 
Total
Balance at January 1, 2017
 
$
692,314

 
$
(6,682
)
 
$
4,967

 
$
(113,025
)
 
$
577,574

Other comprehensive income (loss) before reclassifications, net of tax
 
453,455

 
(645
)
 
11,482

 
241

 
464,533

Reclassifications, net of tax
 
(8,868
)
 

 

 
6,063

 
(2,805
)
Other comprehensive income (loss)
 
444,587

 
(645
)
 
11,482

 
6,304

 
461,728

Balance at September 30, 2017
 
$
1,136,901

 
$
(7,327
)
 
$
16,449

 
$
(106,721
)
 
$
1,039,302

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 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
 
911,069

 
(3,138
)
 
4,808

 
513

 
913,252

Reclassifications, net of tax
 
(7,348
)
 

 

 
4,975

 
(2,373
)
Other comprehensive income (loss)
 
903,721

 
(3,138
)
 
4,808

 
5,488

 
910,879

Balance at September 30, 2016
 
$
1,236,054

 
$
(8,253
)
 
$
8,435

 
$
(93,410
)
 
$
1,142,826

                                                                                                                                                           
Reclassifications out of Accumulated Other Comprehensive Income are presented below for the three and nine month periods ended September 30, 2017 and 2016.
Reclassification Adjustments
  
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
Affected line items in the
Statement of Operations
 
 
2017
 
2016
 
2017
 
2016
 
Unrealized investment gains (losses) on available for sale assets:
 
 
 
 
 
 
 
 
 
 
Realized (gains) losses
 
$
(12,910
)
 
$
(3,513
)
 
$
(13,264
)
 
$
(7,809
)
 
Realized gains (losses)
Amortization of (discount) premium
 
119

 
(927
)
 
(379
)
 
(3,495
)
 
Net investment income
Total before tax
 
(12,791
)
 
(4,440
)
 
(13,643
)
 
(11,304
)
 
 
Tax
 
4,477

 
1,554

 
4,775

 
3,956

 
Income taxes
Total after tax
 
(8,314
)
 
(2,886
)
 
(8,868
)
 
(7,348
)
 
 
Pension adjustments:
 
 
 
 
 
 
 
 
 
 
Amortization of prior service cost
 
118

 
120

 
356

 
360

 
Other operating expenses
Amortization of actuarial gain (loss)
 
2,990

 
2,431

 
8,970

 
7,294

 
Other operating expenses
Total before tax
 
3,108

 
2,551

 
9,326

 
7,654

 
 
Tax
 
(1,087
)
 
(894
)
 
(3,263
)
 
(2,679
)
 
Income taxes
Total after tax
 
2,021

 
1,657

 
6,063

 
4,975

 
 
Total reclassifications (after tax)
 
$
(6,293
)
 
$
(1,229
)
 
$
(2,805
)
 
$
(2,373
)
 
 


9

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 September 30, 2017 is as follows:
Portfolio Composition as of September 30, 2017
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value(1)
 
% of Total
Fixed
Maturities(2)
Fixed maturities available for sale:
 
 
 
 
 
 
 
 
 
U.S. Government direct, guaranteed, and government-sponsored enterprises
$
387,985

 
$
12,800

 
$
(1,098
)
 
$
399,687

 
2
States, municipalities, and political subdivisions
1,160,537

 
127,675

 
(108
)
 
1,288,104

 
8
Foreign governments
20,939

 
1,607

 

 
22,546

 
Corporates, by sector:
 
 
 
 
 
 
 
 
 
Financial
3,199,469

 
426,345

 
(25,880
)
 
3,599,934

 
22
Utilities
1,948,519

 
324,060

 
(2,655
)
 
2,269,924

 
14
Energy
1,602,054

 
185,296

 
(28,070
)
 
1,759,280

 
11
Other corporate sectors
6,025,262

 
666,120

 
(22,670
)
 
