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GLOBE LIFE INC. - Quarter Report: 2017 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, 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
torchmarklogocolora01rgba14.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 July 31, 2017
 
 
Common Stock,
$1.00 Par Value
 
116,320,319
 

Table of Contents




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

Table of Contents




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

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

 
 
Investments:
 
 
 
Fixed maturities—available for sale, at fair value (amortized cost: 2017—$14,651,551; 2016—$14,188,050)
$
16,318,286

 
$
15,245,861

Policy loans
516,064

 
507,975

Other long-term investments
55,532

 
53,852

Short-term investments
94,387

 
72,040

Total investments
16,984,269

 
15,879,728

Cash
97,652

 
76,163

Accrued investment income
228,347

 
223,148

Other receivables
380,028

 
384,454

Deferred acquisition costs
3,862,418

 
3,783,158

Goodwill
441,591

 
441,591

Other assets
515,012

 
520,313

Assets related to discontinued operations
68,623

 
127,532

Total assets
$
22,577,940

 
$
21,436,087

Liabilities:
 
 
 
Future policy benefits
$
13,127,651

 
$
12,825,837

Unearned and advance premiums
69,106

 
64,017

Policy claims and other benefits payable
307,384

 
299,565

Other policyholders' funds
97,237

 
96,993

Total policy liabilities
13,601,378

 
13,286,412

Current and deferred income taxes payable
2,009,825

 
1,743,990

Other liabilities
436,105

 
413,760

Short-term debt
306,271

 
264,475

Long-term debt (estimated fair value: 2017—$1,250,875; 2016—$1,233,019)
1,131,796

 
1,133,165

Liabilities related to discontinued operations
39,149

 
27,424

Total liabilities
17,524,524

 
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 10,959,454 held in treasury and 2016—127,218,183 issued, less 9,187,075 held in treasury)
127,218

 
127,218

Additional paid-in capital
500,123

 
490,421

Accumulated other comprehensive income
984,560

 
577,574

Retained earnings
4,112,757

 
3,890,798

Treasury stock, at cost
(671,242
)
 
(519,150
)
Total shareholders’ equity
5,053,416

 
4,566,861

Total liabilities and shareholders’ equity
$
22,577,940

 
$
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 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Life premium
$
573,836

 
$
548,590

 
$
1,149,673

 
$
1,092,741

Health premium
242,775

 
237,252

 
487,566

 
472,949

Other premium
3

 
13

 
6

 
25

Total premium
816,614

 
785,855

 
1,637,245

 
1,565,715

Net investment income
212,776

 
201,642

 
421,058

 
398,695

Realized investment gains (losses)
(705
)
 
4,005

 
(6,453
)
 
4,298

Other income
393

 
382

 
809

 
803

Total revenue
1,029,078

 
991,884

 
2,052,659

 
1,969,511

 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
Life policyholder benefits
390,859

 
369,342

 
781,938

 
732,202

Health policyholder benefits
156,579

 
153,261

 
314,330

 
306,036

Other policyholder benefits
8,977

 
8,882

 
17,923

 
18,220

Total policyholder benefits
556,415

 
531,485

 
1,114,191

 
1,056,458

Amortization of deferred acquisition costs
122,121

 
117,245

 
248,029

 
236,051

Commissions, premium taxes, and non-deferred acquisition costs
65,032

 
62,854

 
130,148

 
124,456

Other operating expense
62,428

 
57,846

 
124,769

 
115,275

Interest expense
21,156

 
23,110

 
41,855

 
42,479

Total benefits and expenses
827,152

 
792,540

 
1,658,992

 
1,574,719

 
 
 
 
 
 
 
 
Income before income taxes
201,926

 
199,344

 
393,667

 
394,792

Income taxes
(61,563
)
 
(60,050
)
 
(116,126
)
 
(121,924
)
Income from continuing operations
140,363

 
139,294

 
277,541

 
272,868

 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of tax
(90
)
 
(865
)
 
(3,727
)
 
(10,406
)
Net income
$
140,273

 
$
138,429

 
$
273,814

 
$
262,462

 
 
 
 
 
 
 
 
Basic net income (loss) per common share:
 
 
 

 
 
 
Continuing operations
$
1.20

 
$
1.16

 
$
2.37

 
$
2.26

Discontinued operations
—

 
(0.01
)
 
(0.03
)
 
(0.09
)
Total basic net income per common share
$
1.20

 
$
1.15

 
$
2.34

 
$
2.17

 
 
