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
TORCHMARK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE | 63-0780404 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
3700 South Stonebridge Drive, McKinney, Texas | 75070 | |
(Address of principal executive offices) | (Zip Code) |
NONE
Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer”, “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 |
INDEX
Page | |||
Item 1. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 6. |
PART I–FINANCIAL INFORMATION
Item 1. | Condensed Consolidated Financial Statements |
TORCHMARK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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: |