6,668,712

 
40
Total corporates
12,775,304

 
1,601,821

 
(79,275
)
 
14,297,850

 
87
Collateralized debt obligations
59,204

 
19,558

 
(8,994
)
 
69,768

 
Other asset-backed securities
145,224

 
5,018

 
(17
)
 
150,225

 
1
Redeemable preferred stocks, by sector:
 
 
 
 
 
 
 
 
 
Financial
336,822

 
60,159

 
(3,030
)
 
393,951

 
2
Utilities
28,565

 
2,333

 
(116
)
 
30,782

 
Total redeemable preferred stocks
365,387

 
62,492

 
(3,146
)
 
424,733

 
2
Total fixed maturities
$
14,914,580

 
$
1,830,971

 
$
(92,638
)
 
$
16,652,913

 
100
(1) Amounts reported on the balance sheet.
(2) At fair value.

A schedule of fixed maturities available for sale by contractual maturity date at September 30, 2017 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.
 
September 30, 2017
 
Amortized
Cost
 
Fair Value
Fixed maturities available for sale:
 
 
 
Due in one year or less
$
140,702

 
$
143,863

Due after one year through five years
660,487

 
705,847

Due after five years through ten years
1,430,894

 
1,604,091

Due after ten years through twenty years
4,397,807

 
5,084,516

Due after twenty years
8,079,191

 
8,893,450

Mortgage-backed and asset-backed securities
205,499

 
221,146

 
$
14,914,580

 
$
16,652,913


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)

Selected information about sales of fixed maturities available for sale is as follows.
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Proceeds from sales
$
52,951

 
$
24,000

 
$
52,951

 
$
75,299

Gross realized gains
4,851

 
2,577

 
4,851

 
6,133

Gross realized losses

 

 

 
(214
)

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 September 30, 2017 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
 
$

 
$
399,687

 
$

 
$
399,687

States, municipalities, and political subdivisions
 
39,100

 
1,249,004

 

 
1,288,104

Foreign governments
 

 
22,546

 

 
22,546

Corporates, by sector:
 


 


 


 


Financial
 

 
3,537,728

 
62,206

 
3,599,934

Utilities
 

 
2,114,600

 
155,324

 
2,269,924

Energy
 

 
1,717,538

 
41,742

 
1,759,280

Other corporate sectors
 
3,225

 
6,340,276

 
325,211

 
6,668,712

Total corporates
 
3,225

 
13,710,142

 
584,483

 
14,297,850

Collateralized debt obligations
 

 

 
69,768

 
69,768

Other asset-backed securities
 

 
135,842

 
14,383

 
150,225

Redeemable preferred stocks, by sector:
 


 


 


 


Financial
 

 
393,951

 

 
393,951

Utilities
 

 
30,782

 

 
30,782

Total redeemable preferred stocks
 

 
424,733

 

 
424,733

Total fixed maturities
 
$
42,325

 
$
15,941,954

 
$
668,634

 
$
16,652,913

Percent of total
 
0.3
%
 
95.7
%
 
4.0
%
 
100.0
%



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)
 
Nine Months Ended September 30, 2017
 
Asset-
Backed
Securities
 
Collateralized
Debt
Obligations
 
Corporates(1)
 
Total
Balance at January 1, 2017
$

 
$
63,503

 
$
559,600

 
$
623,103

Total gains or losses:
 
 
 
 
 
 
 
Included in realized gains/losses

 

 

 

Included in other comprehensive income
595

 
7,787

 
10,614

 
18,996

Acquisitions
14,000

 

 
21,666

 
35,666

Sales

 

 

 

Amortization

 
3,705

 
14

 
3,719

Other(2)
(212
)
 
(5,227
)
 
(7,411
)
 
(12,850
)
Transfers in and/or out of Level 3(3)

 

 

 