 
 
 
 
 
 
Diluted net income (loss) per common share:
 
 
 

 
 
 
Continuing operations
$
1.18

 
$
1.13

 
$
2.32

 
$
2.22

Discontinued operations
—

 
—

 
(0.03
)
 
(0.09
)
Total diluted net income per common share
$
1.18

 
$
1.13

 
$
2.29

 
$
2.13

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.15

 
$
0.14

 
$
0.30

 
$
0.28






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 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
140,273

 
$
138,429

 
$
273,814

 
$
262,462

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized investment gains (losses):
 
 
 
 
 
 
 
Unrealized gains (losses) on securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during period
394,004

 
695,984

 
609,531

 
1,161,141

Reclassification adjustment for (gains) losses on securities included in net income
681

 
(3,983
)
 
(354
)
 
(4,296
)
Reclassification adjustment for amortization of (discount) and premium
(61
)
 
(1,204
)
 
(498
)
 
(2,568
)
Foreign exchange adjustment on securities recorded at fair value
230

 
593

 
245

 
1,048

Unrealized gains (losses) on securities
394,854

 
691,390

 
608,924

 
1,155,325

Unrealized gains (losses) on other investments
2,075

 
1,225

 
3,071

 
1,883

Total unrealized investment gains (losses)
396,929

 
692,615


611,995


1,157,208

Less applicable tax (expense) benefit
(138,931
)
 
(242,401
)
 
(214,254
)
 
(404,990
)
Unrealized investment gains (losses), net of tax
257,998

 
450,214

 
397,741

 
752,218

 
 
 
 
 
 
 
 
Unrealized gains (losses) attributable to deferred acquisition costs
(727
)
 
(2,681
)
 
(1,497
)
 
(5,450
)
Less applicable tax (expense) benefit
254

 
938

 
524

 
1,907

Unrealized gains (losses) attributable to deferred acquisition costs, net of tax
(473
)
 
(1,743
)
 
(973
)
 
(3,543
)
 
 
 
 
 
 
 
 
Foreign exchange translation adjustments, other than securities
3,302

 
5,382

 
7,516

 
7,142

Less applicable tax (expense) benefit
(1,153
)
 
(1,898
)
 
(1,581
)
 
(2,438
)
Foreign exchange translation adjustments, other than securities, net of tax
2,149

 
3,484

 
5,935

 
4,704

 
 
 
 
 
 
 
 
Pension adjustments:
 
 
 
 
 
 
 
Amortization of pension costs
3,109

 
2,551

 
6,218

 
5,103

Experience gain (loss)
—

 
105

 
371

 
791

Pension adjustments
3,109

 
2,656

 
6,589

 
5,894

Less applicable tax (expense) benefit
(1,088
)
 
(929
)
 
(2,306
)
 
(2,063
)
Pension adjustments, net of tax
2,021

 
1,727

 
4,283

 
3,831

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
261,695

 
453,682

 
406,986

 
757,210

Comprehensive income (loss)
$
401,968

 
$
592,111

 
$
680,800

 
$
1,019,672


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)
 

 

 

 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
 

 

 

 
406,986

 
273,814

 

 
680,800

Common dividends declared ($0.30 per share)
 

 

 

 

 
(35,005
)
 

 
(35,005
)
Acquisition of treasury stock
 

 

 

 

 

 
(203,756
)
 
(203,756
)
Stock-based compensation
 

 

 
9,702

 

 
(606
)
 
7,450

 
16,546

Exercise of stock options
 

 

 


 

 
(16,244
)
 
44,214

 
27,970

Balance at June 30, 2017
 
$
—

 
$
127,218

 
$
500,123

 
$
984,560

 
$
4,112,757

 
$
(671,242
)
 
$
5,053,416














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)
 
Six Months Ended June 30,
 
2017
 
2016
Cash provided from operating activities
$
739,056

 
$
604,935

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

 
51,299

Fixed maturities available for sale—matured, called, and repaid
216,170

 
92,475

Other long-term investments
3,046

 
1,394

Total long-term investments sold or matured
219,216

 
145,168

Acquisition of investments:
 
 
 
Fixed maturities—available for sale
(676,648
)
 
(651,267
)
Other long-term investments
(1,775
)
 
(21,762
)
Total investments acquired
(678,423
)
 
(673,029
)
Net increase in policy loans
(8,089
)
 