Balance at September 30, 2017
$
14,383

 
$
69,768

 
$
584,483

 
$
668,634

Percent of total fixed maturities
0.1
%
 
0.4
%
 
3.5
%
 
4.0
%
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
Asset-
Backed
Securities
 
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

 

 
788

 
788

Included in other comprehensive income

 
(3,879
)
 
33,365

 
29,486

Acquisitions

 

 
33,662

 
33,662

Sales

 

 

 

Amortization

 
3,511

 
14

 
3,525

Other(2)

 
(6,732
)
 
(10,882
)
 
(17,614
)
Transfers in and/or out of Level 3(3)

 

 

 

Balance at September 30, 2016
$

 
$
63,282

 
$
587,753

 
$
651,035

Percent of total fixed maturities
%
 
0.4
%
 
3.7
%
 
4.1
%
(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:

In accordance with the other-than-temporary impairment (OTTI) policy, the Company evaluated its fixed maturities available for sale in an unrealized loss position to determine if there was any impairment for the quarter. Gross unrealized losses may fluctuate quarter over quarter due to adverse factors in the market that affect our holdings, such as changes in the interest rates or credit spreads. While the Company holds securities that may be in an unrealized loss position from time to time, Torchmark has the ability and intent to hold these investments to recovery. Additionally, Torchmark does not expect to be required to sell any of its securities due to the strong cash flows generated by its insurance operations.

For the nine months ended September 30, 2017, the Company recorded $245 thousand ($159 thousand, net of tax) in OTTI. For the comparable period in 2016, the Company concluded that there were no other-than-temporary impairments.

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 September 30, 2017
 
151

 
109

 
260

As of December 31, 2016
 
407

 
94

 
501


Torchmark’s entire fixed maturity portfolio consisted of 1,514 issues at September 30, 2017 and 1,565 issues at December 31, 2016. The weighted average quality rating of all unrealized loss positions as of September 30, 2017 was BBB compared with BBB+ as of December 31, 2016.

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 September 30, 2017 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 September 30, 2017
 
 
 
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
 
$
97,370

 
$
(610
)
 
$
5,422

 
$
(488
)
 
$
102,792

 
$
(1,098
)
States, municipalities and political subdivisions
 
10,115

 
(70
)
 
691

 
(2
)
 
10,806

 
(72
)

 
 
 
 
 
 
 
 
 
 
 
 
Corporates, by sector:
 
 
 
 
 
 
 
 
 
 
 
 
Financial
 
94,944

 
(1,024
)
 
65,729

 
(2,271
)
 
160,673

 
(3,295
)
Utilities
 
101,687

 
(1,643
)
 
40,075

 
(1,012
)
 
141,762

 
(2,655
)
Energy
 
37,009

 
(512
)
 
93,841

 
(6,555
)
 
130,850

 
(7,067
)
Other corporate sectors
 
369,323

 
(6,254
)
 
247,324

 
(11,047
)
 
616,647

 
(17,301
)
Total corporates
 
602,963

 
(9,433
)
 
446,969

 
(20,885
)
 
1,049,932

 
(30,318
)
Other asset-backed securities
 
9,983

 
(17
)
 

 

 
9,983

 
(17
)
Redeemable preferred stocks, by sector:
 
 
 
 
 
 
 
 
 
 
 
 
Utilities
 
5,947

 
(116
)
 

 

 
5,947

 
(116
)
Total redeemable preferred stocks
 
5,947

 
(116
)
 

 

 
5,947

 
(116
)
Total investment grade securities
 
726,378

 
(10,246
)
 
453,082

 
(21,375
)
 
1,179,460

 
(31,621
)
Below investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Bonds:
 
 
 
 
 
 
 
 
 
 
 
 
States, municipalities and political subdivisions
 
269

 
(36
)
 

 

 
269

 
(36
)
Corporates, by sector:
 


 


 


 


 
 
 
 
Financial
 

 

 
83,164

 
(22,585
)
 
83,164

 
(22,585
)
Energy
 

 

 
78,721

 
(21,003
)
 
78,721

 
(21,003
)
Other corporate sectors
 

 

 
45,330

 
(5,369
)
 
45,330

 
(5,369
)
Total corporates
 

 

 
207,215

 
(48,957
)
 
207,215

 
(48,957
)
Collateralized debt obligations
 

 

 
11,006

 
(8,994
)
 
11,006

 
(8,994
)
Redeemable preferred stocks, by sector:
 
 
 
 
 
 
 
 
 
 
 
 
Financial
 

 

 
24,080

 
(3,030
)
 
24,080

 
(3,030
)
Total redeemable preferred stocks
 

 

 
24,080

 
(3,030
)
 
24,080

 
(3,030
)
Total below investment grade securities
 
269

 
(36
)
 
242,301

 
(60,981
)
 
242,570

 
(61,017
)
Total fixed maturities
 
$
726,647

 
$
(10,282
)
 
$
695,383

 
$
(82,356
)
 
$
1,422,030

 
$
(92,638
)




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. Effective July 1, 2016, Torchmark sold its Medicare Part D Prescription Drug Plan business to an unaffiliated third party.

The sale resulted in a net gain of $1.8 million ($1.2 million net of tax) in 2016. The operating results from discontinued operations are reflected in income for the nine months ended September 30, 2017. The remaining assets and liabilities reflected on the Torchmark balance sheet related to discontinued operations are receivables and payables associated with the 2016 and prior plan years that are expected to be settled in the ordinary course of business during 2017 and 2018.

The net assets related to discontinued operations at September 30, 2017 and December 31, 2016 were as follows:
 
September 30,
2017
 
December 31,
2016
Assets:
 
 
 
Due premiums
$
3,945

 
$
8,840

Other receivables(1)
64,627

 
118,692

Total assets related to discontinued operations
68,572

 
127,532


 
 
 
Liabilities:
 
 
 
Risk sharing payable
9,065

 
8,374

Current and deferred income taxes payable
1,630

 
3,820

Other(2)
38,633

 
15,230

Total liabilities related to discontinued operations
49,328

 
27,424


 
 
 
Net assets
$
19,244

 
$
100,108

(1) At September 30, 2017, other receivables included $65 million from the Centers for Medicare and Medicaid Services (CMS). At December 31, 2016, other receivables included $50 million from the Centers for Medicare and Medicaid Services (CMS) and $69 million from drug manufacturer rebates.
(2) At September 30, 2017, the balance included $35.8 million due to CMS. At December 31, 2016, the balance included a $3.6 million contingent purchase price reserve.

15

Table of Contents
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 nine months ended September 30, 2017 and 2016 was as follows:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 

 

Health premium
$
(48
)
 
$
53,632

 
$
(343
)
 
$
165,105


 
 
 
 

 

Benefits and expenses:
 
 
 
 

 

Health policyholder benefits
(115
)
 
33,331

 
3,817

 
146,683

Amortization of deferred acquisition costs

 
1,018

 

 
2,958

Commissions, premium taxes, and non-deferred acquisition expenses
53

 
3,352

 
783

 
12,253

Other operating expense
32

 
1,222

 
809

 
4,512

Total benefits and expenses
(30
)
 
38,923

 
5,409

 
166,406


 
 
 
 

 

Income (loss) before income taxes for discontinued operations
(18
)
 
14,709

 
(5,752
)
 
(1,301
)
Gain from sale of discontinued operations

 
613

 

 
613

Income tax benefit (expense)
6

 
(5,363
)
 
2,013

 
241

Income (loss) from discontinued operations
$
(12
)
 
$
9,959

 
$
(3,739
)
 
$
(447
)

Operating cash flows of the discontinued operations for the nine months ended September 30, 2017 and 2016 were as follows:
 
Nine Months Ended 
 September 30,
 
2017
 
2016
Net cash provided from (used for) discontinued operations
$
77,125

 
$
82,565


Note 6—Commitments and Contingencies

Litigation:

Torchmark and its subsidiaries, in common with the insurance industry in general, are subject to litigation, involving various matters where we are either the defendant or the plaintiff. Torchmark subsidiaries are also currently the subject of audits regarding the identification, reporting and escheatment of unclaimed property arising from life insurance policies and a limited number of annuity contracts. In each of these matters, based upon information presently available, management does not believe that such litigation or audits will have a material adverse effect on Torchmark’s financial condition, future operating results or liquidity.