(9,093
)
Net (increase) decrease in short-term investments
(22,347
)
 
6,185

Net change in payable or receivable for securities
—

 
(711
)
Additions to property and equipment
(8,080
)
 
(6,740
)
Sale of other assets
18

 
—

Investment in low-income housing interests
(8,875
)
 
(9,260
)
Cash provided from (used for) investing activities
(506,580
)
 
(547,480
)
 
 
 
 
Cash provided from (used for) financing activities:
 
 
 
Issuance of common stock
27,970

 
25,286

Cash dividends paid to shareholders
(34,093
)
 
(33,478
)
Proceeds from issuance of debt
—

 
400,000

Payment for debt issuance costs
—

 
(9,638
)
Repayment of debt
(625
)
 
(250,000
)
Net borrowing (repayment) of commercial paper
40,546

 
45,010

Acquisition of treasury stock
(203,756
)
 
(202,975
)
Net receipts (payments) from deposit-type product
(44,294
)
 
(38,193
)
Cash provided from (used for) financing activities
(214,252
)
 
(63,988
)
 
 
 
 
Effect of foreign exchange rate changes on cash
3,265

 
(5,172
)
Net increase (decrease) in cash
21,489

 
(11,705
)
Cash at beginning of year
76,163

 
61,383

Cash at end of period
$
97,652

 
$
49,678










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, 2017, and the condensed consolidated results of operations, comprehensive income, and cash flows for the periods ended June 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 FASB issued Accounting Standards Update 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 Company does not expect the adoption to 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 Accounting Standards Update 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 Accounting Standards Update 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 Accounting Standards Update 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. This adoption will not have a significant impact on the financial statements.
ASU 2016-16: In October 2016, the FASB issued Accounting Standards Update 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

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)


be applied on a modified retrospective 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 Accounting Standards Update 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. 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 Accounting Standards Update 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 for the year.
ASU 2017-08: In March 2017, the FASB issued Accounting Standards Update 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 Accounting Standards Update 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.


7
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

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, 2017 and 2016.

Components of Accumulated Other Comprehensive Income
 
 
Three Months Ended June 30, 2017
 
 
Available
for Sale
Assets
 
Deferred
Acquisition
Costs
 
Foreign
Exchange
 
Pension
Adjustments
 
Total
Balance at April 1, 2017
 
$
832,057

 
$
(7,182
)
 
$
8,753

 
$
(110,763
)
 
$
722,865

Other comprehensive income (loss) before reclassifications, net of tax
 
257,595

 
(473
)
 
2,149

 
—

 
259,271

Reclassifications, net of tax
 
403

 
—

 
—

 
2,021

 
2,424

Other comprehensive income (loss)
 
257,998

 
(473
)
 
2,149

 
2,021

 
261,695

Balance at June 30, 2017
 
$
1,090,055

 
$
(7,655
)
 
$
10,902

 
$
(108,742
)
 
$
984,560

 
 
 
 
 
 
 
 
 
 
 
 
 
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


 

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
 
 
Six Months Ended June 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
 
398,295

 
(973
)
 
5,935

 
241

 
403,498

Reclassifications, net of tax
 
(554
)
 
—

 
—

 
4,042

 
3,488

Other comprehensive income (loss)
 
397,741

 
(973
)
 
5,935

 
4,283

 
406,986

Balance at June 30, 2017
 
$
1,090,055

 
$
(7,655
)
 
$
10,902

 
$
(108,742
)
 
$
984,560

 
 
 
 
 
 
 
 
 
 
 
 
 
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

                                                                                                                                                           

Reclassifications out of Accumulated Other Comprehensive Income are presented below for the three and six month periods ended June 30, 2017 and 2016.
Reclassification Adjustments
  
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 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
 
$
681

 
$
(3,983
)
 
$
(354
)
 
$
(4,296
)
 
Realized gains (losses)
Amortization of (discount) premium
 
(61
)
 
(1,204
)
 
(498
)
 
(2,568
)
 
Net investment income
Total before tax
 
620

 
(5,187
)
 
(852
)
 
(6,864
)
 
 
Tax
 
(217
)
 
1,815

 
298

 
2,402

 
Income taxes
Total after tax
 
403

 
(3,372
)
 
(554
)
 
(4,462
)
 
 
Pension adjustments:
 
 
 
 
 
 
 
 
 