As previously reported, litigation was filed on February 10, 2015 against Torchmark subsidiary, Globe Life And Accident Insurance Company (Globe) in Oklahoma County, Oklahoma District Court (Proctor v. Globe Life And Accident Insurance Company, Case No. CJ-2015-838) asserting claims for breach of the implied covenants of good faith and fair dealing and for false representation, deceit and conversion in connection with Globe’s denial of plaintiff’s claim on a life insurance policy for non-payment of premium. Plaintiff, who had alleged that Globe had improperly retained 12 monthly premium payments on a policy that was treated as lapsed or not returned to in-force status, seeks actual and punitive damages, prejudgment interest, attorney fees, costs and other relief. Plaintiff subsequently amended his

16

Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 6—Commitments and Contingencies (continued)


complaint to add allegations of conversion and civil theft on behalf of a purported class of Globe’s U.S. policyholders who had paid premiums retained by Globe when their policies were lapsed and not reinstated at the time of the premium payments. Globe removed the case to the U.S. District Court for the Western District of Oklahoma (Case No. 15-CV-0070-M) on July 10, 2015 and filed a Motion to Dismiss on July 17, 2015. The Court denied plaintiff’s Motion to Remand back to state court on October 26, 2015, but allowed the plaintiff to amend the complaint to assert a putative class action in federal court. Plaintiff filed a Motion for Class Certification on September 23, 2016. Globe filed a Response in Opposition on November 4, 2016. The Court denied plaintiff’s Motion for Class Certification on August 18, 2017.

With respect to current litigation, at this time management believes that the possibility of a material judgment adverse to Torchmark is remote, and no estimate of range can be made for loss contingencies that are at least reasonably possible but not accrued.

Guaranty Fund Assessment:

In 2017, the Commonwealth Court of Pennsylvania issued orders placing Penn Treaty Network America Insurance Company (Penn Treaty) and affiliate American Network Insurance Company (ANIC) in liquidation due to financial difficulties. In such instances, the various state guaranty fund associations employ funding mechanisms, through assessments to their member companies, to cover the obligations of the insolvent entities. Consequently, the Company continues to receive guaranty fund assessments from the state associations related to these companies. The Company has projected its share of the ultimate assessments from these insolvencies based on assumptions about future events and its market share of premiums by state. The total estimated assessment for Torchmark's subsidiaries is approximately $10 million of which $1.4 million is estimated to be unrecoverable. We are anticipating the remaining amount of the assessments to be recovered through premium tax credits.

Note 7—Liability for Unpaid Claims

Activity in the liability for unpaid health claims is summarized as follows:
 
Nine Months Ended 
 September 30,
 
2017
 
2016
Balance at beginning of period
$
143,128

 
$
137,120

Incurred related to:

 

Current year
393,747

 
388,998

Prior years
(10,745
)
 
(5,710
)
Total incurred
383,002

 
383,288

Paid related to:

 

Current year
279,563

 
275,388

Prior years
103,010

 
102,435

Total paid
382,573

 
377,823

Balance at end of period
$
143,557

 
$
142,585

 
Below is the reconciliation of the liability for "Policy claims and other benefits payable" in the Condensed Consolidated Balance Sheets.

17

Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 7—Liability for Unpaid Claims (continued)


 
September 30,
2017
 
December 31, 2016
Policy claims and other benefits payable:

 

Short-duration contracts
$
23,193

 
$
26,721

Insurance lines other than short duration—health
120,364

 
116,407

Insurance lines other than short duration—life
175,275

 
156,437

Total policy claims and other benefits payable
$
318,832

 
$
299,565



Short-Duration Contracts

Although Torchmark primarily sells long-duration contracts for both life and health, the Company also has a limited amount of group health products that qualify as short-duration contracts in accordance with the applicable guidance.

The below table illustrates the total incurred but not reported liabilities plus expected development on reported claims for short-duration products over the last five years. Claim frequency is determined by duration and incurred date.
 
As of September 30, 2017
Accident Year
Total of incurred-but-not-reported liabilities plus expected development on reported claims
2013
$

2014
1

2015
46

2016
1,022

2017
22,124

Total
$
23,193



18

Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)


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 September 30,
 
Pension Benefits
 
Other Benefits
 
2017
 
2016
 
2017
 
2016
Service cost
$
4,486

 
$
3,894

 
$

 
$

Interest cost
5,552

 
5,430

 
249

 
212

Expected return on assets
(5,900
)
 
(5,782
)
 

 

Amortization:
 
 
 
 
 
 
 
Prior service cost
118

 
120

 

 

Actuarial (gain) loss
2,952

 
2,423

 
38

 
8

Direct recognition of expense

 

 
111

 
45

Net periodic benefit cost
$
7,208

 
$
6,085

 
$
398

 
$
265

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
Pension Benefits
 
Other Benefits
 
2017
 
2016
 
2017
 
2016
Service cost
$
13,457

 
$
11,682

 
$

 
$

Interest cost
16,653

 
16,294

 
749

 
636

Expected return on assets
(17,697
)
 
(17,346
)
 

 

Amortization:
 
 
 
 
 
 
 
Prior service cost
356

 
360

 

 

Actuarial (gain)/loss
8,855

 
7,270

 
115

 
24

Direct recognition of expense

 

 
323

 
99

Net periodic benefit cost
$
21,624

 
$
18,260

 
$
1,187

 
$
759

 
The following table presents assets at fair value for the defined-benefit pension plans at September 30, 2017 and December 31, 2016.
Pension Assets by Component
 
September 30, 2017
 
December 31, 2016
 
Amount
 
%
 
Amount
 
%
Corporate bonds
$
172,587

 
47
 
$
160,036

 
49
Exchange traded fund(1)
153,824

 
42
 
134,771

 
41
Other bonds
259

 
 
258

 
Guaranteed annuity contract(2)
21,163

 
6
 
18,997

 
6
Short-term investments
12,676

 
4
 
7,391

 
2
Other
5,118

 
1
 
7,418

 
2
Total
$
365,627

 
100
 
$
328,871

 
100
(1)
A fund including marketable securities that mirror the S&P 500 index.
(2)
Representing a guaranteed annuity contract issued by Torchmark's subsidiary, American Income Life Insurance Company, to fund the obligations of the American Income Pension Plan.


19

Table of Contents
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 liabilities for the defined-benefit pension plans at September 30, 2017 and December 31, 2016.
Pension Liability
 
September 30,
2017
 
December 31, 2016
Funded defined benefit pension
$
475,927

 
$
449,613

SERP(1) (Active)
77,223

 
74,687

SERP(1) (Closed)
2,827

 
3,222

Pension Benefit Obligation
$
555,977

 
$
527,522

(1)
Supplemental executive retirement plan (SERP).
During the nine months ended September 30, 2017, the Company made $19 million in cash contributions to the qualified pension plans. Torchmark will not make any additional cash contributions in 2017.
With respect to the Company’s active nonqualified noncontributory SERP, life insurance policies on the lives of plan participants have been established with an unaffiliated carrier to provide for a portion of the Company’s obligations under the plan. These policies along with investments deposited with an unaffiliated trustee were previously placed in a Rabbi Trust to provide for the payment of the plan obligations. At September 30, 2017, the combined value of the insurance policies and investments in the Rabbi Trust to support plan liabilities were $94 million, compared with $86 million at December 31, 2016. Since this plan is nonqualified and therefore is treated as unfunded, 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.
 