 
Amortization of prior service cost
 
119

 
120

 
238

 
240

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

 
2,431

 
5,980

 
4,863

 
Other operating expenses
Total before tax
 
3,109

 
2,551

 
6,218

 
5,103

 
 
Tax
 
(1,088
)
 
(893
)
 
(2,176
)
 
(1,786
)
 
Income taxes
Total after tax
 
2,021

 
1,658

 
4,042

 
3,317

 
 
Total reclassifications (after tax)
 
$
2,424

 
$
(1,714
)
 
$
3,488

 
$
(1,145
)
 
 


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 June 30, 2017 is as follows:
Portfolio Composition as of June 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
$
387,331

 
$
8,552

 
$
(1,696
)
 
$
394,187

 
2
States, municipalities, and political subdivisions
1,182,708

 
128,175

 
(185
)
 
1,310,698

 
8
Foreign governments
20,720

 
1,592

 
—

 
22,312

 
—
Corporates, by sector:
 
 
 
 
 
 
 
 
 
Financial
3,152,297

 
413,004

 
(25,309
)
 
3,539,992

 
22
Utilities
1,909,247

 
314,825

 
(3,351
)
 
2,220,721

 
14
Energy
1,589,769

 
170,566

 
(35,952
)
 
1,724,383

 
11
Other corporate sectors
5,847,507

 
651,703

 
(20,017
)
 
6,479,193

 
40
Total corporates
12,498,820

 
1,550,098

 
(84,629
)
 
13,964,289

 
87
Collateralized debt obligations
59,871

 
16,677

 
(10,303
)
 
66,245

 
—
Other asset-backed securities
126,019

 
3,607

 
(15
)
 
129,611

 
1
Redeemable preferred stocks, by sector:
 
 
 
 
 
 
 
 
 
Financial
347,505

 
59,206

 
(5,849
)
 
400,862

 
2
Utilities
28,577

 
1,725

 
(220
)
 
30,082

 
—
Total redeemable preferred stocks
376,082

 
60,931

 
(6,069
)
 
430,944

 
2
Total fixed maturities
$
14,651,551

 
$
1,769,632

 
$
(102,897
)
 
$
16,318,286

 
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 June 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.
 
June 30, 2017
 
Amortized
Cost
 
Fair Value
Fixed maturities available for sale:
 
 
 
Due in one year or less
$
143,830

 
$
148,150

Due after one year through five years
578,037

 
622,103

Due after five years through ten years
1,434,971

 
1,597,721

Due after ten years through twenty years
4,363,391

 
5,019,819

Due after twenty years
7,944,279

 
8,733,397

Mortgage-backed and asset-backed securities
187,043

 
197,096

 
$
14,651,551

 
$
16,318,286


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 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Proceeds from sales
$
—

 
$
36,968

 
$
—

 
$
51,299

Gross realized gains
—

 
3,061

 
—

 
3,556

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 June 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
 
$
—

 
$
394,187

 
$
—

 
$
394,187

States, municipalities, and political subdivisions
 
—

 
1,310,698

 
—

 
1,310,698

Foreign governments
 
—

 
22,312

 
—

 
22,312

Corporates, by sector:
 


 


 


 


Financial
 
—

 
3,477,619

 
62,373

 
3,539,992

Utilities
 
—

 
2,065,431

 
155,290

 
2,220,721

Energy
 
—

 
1,683,064

 
41,319

 
1,724,383

Other corporate sectors
 
—

 
6,151,889

 
327,304

 
6,479,193

Total corporates
 
—

 
13,378,003

 
586,286

 
13,964,289

Collateralized debt obligations
 
—

 
—

 
66,245

 
66,245

Other asset-backed securities
 
—

 
115,458

 
14,153

 
129,611

Redeemable preferred stocks, by sector:
 


 


 


 


Financial
 
—

 
400,862

 
—

 
400,862

Utilities
 
—

 
30,082

 
—

 
30,082

Total redeemable preferred stocks
 
—

 
430,944

 
—

 
430,944

Total fixed maturities
 
$
—

 
$
15,651,602

 
$
666,684

 
$
16,318,286

Percent of total
 
—
%
 
95.9
%
 
4.1
%
 
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)
 
Six Months Ended June 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
261

 
3,597

 
11,637

 
15,495

Acquisitions
14,000

 
—

 
21,666

 
35,666

Sales
—

 
—

 
—

 
—

Amortization
—

 
2,481

 
8

 
2,489

Other(2)
(108
)
 
(3,336
)
 
(6,625
)
 