Note 9—Earnings Per Share
A reconciliation of basic and diluted weighted-average shares outstanding is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Basic weighted average shares outstanding
115,921,134

 
119,480,642

 
116,772,652

 
120,476,813

Weighted average dilutive options outstanding
2,521,815

 
2,430,121

 
2,540,955

 
2,209,739

Diluted weighted average shares outstanding
118,442,949

 
121,910,763

 
119,313,607

 
122,686,552

Antidilutive shares

 

 
1,174,469

 


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.
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.

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)

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 net policy benefits and expenses. Management believes 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. However, dispositions of investments occur from time to time, generally for reasons such as credit concerns, calls by issuers, or other factors.

Since Torchmark does not actively trade investments, realized gains and losses from the disposition and write down of investments are generally incidental to operations and are not considered a material factor in insurance pricing or product profitability. While from time to time these realized gains and losses could be significant to net income in the period in which they occur, they generally have a limited effect on the yield of the total investment portfolio. Further, because the proceeds of the disposals are reinvested in the portfolio, the disposals have little effect on the size of the portfolio and the income from the reinvestments is included in net investment income. Therefore, management removes realized investment gains and losses from results of core operations when evaluating the performance of the Company. For this reason, these gains and losses are excluded from Torchmark’s operating segments.
Torchmark accounts for its stock options and restricted stock under current accounting guidance requiring stock options and stock grants to be expensed based on fair value at the time of grant. Management considers stock compensation expense to be an expense of the Parent Company. Therefore, stock compensation expense is treated as a corporate expense in Torchmark’s segment analysis.
As discussed in Note 6—Commitments and Contingencies, the Company received an assessment from various state guaranty fund associations for the liquidation of Penn Treaty and its affiliate. The total estimated assessment for Torchmark's subsidiaries is approximately $10 million of which $1.4 million is estimated to be unrecoverable. We are anticipating the remaining amount of the assessments to be recovered through premium tax credits. The assessment expenses were considered a non-operational event and therefore were excluded from the core underwriting operations of the Company.

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)

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 Condensed Consolidated Statement of Operations
 
Three Months Ended September 30, 2017
 
Life
 
Health
 
Annuity
 
Investment
 
Other &
Corporate
 
Adjustments
 
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
576,223

 
$
242,991

 
$
3

 
 
 
 
 
 
 
 
$
819,217

Net investment income
 
 
 
 
 
 
$
213,872

 
 
 
 
 
 
213,872

Other income
 
 
 
 
 
 
 
 
$
361

 
$
(30
)
 
(2)
331

    Total revenue
576,223

 
242,991

 
3

 
213,872

 
361

 
(30
)
 
 
1,033,420

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Policy benefits
386,445

 
155,774

 
9,000

 
 
 
 
 


 

551,219

Required interest on reserves
(152,862
)
 
(19,617
)
 
(12,433
)
 
184,912

 
 
 
 
 
 

Required interest on DAC
46,893

 
5,881

 
172

 
(52,946
)
 
 
 
 
 
 

Amortization of acquisition costs
98,268

 
23,458

 
608

 
 
 
 
 
 
 
 
122,334

Commissions, premium taxes, and non-deferred acquisition costs
44,748

 
21,746

 
7

 
 
 
 
 
1,362

 
(2,3)
67,863

Insurance administrative expense(1)
 
 
 
 
 
 
 
 
52,426

 


 

52,426

Parent expense
 
 
 
 
 
 
 
 
2,330

 
 
 
 
2,330

Stock compensation expense
 
 
 
 
 
 
 
 
8,263

 
 
 
 
8,263

Interest expense
 
 
 
 
 
 
20,970

 
 
 
 
 
 