(10,069
)
Transfers in and/or out of Level 3(3)
—

 
—

 
—

 
—

Balance at June 30, 2017
$
14,153

 
$
66,245

 
$
586,286

 
$
666,684

Percent of total fixed maturities
0.1
%
 
0.4
%
 
3.6
%
 
4.1
%
 
 
 
 
 
 
 
 
 
Six Months Ended June 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
—

 
—

 
—

 
—

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
%
(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, and 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 six months ended June 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 June 30, 2017
 
164

 
76

 
240

As of December 31, 2016
 
407

 
94

 
501


Torchmark’s entire fixed maturity portfolio consisted of 1,516 issues at June 30, 2017 and 1,565 issues at December 31, 2016. The weighted average quality rating of all unrealized loss positions as of June 30, 2017 was BBB.

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, 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 June 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
 
$
114,030

 
$
(1,194
)
 
$
1,501

 
$
(502
)
 
$
115,531

 
$
(1,696
)
States, municipalities and political subdivisions
 
13,502

 
(155
)
 
666

 
(30
)
 
14,168

 
(185
)
Foreign governments
 
—

 
—

 
—

 
—

 
—

 
—


 
 
 
 
 
 
 
 
 
 
 
 
Corporates, by sector:
 
 
 
 
 
 
 
 
 
 
 
 
Financial
 
123,632

 
(3,735
)
 
47,847

 
(1,157
)
 
171,479

 
(4,892
)
Utilities
 
120,890

 
(2,481
)
 
17,710

 
(870
)
 
138,600

 
(3,351
)
Energy
 
36,740

 
(486
)
 
137,991

 
(9,595
)
 
174,731

 
(10,081
)
Other corporate sectors
 
437,568

 
(11,357
)
 
69,796

 
(2,624
)
 
507,364

 
(13,981
)
Total corporates
 
718,830

 
(18,059
)
 
273,344

 
(14,246
)
 
992,174

 
(32,305
)
Other asset-backed securities
 
9,927

 
(15
)
 
—

 
—

 
9,927

 
(15
)
Redeemable preferred stocks, by sector:
 
 
 
 
 
 
 
 
 
 
 
 
Financial
 
—

 
—

 
—

 
—

 
—

 
—

Utilities
 
5,855

 
(220
)
 
—

 
—

 
5,855

 
(220
)
Total redeemable preferred stocks
 
5,855

 
(220
)
 
—

 
—

 
5,855

 
(220
)
Total investment grade securities
 
862,144

 
(19,643
)
 
275,511

 
(14,778
)
 
1,137,655

 
(34,421
)
Below investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Bonds:
 
 
 
 
 
 
 
 
 
 
 
 
States, municipalities and political subdivisions
 
—

 
—

 
—

 
—

 
—

 
—

Corporates, by sector:
 


 


 


 


 
 
 
 
Financial
 
—

 
—

 
85,338

 
(20,417
)
 
85,338

 
(20,417
)
Energy
 
20,173

 
(185
)
 
81,387

 
(25,686
)
 
101,560

 
(25,871
)
Other corporate sectors
 
—

 
—

 
56,134

 
(6,036
)
 
56,134

 
(6,036
)
Total corporates
 
20,173

 
(185
)
 
222,859

 
(52,139
)
 
243,032

 
(52,324
)
Collateralized debt obligations
 
—

 
—

 
9,697

 
(10,303
)
 
9,697

 
(10,303
)
Redeemable preferred stocks, by sector:
 
 
 
 
 
 
 
 
 
 
 
 
Financial
 
—

 
—

 
21,269

 
(5,849
)
 
21,269

 
(5,849
)
Total redeemable preferred stocks
 
—

 
—

 
21,269

 
(5,849
)
 
21,269

 
(5,849
)
Total below investment grade securities
 
20,173

 
(185
)
 
253,825

 
(68,291
)
 
273,998

 
(68,476
)
Total fixed maturities
 
$
882,317

 
$
(19,828
)
 
$
529,336

 
$
(83,069
)
 
$
1,411,653

 
$
(102,897
)




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 six months ended June 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 June 30, 2017 and December 31, 2016 were as follows:
 
June 30,
2017
 
December 31,
2016
Assets:
 
 
 
Due premiums
$
3,945

 
$
8,840

Other receivables(1)
64,678

 
118,692

Total assets related to discontinued operations
68,623

 
127,532


 
 
 
Liabilities:
 
 
 
Risk sharing payable
9,126

 
8,374

Current and deferred income taxes payable
1,910

 
3,820

Other(2)
28,113

 
15,230

Total liabilities related to discontinued operations
39,149

 
27,424


 
 
 
Net assets
$
29,474

 
$
100,108

(1) At June 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 June 30, 2017, the balance included $25.6 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 six months ended June 30, 2017 and 2016 was as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 

 

Health premium
$
(71
)
 
$
56,774

 
$
(295
)
 
$
111,473


 
 
 
 

 

Benefits and expenses:
 
 
 
 

 

Health policyholder benefits
(252
)
 
51,871

 
3,932

 
113,352

Amortization of deferred acquisition costs
—

 
932

 
—

 
1,940

Commissions, premium taxes, and non-deferred acquisition expenses
154

 
3,792

 
730

 
8,901

Other operating expense
166

 
1,510

 
777

 
3,290

Total benefits and expenses
68

 
58,105

 
5,439

 
127,483


 
 
 
 

 

Income (loss) before income taxes for discontinued operations
(139
)
 
(1,331
)
 
(5,734
)
 
(16,010
)
Income tax benefit (expense)
49

 
466

 
2,007

 
5,604

Income (loss) from discontinued operations
$
(90
)
 
$
(865
)
 
$
(3,727
)
 
$
(10,406
)

Operating cash flows of the discontinued operations for the six months ended June 30, 2017 and 2016 were as follows:
 
Six Months Ended 
 June 30,
 
2017
 
2016
Net cash provided from (used for) discontinued operations
$
66,907

 
$
60,995


Note 6—Commitments and Contingencies

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.

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.


16
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

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

 
$
137,120

Incurred related to:

 

Current year
264,648

 
258,640

Prior years
(8,364
)
 
(3,789
)
Total incurred
256,284

 
254,851

Paid related to:

 

Current year
164,271

 
160,740

Prior years
94,676

 
94,284

Total paid
258,947

 
255,024

Balance at end of period
$
140,465

 
$
136,947

 
Below is the reconciliation of the liability for "Policy claims and other benefits payable" in the Condensed Consolidated Balance Sheets.
 
June 30,
2017
 
December 31, 2016
Policy claims and other benefits payable:

 

Short-duration contracts
$
21,869

 
$
26,721

Insurance lines other than short duration—health
118,596

 
116,407

Insurance lines other than short duration—life
166,919

 
156,437

Total policy claims and other benefits payable
$
307,384

 
$
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 June 30, 2017
Accident Year
Total of incurred-but-not-reported liabilities plus expected development on reported claims
2013
$
—

2014
3

2015
93

2016
2,266

2017
19,507

Total
$
21,869




17
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 June 30,
 
Pension Benefits
 
Other Benefits
 
2017
 
2016
 
2017
 
2016
Service cost
$
4,484

 
$
3,894

 
$
—

 
$
—

Interest cost
5,551

 
5,432

 
250

 
212

Expected return on assets
(5,898
)
 
(5,782
)
 
—

 
—

Amortization:
 
 
 
 
 
 
 
Prior service cost
119

 
120

 
—

 
—

Actuarial (gain) loss
2,952

 
2,423

 
38

 
8

Direct recognition of expense
—

 
—

 
116

 
20

Net periodic benefit cost
$
7,208

 
$
6,087

 
$
404

 
$
240

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Pension Benefits
 
Other Benefits
 
2017
 
2016
 
2017
 
2016
Service cost
$
8,971

 
$
7,788

 
$
—

 
$
—

Interest cost
11,101

 
10,864

 
500

 
424

Expected return on assets
(11,797
)
 
(11,564
)
 
—

 
—

Amortization:
 
 
 
 
 
 
 
Prior service cost
238

 
240

 
—

 
—

Actuarial (gain)/loss
5,903

 
4,847

 
77

 
16

Direct recognition of expense
—

 
—

 
212

 
54

Net periodic benefit cost
$
14,416

 
$
12,175

 
$
789

 
$
494

 

18
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 assets at fair value for the defined-benefit pension plans at June 30, 2017 and the prior-year end.
Pension Assets by Component
 
June 30, 2017
 
December 31, 2016
 
Amount
 
%
 
Amount
 
%
Corporate bonds
$
158,227

 
45
 
$
160,036

 
49
Exchange traded fund(1)
147,357

 
42
 
134,771

 
41
Other bonds
261

 
—
 
258

 
—
Guaranteed annuity contract(2)
19,254

 
5
 
18,997

 
6
Short-term investments
24,673

 
7
 
7,391

 
2
Other
5,281

 
1
 
7,418

 
2
Total
$
355,053

 
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.

The following table presents liabilities for the defined-benefit pension plans at June 30, 2017 and the prior-year end.
Pension Liability
 
June 30,
2017
 
December 31, 2016
Funded defined benefit pension
$
469,357

 
$
449,613

SERP(1) (Active)
76,377

 
74,687

SERP(1) (Closed)
2,845

 
3,222

Pension Benefit Obligation
$
548,579

 
$
527,522

(1)
Supplemental executive retirement plan (SERP)
During the six months ended June 30, 2017, the Company made $12 million in cash contributions to the qualified pension plans. Torchmark expects to make total cash contributions to these plans during 2017 in an amount not to exceed $20 million.
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 June 30, 2017, the combined value of the insurance policies and investments in the Rabbi Trust to support plan liabilities were $91 million, compared with $86 million at year end 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.
 

19
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)


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,
 
2017
 
2016
 
2017
 
2016
Basic weighted average shares outstanding
116,646,669

 
120,479,938

 
117,205,467

 
120,980,372

Weighted average dilutive options outstanding
2,449,882

 
2,267,910

 
2,554,158

 
2,055,407

Diluted weighted average shares outstanding
119,096,551

 
122,747,848

 
119,759,625

 
123,035,779

Antidilutive shares
1,444,280

 
—

 
1,037,328

 
18,158


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. 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

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)

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.
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.


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)

Reconciliation of Segment Operating Information to the Condensed Consolidated Statement of Operations
 
Three Months Ended June 30, 2017
 
Life
 
Health
 
Annuity
 
Investment
 
Other &
Corporate
 
Adjustments
 
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
573,836

 
$
242,775

 
$
3

 
 
 
 
 
 
 
 
$
816,614

Net investment income
 
 
 
 
 
 
$
212,776

 
 
 
 
 
 
212,776

Other income
 
 
 
 
 
 
 
 
$
427

 
$
(34
)
 
(2)
393

    Total revenue
573,836

 
242,775

 
3

 
212,776

 
427

 
(34
)
 
 
1,029,783

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Policy benefits
388,765

 
156,579

 
8,977

 
 
 
 
 
2,094

 
(3)
556,415

Required interest on reserves
(150,652
)
 
(19,267
)
 
(12,394
)
 
182,313

 
 
 
 
 
 
—

Required interest on DAC
46,213

 
5,840

 
174

 
(52,227
)
 
 
 
 
 
 
—

Amortization of acquisition costs
98,473

 
23,016

 
632

 
 
 
 
 
 
 
 
122,121

Commissions, premium taxes, and non-deferred acquisition costs
43,708

 
21,351

 
7

 
 
 
 
 
(34
)
 
(2)
65,032

Insurance administrative expense (1)
 
 
 
 
 
 
 
 
51,412

 


 

51,412

Parent expense
 
 
 
 
 
 
 
 
2,665

 
 
 
 
2,665

Stock compensation expense
 
 
 
 
 
 
 
 
8,351

 
 
 
 
8,351

Interest expense
 
 
 
 
 
 
21,156

 
 
 
 
 
 
21,156

Total expenses
426,507

 
187,519

 
(2,604
)
 
151,242

 
62,428

 
2,060

 
 
827,152

Subtotal
147,329

 
55,256

 
2,607

 
61,534

 
(62,001
)
 
(2,094
)
 
 
202,631

Non-operating items
 
 
 
 
 
 
 
 
 
 
2,094

 
(3)
2,094

Measure of segment profitability (pretax)
$
147,329

 
$
55,256

 
$
2,607

 
$
61,534

 
$
(62,001
)
 
$
—

 
 
204,725

Deduct applicable income taxes
 
 
(62,543
)
Segment profits after tax
 
 
142,182

Add back income taxes applicable to segment profitability
 
 
62,543

Add (deduct) realized investment gains (losses)
 
   
(705
)
Add (deduct) administrative settlements (3)
 
 
(2,094
)
Pretax income from continuing operations per Condensed Consolidated Statements of Operations
 
   
$
201,926


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


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 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

Non-operating 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 from continuing operations per Condensed Consolidated Statements of Operations
 
   
$
199,344


(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)


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