20,970

Total expenses
423,492

 
187,242

 
(2,646
)
 
152,936

 
63,019

 
1,362

 
 
825,405

Subtotal
152,731

 
55,749

 
2,649

 
60,936

 
(62,658
)
 
(1,392
)
 
 
208,015

Non-operating items
 
 
 
 
 
 
 
 
 
 
1,392

 
(3)
1,392

Measure of segment profitability (pretax)
$
152,731

 
$
55,749

 
$
2,649

 
$
60,936

 
$
(62,658
)
 
$

 
 
209,407

Deduct applicable income taxes
 
 
(63,342
)
Segment profits after tax
 
 
146,065

Add back income taxes applicable to segment profitability
 
 
63,342

Add (deduct) realized investment gains (losses)
 
   
12,595

Add (deduct) guaranty fund assessments(3)
 
 
(1,392
)
Pretax income from continuing operations per Condensed Consolidated Statements of Operations
 
   
$
220,610


(1) Administrative expense is not allocated to insurance segments.
(2) Elimination of intersegment commission.
(3) Guaranty fund assessments.



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)

 
Three Months Ended September 30, 2016
 
Life
 
Health
 
Annuity
 
Investment
 
Other &
Corporate
 
Adjustments
 
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
546,415

 
$
236,987

 
$
9

 
 
 
 
 
 
 
 
$
783,411

Net investment income
 
 
 
 
 
 
$
202,720

 
 
 
 
 
 
202,720

Other income
 
 
 
 
 
 
 
 
$
199

 
$
(39
)
 
(2)
160

Total revenue
546,415

 
236,987

 
9


202,720

 
199

 
(39
)
 
 
986,291

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Policy benefits
369,546

 
153,351

 
9,255

 
 
 
 
 
 
 
 
532,152

Required interest on reserves
(145,295
)
 
(18,476
)
 
(12,761
)
 
176,532

 
 
 
 
 
 

Required interest on DAC
44,950

 
5,789

 
192

 
(50,931
)
 
 
 
 
 
 

Amortization of acquisition costs
93,496

 
22,643

 
682

 
 
 
 
 
 
 
 
116,821

Commissions, premium taxes, and non-deferred acquisition costs
40,577

 
20,604

 
11

 
 
 
 
 
(39
)
 
(2)
61,153

Insurance administrative expense(1)
 
 
 
 
 
 
 
 
49,248

 
257

 
 
49,505

Parent expense
 
 
 
 
 
 
 
 
1,955

 
 
 
 
1,955

Stock compensation expense
 
 
 
 
 
 
 
 
6,345

 
 
 
 
6,345

Interest expense
 
 
 
 
 
 
20,381

 
 
 
 
 
 
20,381

Total expenses
403,274

 
183,911

 
(2,621
)
 
145,982

 
57,548

 
218

 
 
788,312

Subtotal
143,141

 
53,076

 
2,630

 
56,738

 
(57,349
)
 
(257
)
 
 
197,979

Non-operating items
 
 
 
 
 
 
 
 
 
 
257

 
 
257

Measure of segment profitability (pretax)
$
143,141

 
$
53,076

 
$
2,630

 
$
56,738

 
$
(57,349
)
 
$

 
 
198,236

Deduct applicable income taxes
 
 
(58,422
)
Segment profits after tax
 
 
139,814

Add back income taxes applicable to segment profitability
 
 
58,422

Add (deduct) realized investment gains (losses)
 
   
3,482

Add (deduct) non-operating fees
 
 
(257
)
Pretax income from continuing operations per Condensed Consolidated Statements of Operations
 
   
$
201,461


(1) Administrative expense is not allocated to insurance segments.
(2) Elimination of intersegment commission.


23

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)

 
Nine Months Ended September 30, 2017
 
Life
 
Health
 
Annuity
 
Investment
 
Other &
Corporate
 
Adjustments
 
  
Consolidated
Revenue: