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GLOBE LIFE INC. - Quarter Report: 2017 March (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 March 31, 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
torchmarklogocolora01rgba11.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 April 28, 2017
 
 
Common Stock,
$1.00 Par Value
 
116,982,255
 


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)
 
March 31,
2017
 
December 31,
2016
Assets:

 
 
Investments:
 
 
 
Fixed maturities—available for sale, at fair value (amortized cost: 2017—$14,602,250; 2016—$14,188,050)
$
15,874,131

 
$
15,245,861

Policy loans
510,574

 
507,975

Other long-term investments
53,741

 
53,852

Short-term investments
120,990

 
72,040

Total investments
16,559,436

 
15,879,728

Cash
61,754

 
76,163

Accrued investment income
235,120

 
223,148

Other receivables
370,306

 
384,454

Deferred acquisition costs
3,821,718

 
3,783,158

Goodwill
441,591

 
441,591

Other assets
513,706

 
520,313

Assets related to discontinued operations
83,345

 
127,532

Total assets
$
22,086,976

 
$
21,436,087

Liabilities:
 
 
 
Future policy benefits
$
12,972,517

 
$
12,825,837

Unearned and advance premiums
70,022

 
64,017

Policy claims and other benefits payable
301,944

 
299,565

Other policyholders' funds
97,015

 
96,993

Total policy liabilities
13,441,498

 
13,286,412

Current and deferred income taxes payable
1,864,015

 
1,743,990

Other liabilities
563,102

 
413,760

Short-term debt
327,019

 
264,475

Long-term debt (estimated fair value: 2017—$1,244,283; 2016—$1,233,019)
1,132,791

 
1,133,165

Liabilities related to discontinued operations
13,724

 
27,424

Total liabilities
17,342,149

 
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 in 2016

 

Common stock, par value $1 per share—Authorized 320,000,000 shares; outstanding: (2017—127,218,183 issued, less 9,951,143 held in treasury and 2016—127,218,183 issued, less 9,187,075 held in treasury)
127,218

 
127,218

Additional paid-in capital
491,772

 
490,421

Accumulated other comprehensive income
722,865

 
577,574

Retained earnings
3,994,665

 
3,890,798

Treasury stock, at cost
(591,693
)
 
(519,150
)
Total shareholders’ equity
4,744,827

 
4,566,861

Total liabilities and shareholders’ equity
$
22,086,976

 
$
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 
 March 31,
 
2017
 
2016
Revenue:
 
 
 
Life premium
$
575,837

 
$
544,151

Health premium
244,791

 
235,697

Other premium
3

 
12

Total premium
820,631

 
779,860

Net investment income
208,282

 
197,053

Realized investment gains (losses)
(5,748
)
 
293

Other income
416

 
421

Total revenue
1,023,581

 
977,627

 
 
 
 
Benefits and expenses:
 
 
 
Life policyholder benefits
391,079

 
362,860

Health policyholder benefits
157,751

 
152,775

Other policyholder benefits
8,946

 
9,338

Total policyholder benefits
557,776

 
524,973

Amortization of deferred acquisition costs
125,908

 
118,806

Commissions, premium taxes, and non-deferred acquisition costs
65,116

 
61,602

Other operating expense
62,341

 
57,429

Interest expense
20,699

 
19,369

Total benefits and expenses
831,840

 
782,179

 
 
 
 
Income before income taxes
191,741

 
195,448

Income taxes
(54,563
)
 
(61,874
)
Income from continuing operations
137,178

 
133,574

 
 
 
 
Income (loss) from discontinued operations, net of tax
(3,637
)
 
(9,541
)
Net income
$
133,541

 
$
124,033

 
 
 
 
Basic net income (loss) per common share:
 
 
 
Continuing operations
$
1.16

 
$
1.10

Discontinued operations
(0.03
)
 
(0.08
)
Total basic net income per common share
$
1.13

 
$
1.02

 
 
 
 
Diluted net income (loss) per common share:
 
 
 
Continuing operations
$
1.14

 
$
1.08

Discontinued operations
(0.03
)
 
(0.07
)
Total diluted net income per common share
$
1.11

 
$
1.01

 
 
 
 
Dividends declared per common share
$
0.15

 
$
0.14






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 
 March 31,
 
2017
 
2016
Net income
$
133,541

 
$
124,033

 
 
 
 
Other comprehensive income (loss):
 
 
 
Unrealized investment gains (losses):
 
 
 
Unrealized gains (losses) on securities:
 
 
 
Unrealized holding gains (losses) arising during period
215,527

 
465,157

Reclassification adjustment for (gains) losses on securities included in net income
(1,035
)
 
(313
)
Reclassification adjustment for amortization of (discount) and premium
(437
)
 
(1,364
)
Foreign exchange adjustment on securities recorded at fair value
15

 
455

Unrealized gains (losses) on securities
214,070

 
463,935

Unrealized gains (losses) on other investments
996

 
658

Total unrealized investment gains (losses)
215,066


464,593

Less applicable tax (expense) benefit
(75,323
)
 
(162,589
)
Unrealized investment gains (losses), net of tax
139,743

 
302,004

 
 
 
 
Unrealized gains (losses) attributable to deferred acquisition costs
(770
)
 
(2,769
)
Less applicable tax (expense) benefit
270

 
969

Unrealized gains (losses) attributable to deferred acquisition costs, net of tax
(500
)
 
(1,800
)
 
 
 
 
Foreign exchange translation adjustments, other than securities
4,214

 
1,760

Less applicable tax (expense) benefit
(428
)
 
(540
)
Foreign exchange translation adjustments, other than securities, net of tax
3,786

 
1,220

 
 
 
 
Pension adjustments:
 
 
 
Amortization of pension costs
3,109

 
2,552

Experience gain (loss)
371

 
686

Pension adjustments
3,480

 
3,238

Less applicable tax (expense) benefit
(1,218
)
 
(1,134
)
Pension adjustments, net of tax
2,262

 
2,104

 
 
 
 
Other comprehensive income (loss)
145,291

 
303,528

Comprehensive income (loss)
$
278,832

 
$
427,561






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)
 

 

 

 
303,528

 
124,033

 

 
427,561

Common dividends declared ($0.14 per share)
 

 

 

 

 
(16,979
)
 

 
(16,979
)
Acquisition of treasury stock
 

 

 

 

 

 
(85,089
)
 
(85,089
)
Stock-based compensation
 

 

 
388

 

 
(2,224
)
 
8,771

 
6,935

Exercise of stock options
 

 

 


 

 
(4,020
)
 
7,783

 
3,763

Balance at March 31, 2016
 
$

 
$
130,218

 
$
482,672

 
$
535,475

 
$
3,715,179

 
$
(471,801
)
 
$
4,391,743

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
 

 

 

 
145,291

 
133,541

 

 
278,832

Common dividends declared ($0.15 per share)
 

 

 

 

 
(17,567
)
 

 
(17,567
)
Acquisition of treasury stock
 

 

 

 

 

 
(113,719
)
 
(113,719
)
Stock-based compensation
 

 

 
1,351

 

 
(606
)
 
7,450

 
8,195

Exercise of stock options
 

 

 


 

 
(11,501
)
 
33,726

 
22,225

Balance at March 31, 2017
 
$

 
$
127,218

 
$
491,772

 
$
722,865

 
$
3,994,665

 
$
(591,693
)
 
$
4,744,827














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)
 
Three Months Ended March 31,
 
2017
 
2016
Cash provided from operating activities
$
460,756

 
$
340,738

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

 
14,331

Fixed maturities available for sale—matured, called, and repaid
108,899

 
44,622

Other long-term investments
3,071

 
8

Total long-term investments sold or matured
111,970

 
58,961

Acquisition of investments:
 
 
 
Fixed maturities—available for sale
(461,324
)
 
(287,204
)
Other long-term investments

 
(644
)
Total investments acquired
(461,324
)
 
(287,848
)
Net increase in policy loans
(2,599
)
 
(4,378
)
Net (increase) decrease in short-term investments
(48,950
)
 
(89,905
)
Additions to property and equipment
(3,978
)
 
(3,879
)
Sale of other assets
18

 

Investment in low-income housing interests
(5,875
)
 
(7,925
)
Cash provided from (used for) investing activities
(410,738
)
 
(334,974
)
 
 
 
 
Cash provided from (used for) financing activities:
 
 
 
Issuance of common stock
22,225

 
3,763

Cash dividends paid to shareholders
(16,503
)
 
(16,524
)
Net borrowing (repayment) of commercial paper
61,919

 
66,899

Acquisition of treasury stock
(113,719
)
 
(85,089
)
Net receipts (payments) from deposit-type product
(21,174
)
 
(17,641
)
Cash provided from (used for) financing activities
(67,252
)
 
(48,592
)
 
 
 
 
Effect of foreign exchange rate changes on cash
2,825

 
(5,797
)
Net increase (decrease) in cash
(14,409
)
 
(48,625
)
Cash at beginning of year
76,163

 
61,383

Cash at end of period
$
61,754

 
$
12,758














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 March 31, 2017, and the condensed consolidated results of operations, comprehensive income, and cash flows for the periods ended March 31, 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 Instrument—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which revises the classification and measurement of certain equity investments such that they are measured at fair value through net income. The standard will become effective for the Company beginning January 1, 2018 and early adoption is permitted. The Company does not expect the adoption to have a significant impact on the financial statements.
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 most leases. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. The standard will become effective for the Company beginning January 1, 2019 and will require recognizing and measuring leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted. The Company 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 non-cancellable operating lease 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.
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. The Company is currently evaluating the standard to determine its impact.
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 be applied on a modified retrospective approach and will become effective on January 1, 2018. The Company does not expect the adoption to have a significant impact on the financial statements.

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)


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. The Company does not expect the adoption to 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 is currently evaluating the standard to determine its impact.
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. The Company is currently evaluating the standard to determine its impact.


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


Note 3—Supplemental Information about Changes to Accumulated Other Comprehensive Income

An analysis of the change in balance by component of Accumulated Other Comprehensive Income is as follows for the three month periods ended March 31, 2017 and 2016.
 
 
 
 
 
 
 
 
 
 
 
Components of Accumulated Other Comprehensive Income
    
 
 
Three Months Ended March 31, 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
 
140,700

 
(500
)
 
3,786

 
241

 
144,227

Reclassifications, net of tax
 
(957
)
 

 

 
2,021

 
1,064

Other comprehensive income (loss)
 
139,743

 
(500
)
 
3,786

 
2,262

 
145,291

Balance at March 31, 2017
 
$
832,057

 
$
(7,182
)
 
$
8,753

 
$
(110,763
)
 
$
722,865

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 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
 
303,094

 
(1,800
)
 
1,220

 
445

 
302,959

Reclassifications, net of tax
 
(1,090
)
 

 

 
1,659

 
569

Other comprehensive income (loss)
 
302,004

 
(1,800
)
 
1,220

 
2,104

 
303,528

Balance at March 31, 2016
 
$
634,337

 
$
(6,915
)
 
$
4,847

 
$
(96,794
)
 
$
535,475

                                                                                                                                                           

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

Note 3—Supplemental Information about Changes to Accumulated Other Comprehensive Income (continued)



Reclassifications out of Accumulated Other Comprehensive Income are presented below for the three month periods ended March 31, 2017 and 2016.
Reclassification Adjustments
  
 
Three Months Ended 
 March 31,
 
Affected line items in the
Statement of Operations
 
 
2017
 
2016
 
Unrealized investment gains (losses) on available for sale assets:
 
 
 
 
 
 
Realized (gains) losses
 
$
(1,035
)
 
$
(313
)
 
Realized gains (losses)
Amortization of (discount) premium
 
(437
)
 
(1,364
)
 
Net investment income
Total before tax
 
(1,472
)
 
(1,677
)
 
 
Tax
 
515

 
587

 
Income taxes
Total after tax
 
(957
)
 
(1,090
)
 
 
Pension adjustments:
 
 
 
 
 
 
Amortization of prior service cost
 
119

 
120

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

 
2,432

 
Other operating expenses
Total before tax
 
3,109

 
2,552

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

 
1,659

 
 
Total reclassifications (after tax)
 
$
1,064

 
$
569

 
 


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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 March 31, 2017 is as follows:
Portfolio Composition as of March 31, 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
$
385,755

 
$
1,830

 
$
(6,424
)
 
$
381,161

 
3
States, municipalities, and political subdivisions
1,184,062

 
120,066

 
(1,029
)
 
1,303,099

 
8
Foreign governments
20,066

 
1,466

 
(8
)
 
21,524

 
Corporates, by sector:
 
 
 
 
 
 
 
 
 
Financial
3,137,495

 
331,704

 
(34,260
)
 
3,434,939

 
21
Utilities
1,896,115

 
268,397

 
(9,842
)
 
2,154,670

 
14
Energy
1,589,982

 
145,310

 
(31,320
)
 
1,703,972

 
11
Other corporate sectors
5,824,044

 
494,335

 
(59,618
)
 
6,258,761

 
39
Total corporates
12,447,636

 
1,239,746

 
(135,040
)
 
13,552,342

 
85
Collateralized debt obligations
59,976

 
17,515

 
(9,648
)
 
67,843

 
Other asset-backed securities
104,476

 
1,072

 
(361
)
 
105,187

 
1
Redeemable preferred stocks, by sector:
 
 
 
 
 
 
 
 
 
Financial
371,691

 
48,325

 
(7,011
)
 
413,005

 
3
Utilities
28,588

 
1,628

 
(246
)
 
29,970

 
Total redeemable preferred stocks
400,279

 
49,953

 
(7,257
)
 
442,975

 
3
Total fixed maturities
$
14,602,250

 
$
1,431,648

 
$
(159,767
)
 
$
15,874,131

 
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 March 31, 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.
 
March 31, 2017
 
Amortized
Cost
 
Fair Value
Fixed maturities available for sale:
 
 
 
Due in one year or less
$
88,952

 
$
91,746

Due from one to five years
628,487

 
675,601

Due from five to ten years
1,335,053

 
1,474,252

Due from ten to twenty years
4,256,853

 
4,794,890

Due after twenty years
8,127,226

 
8,663,281

Mortgage-backed and asset-backed securities
165,679

 
174,361

 
$
14,602,250

 
$
15,874,131


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 March 31,
 
2017
 
2016
Proceeds from sales
$

 
$
14,331

Gross realized gains

 
495

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 March 31, 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
 
$
4

 
$
381,157

 
$

 
$
381,161

States, municipalities, and political subdivisions
 

 
1,303,099

 

 
1,303,099

Foreign governments
 

 
21,524

 

 
21,524

Corporates, by sector:
 


 


 


 


Financial
 

 
3,372,832

 
62,107

 
3,434,939

Utilities
 

 
2,000,220

 
154,450

 
2,154,670

Energy
 

 
1,663,113

 
40,859

 
1,703,972

Other corporate sectors
 

 
5,930,189

 
328,572

 
6,258,761

Total corporates
 

 
12,966,354

 
585,988

 
13,552,342

Collateralized debt obligations
 

 

 
67,843

 
67,843

Other asset-backed securities
 

 
91,187

 
14,000

 
105,187

Redeemable preferred stocks, by sector:
 


 


 


 


Financial
 

 
413,005

 

 
413,005

Utilities
 

 
29,970

 

 
29,970

Total redeemable preferred stocks
 

 
442,975

 

 
442,975

Total fixed maturities
 
$
4

 
$
15,206,296

 
$
667,831

 
$
15,874,131

Percent of total
 
%
 
95.8
%
 
4.2
%
 
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)
 
Three Months Ended March 31, 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

 
5,090

 
6,275

 
11,365

Acquisitions
14,000

 

 
21,666

 
35,666

Sales

 

 

 

Amortization

 
1,249

 
4

 
1,253

Other(2)

 
(1,999
)
 
(1,557
)
 
(3,556
)
Transfers in and/or out of Level 3(3)

 

 

 

Balance at March 31, 2017
$
14,000

 
$
67,843

 
$
585,988

 
$
667,831

Percent of total fixed maturities
0.1
%
 
0.4
%
 
3.7
%
 
4.2
%
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 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

 
(3,598
)
 
9,568

 
5,970

Acquisitions

 

 
15,800

 
15,800

Sales

 

 

 

Amortization

 
1,334

 
4

 
1,338

Other(2)

 
(2,626
)
 
(1,377
)
 
(4,003
)
Transfers in and/or out of Level 3(3)

 

 

 

Balance at March 31, 2016
$

 
$
65,492

 
$
554,801

 
$
620,293

Percent of total fixed maturities
%
 
0.5
%
 
3.8
%
 
4.3
%
(1) Includes redeemable preferred stocks.
(2) Includes capitalized interest, foreign exchange adjustments, and principal repayments.
(3) Considered to be transferred at the end of the period. Transfers into Level 3 occur when observable inputs are no longer available. Transfers out of Level 3 occur when observable inputs become available.


12

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

Note 4—Investments (continued)

Other-Than-Temporary Impairments:

Based on the Company's evaluation of its fixed maturities available for sale in an unrealized loss position in accordance with the other-than-temporary impairment (OTTI) policy, the Company concluded that there were no other-than-temporary impairments during the three month periods ended March 31, 2017 and 2016. Torchmark is continuously monitoring the market conditions impacting its portfolio. Additionally, Torchmark has the ability and intent to hold these investments to recovery, and does not expect to be required to sell any of its securities.

Unrealized Loss Analysis:

The following table discloses information about fixed maturities available for sale in an unrealized loss position.
 
 
Less than
Twelve
Months
 
Twelve
Months
or Longer
 
Total
Number of issues (CUSIP numbers) held:
 
 
 
 
 
 
As of March 31, 2017
 
346

 
87

 
433

As of December 31, 2016
 
407

 
94

 
501


Torchmark’s entire fixed maturity portfolio consisted of 1,535 issues at March 31, 2017 and 1,565 issues at December 31, 2016. The weighted average quality rating of all unrealized loss positions as of March 31, 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 March 31, 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 March 31, 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
 
$
243,425

 
$
(5,865
)
 
$
1,441

 
$
(559
)
 
$
244,866

 
$
(6,424
)
States, municipalities and political subdivisions
 
30,822

 
(779
)
 
668

 
(32
)
 
31,490

 
(811
)
Foreign governments
 
2,187

 
(8
)
 

 

 
2,187

 
(8
)

 
 
 
 
 
 
 
 
 
 
 
 
Corporates, by sector:
 
 
 
 
 
 
 
 
 
 
 
 
Financial
 
335,653

 
(7,863
)
 
80,362

 
(3,632
)
 
416,015

 
(11,495
)
Utilities
 
246,001

 
(7,937
)
 
16,675

 
(1,905
)
 
262,676

 
(9,842
)
Energy
 
57,535

 
(955
)
 
141,685

 
(12,049
)
 
199,220

 
(13,004
)
Other corporate sectors
 
1,301,093

 
(46,268
)
 
70,324

 
(5,124
)
 
1,371,417

 
(51,392
)
Total corporates
 
1,940,282

 
(63,023
)
 
309,046

 
(22,710
)
 
2,249,328

 
(85,733
)
Other asset-backed securities
 
24,580

 
(361
)
 

 

 
24,580

 
(361
)
Redeemable preferred stocks, by sector:
 
 
 
 
 
 
 
 
 
 
 
 
Financial
 
23,985

 
(6
)
 

 

 
23,985

 
(6
)
Utilities
 
5,842

 
(246
)
 

 

 
5,842

 
(246
)
Total redeemable preferred stocks
 
29,827

 
(252
)
 

 

 
29,827

 
(252
)
Total investment grade securities
 
2,271,123

 
(70,288
)
 
311,155

 
(23,301
)
 
2,582,278

 
(93,589
)
Below investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Bonds:
 
 
 
 
 
 
 
 
 
 
 
 
States, municipalities and political subdivisions
 

 

 
333

 
(218
)
 
333

 
(218
)
Corporates, by sector:
 


 


 


 


 
 
 
 
Financial
 

 

 
82,995

 
(22,765
)
 
82,995

 
(22,765
)
Energy
 
10,563

 
(123
)
 
88,907

 
(18,193
)
 
99,470

 
(18,316
)
Other corporate sectors
 

 

 
115,418

 
(8,226
)
 
115,418

 
(8,226
)
Total corporates
 
10,563

 
(123
)
 
287,320

 
(49,184
)
 
297,883

 
(49,307
)
Collateralized debt obligations
 

 

 
10,351

 
(9,648
)
 
10,351

 
(9,648
)
Redeemable preferred stocks, by sector:
 
 
 
 
 
 
 
 
 
 
 
 
Financial
 
10,000

 

 
20,119

 
(7,005
)
 
30,119

 
(7,005
)
Total redeemable preferred stocks
 
10,000

 

 
20,119

 
(7,005
)
 
30,119

 
(7,005
)
Total below investment grade securities
 
20,563

 
(123
)
 
318,123

 
(66,055
)
 
338,686

 
(66,178
)
Total fixed maturities
 
$
2,291,686

 
$
(70,411
)
 
$
629,278

 
$
(89,356
)
 
$
2,920,964

 
$
(159,767
)




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 as of March 31, 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 March 31, 2017 and December 31, 2016 were as follows:
 
March 31, 2017
 
December 31, 2016
Assets:
 
 
 
Due premiums
$
3,945

 
$
8,840

Other receivables(1)
79,400

 
118,692

Total assets related to discontinued operations
83,345

 
127,532


 
 
 
Liabilities:
 
 
 
Risk sharing payable
8,528

 
8,374

Current and deferred income taxes payable
3,128

 
3,820

Other(2)
2,068

 
15,230

Total liabilities related to discontinued operations
13,724

 
27,424


 
 
 
Net assets
$
69,621

 
$
100,108

(1) At March 31, 2017, receivables included $65 million from the Centers for Medicare and Medicaid Services (CMS) and $14 million from drug manufacturer rebates. At December 31, 2016, the comparable amounts were $50 million and $69 million, respectively.
(2) Balance at December 31, 2016 includes $3.6 million representing a 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 months ended March 31, 2017 and 2016 was as follows:
 
Three Months Ended 
 March 31,
 
2017
 
2016
Revenue:

 

Health premium
$
(224
)
 
$
54,699



 

Benefits and expenses:

 

Health policyholder benefits
4,184

 
61,481

Amortization of deferred acquisition costs

 
1,008

Commissions, premium taxes, and non-deferred acquisition expenses
576

 
5,109

Other operating expense
611

 
1,780

Total benefits and expenses
5,371

 
69,378



 

Income (loss) before income taxes for discontinued operations
(5,595
)
 
(14,679
)
Income tax benefit (expense)
1,958

 
5,138

Income (loss) from discontinued operations
$
(3,637
)
 
$
(9,541
)

Operating cash flows of the discontinued operations for the three months ended March 31, 2017 and 2016 were as follows:
 
Three Months Ended 
 March 31,
 
2017
 
2016
Net cash provided from (used for) discontinued operations
$
26,850

 
$
14,061


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:
 
Three Months Ended March 31,
 
2017
 
2016
Balance at beginning of period
$
143,128

 
$
137,120

Incurred related to:

 

Current year
135,377

 
126,897

Prior years
(4,024
)
 
(316
)
Total incurred
131,353

 
126,581

Paid related to:

 

Current year
54,241

 
52,621

Prior years
77,555

 
76,421

Total paid
131,796

 
129,042

Balance at end of period
$
142,685

 
$
134,659

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

 

Short-duration contracts
$
24,341

 
$
26,721

Insurance lines other than short duration—health
118,344

 
116,407

Insurance lines other than short duration—life
159,259

 
156,437

Total policy claims and other benefits payable
$
301,944

 
$
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 March 31, 2017
Accident Year
Total of incurred-but-not-reported liabilities plus expected development on reported claims
2013
$

2014
7

2015
210

2016
6,174

2017
17,950

Total
$
24,341




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 March 31,
 
Pension Benefits
 
Other Benefits
 
2017
 
2016
 
2017
 
2016
Service cost
$
4,487

 
$
3,894

 
$

 
$

Interest cost
5,550

 
5,432

 
250

 
212

Expected return on assets
(5,899
)
 
(5,782
)
 

 

Amortization:
 
 
 
 
 
 
 
Prior service cost
119

 
120

 

 

Actuarial (gain)/loss
2,951

 
2,424

 
39

 
8

Direct recognition of expense

 

 
96

 
34

Net periodic benefit cost
$
7,208

 
$
6,088

 
$
385

 
$
254

 
The following table presents assets at fair value for the defined-benefit pension plans at March 31, 2017 and the prior-year end.
Pension Assets by Component
 
March 31, 2017
 
December 31, 2016
 
Amount
 
%
 
Amount
 
%
Corporate bonds
$
160,254

 
48
 
$
160,036

 
49
Exchange traded fund(1)
142,902

 
42
 
134,771

 
41
Other bonds
260

 
 
258

 
Guaranteed annuity contract(2)
19,126

 
6
 
18,997

 
6
Short-term investments
11,336

 
3
 
7,391

 
2
Other
3,075

 
1
 
7,418

 
2
Total
$
336,953

 
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.
Pension Liability
 
March 31, 2017
 
December 31, 2016
Funded defined benefit pension
$
460,475

 
$
449,613

SERP(1) (Active)
75,533

 
74,687

SERP(1) (Closed)
2,864

 
3,222

Pension Benefit Obligation
$
538,872

 
$
527,522

(1)
Supplemental executive retirement plan (SERP).

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)

As noted in the table above, the liability for the funded defined-benefit pension plans was $460 million at March 31, 2017 and $450 million at December 31, 2016. During the three months ended March 31, 2017, the Company made no 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 March 31, 2017, the combined value of the insurance policies and investments in the Rabbi Trust to support plan liabilities were $88 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. The liability for the active non-qualified pension plan was $76 million at March 31, 2017 and $75 million at December 31, 2016.
 
Note 9—Earnings Per Share
A reconciliation of basic and diluted weighted-average shares outstanding is as follows:
 
Three Months Ended March 31,
 
2017
 
2016
Basic weighted average shares outstanding
117,770,474

 
121,480,805

Weighted average dilutive options outstanding
2,659,242

 
1,831,938

Diluted weighted average shares outstanding
120,429,716

 
123,312,743

Antidilutive shares
625,855

 
1,489,562


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

19

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

Note 10—Business Segments (continued)

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 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.

20

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

Note 10—Business Segments (continued)

The following tables set forth a reconciliation of Torchmark’s revenues and operations by segment to its pretax income and each significant line item in its Condensed Consolidated Statements of Operations.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation of Segment Operating Information to the Condensed Consolidated Statement of Operations
 
Three Months Ended March 31, 2017
 
Life
 
Health
 
Annuity
 
Investment
 
Other &
Corporate
 
Adjustments
 
  
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
575,837

 
$
244,791

 
$
3

 

 

 


 

$
820,631

Net investment income

 

 

 
$
208,282

 

 


 

208,282

Other income

 

 

 

 
$
451

 
$
(35
)
 
(2)
416

    Total revenue
575,837

 
244,791

 
3

 
208,282

 
451

 
(35
)
 

1,029,329

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Policy benefits
391,079

 
157,751

 
8,946

 

 

 


 

557,776

Required interest on reserves
(148,825
)
 
(18,975
)
 
(12,418
)
 
180,218

 

 

 


Required interest on DAC
45,936

 
5,809

 
178

 
(51,923
)
 

 

 


Amortization of acquisition costs
99,905

 
25,327

 
676

 

 

 

 

125,908

Commissions, premium taxes, and non-deferred acquisition costs
43,638

 
21,502

 
11

 


 


 
(35
)
 
(2)
65,116

Insurance administrative expense (1)


 


 


 


 
51,913

 


 

51,913

Parent expense


 


 


 


 
2,233

 


 

2,233

Stock compensation expense


 


 


 


 
8,195

 


 

8,195

Interest expense


 


 


 
20,699

 


 


 

20,699

Total expenses
431,733

 
191,414

 
(2,607
)
 
148,994

 
62,341

 
(35
)
 
 
831,840

Subtotal
144,104

 
53,377

 
2,610

 
59,288

 
(61,890
)
 

 
 
197,489

Non-operating items
 
 
 
 
 
 
 
 
 
 

 


Measure of segment profitability (pretax)
$
144,104

 
$
53,377

 
$
2,610

 
$
59,288

 
$
(61,890
)
 
$

 
 
197,489

Deduct applicable income taxes
 
 
(58,818
)
Segment profits after tax
 
 
138,671

Add back income taxes applicable to segment profitability
 
 
58,818

Add (deduct) realized investment gains (losses)
 
   
(5,748
)
Pretax income from continuing operations per Condensed Consolidated Statements of Operations
 
   
$
191,741


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




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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 March 31, 2016
 
Life
 
Health
 
Annuity
 
Investment
 
Other &
Corporate
 
Adjustments
 
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
544,151

 
$
235,697

 
$
12

 
 
 
 
 
 
 

$
779,860

Net investment income


 


 


 
$
197,053

 
 
 
 
 

197,053

Other income


 


 


 


 
$
465

 
$
(44
)
 
(2)
421

Total revenue
544,151

 
235,697

 
12

 
197,053

 
465

 
(44
)
 
 
977,334

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Policy benefits
362,860

 
152,775

 
9,338

 


 


 


 

524,973

Required interest on reserves
(142,011
)
 
(18,076
)
 
(13,092
)
 
173,179

 


 


 


Required interest on DAC
44,202

 
5,742

 
224

 
(50,168
)
 


 


 


Amortization of acquisition costs
94,539

 
22,365

 
1,902

 


 


 


 

118,806

Commissions, premium taxes, and non-deferred acquisition costs
40,261

 
21,376

 
9

 


 


 
(44
)
 
(2)
61,602

Insurance administrative expense (1)


 


 


 


 
48,468

 


 

48,468

Parent expense


 


 


 


 
2,026

 


 

2,026

Stock compensation expense


 


 


 


 
6,935

 


 

6,935

Interest expense


 


 


 
19,369

 


 


 

19,369

Total expenses
399,851

 
184,182

 
(1,619
)

142,380

 
57,429

 
(44
)
 
 
782,179

Subtotal
144,300

 
51,515

 
1,631

 
54,673

 
(56,964
)
 

 
 
195,155

Non-operating items
 
 
 
 
 
 
 
 
 
 

 
 

Measure of segment profitability (pretax)
$
144,300

 
$
51,515

 
$
1,631

 
$
54,673

 
$
(56,964
)
 
$

 
 
195,155

Deduct applicable income taxes
 
 
(61,771
)
Segment profits after tax
 
 
133,384

Add back income taxes applicable to segment profitability
 
 
61,771

Add (deduct) realized investment gains (losses)
 
  
293

Pretax income from continuing operations per Condensed Consolidated Statements of Operations
 
  
$
195,448


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





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

Note 10—Business Segments (continued)

The following table summarizes the measures of segment profitability for comparison. It also reconciles segment profits to net income.
Analysis of Profitability by Segment
 
Three Months Ended 
 March 31,
 
2017
 
2016
Life insurance underwriting margin
$
144,104

 
$
144,300

Health insurance underwriting margin
53,377

 
51,515

Annuity underwriting margin
2,610

 
1,631

Excess investment income
59,288

 
54,673

Other insurance:
 
 
 
Other income
451

 
465

Administrative expense
(51,913
)
 
(48,468
)
Corporate and adjustments
(10,428
)
 
(8,961
)
Segment profits before tax
197,489

 
195,155

Applicable taxes
(58,818
)
 
(61,771
)
Segment profits after tax
138,671

 
133,384

Discontinued operations (after tax)
(3,637
)
 
(9,541
)
Net operating income
135,034

 
123,843

Reconciling items, net of tax:
 
 
 
Realized gains (losses)—investments (after tax)
(1,493
)
 
190

Net income
$
133,541

 
$
124,033

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Summary of Operations. Torchmark’s operations are segmented into its insurance underwriting and investment operations as described in Note 10—Business Segments in the Notes to the Condensed Consolidated Financial Statements. The measures of profitability are useful in evaluating the performance of the segments and the marketing groups within each insurance segment because each of our distribution channels operates in a niche market. Insurance underwriting margin consists of premium less policy obligations, commissions and other acquisition expenses. These measures enable management to view period-to-period trends, and to make informed decisions regarding future courses of action.
The tables in Note 10 demonstrate how the measures of profitability are determined. Those tables also reconcile our revenues and expenses by segment to major income statement line items for the three month period ended March 31, 2017 and 2016. Additionally, a table in that note, Analysis of Profitability by Segment, provides a summary of the profitability measures that demonstrates year-to-year comparability and reconciles those measures to our net income. That summary represents our overall operations in the manner that management views the business, and is a basis of the following highlights discussion.
We use three statistical measures as indicators of future premium growth: “annualized premium in force", "net sales", and “first-year collected premium.” Annualized premium in force is defined as the premium income that would be received over the following twelve months at any given date on all active policies if those policies remain in force throughout the twelve month period. Annualized premium in force is an indicator of potential growth in premium revenue. Net sales is defined as annualized premium issued, net of cancellations in the first thirty days after issue, except for Globe Life Direct Response, where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer has expired. Annualized premium issued is the gross premium that would be received during the policies’ first year in force, assuming that none of the policies lapsed or terminated. Although lapses and terminations will occur, we believe that net sales is a useful indicator of the rate of acceleration of premium growth. First-year collected premium is the premium collected during the reporting period for all policies in their first policy year. First-year collected premium takes lapses into account in the first policy year when lapses are more likely to occur, and thus is a useful indicator of how much new premium is expected to be added to premium income in the future.
A discussion of operations by each segment follows later in this report. These discussions compare the first three months of 2017 with the same period of 2016, unless otherwise noted. The following discussions are presented in the manner we view our operations, as described in Note 10.
Highlights, comparing the first three months of 2017 with the first three months of 2016. Net income per diluted common share increased 10% to $1.11 from $1.01. Included in net income were after-tax realized losses of $1.5 million in 2017 compared with gains of $190 thousand for the same period in 2016. Realized gains and losses are presented more fully under the caption Realized Gains and Losses in this report. Net operating income from continuing operations is the consolidated total of segment profits after tax and as such is considered a non-GAAP measure. Net operating income from continuing operations increased 4.0% or $5.3 million to $139 million for the three months ended March 31, 2017 compared to $133 million for the same 2016 period.
Total premium income rose 5% in 2017 to $821 million. Total net sales increased 3% to $140 million, when compared with the same period in 2016. First-year collected premium was $112 million for the 2017 period, compared with $113 million for the 2016 period.
Life insurance premium income grew 6% to $576 million. Life net sales increased 2% when compared with the same period in 2016. First-year collected life premium grew 1% during the first three months of 2017 to $80 million over the same period in 2016. Life underwriting margin as a percentage of premium was down to 25% from 27% as a result of higher Globe Life Direct Response policy obligations. Underwriting income was flat at $144 million when compared with the same period in 2016.
Health insurance premium income increased 4% to $245 million over the prior year total of $236 million. Health net sales rose 6% to $34 million for the three month period. First-year collected health premium fell 4% to $32 million. Health margins were flat at 22%, with underwriting income of $53 million for the first three months of 2017.
Insurance administrative expenses were up 7.1% in 2017 when compared with the prior year period. These expenses were 6.3% as a percentage of premium during the first three months of 2017 compared with 6.2% a year earlier. The

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increase in administrative expenses was primarily due to investments in information technology that will enhance our customer experience, improve our data analytics capabilities, improve our ability to react quickly to future changes and bolster our information security programs.
Excess investment income is defined as net investment income less the required interest on net policy liabilities and the interest cost associated with capital funding or “financing costs”. Excess investment income per diluted common share is an important measure to management. Refer to the Excess Investment Income section of this report for further details. Excess investment income per common share increased 11% in 2017 to $0.49 from $0.44 in the same period last year, while the dollar amount of excess investment income increased 8% to $59 million. Net investment income rose $11 million or 6% to $208 million in 2017, below the 8% growth in our average investment portfolio at amortized cost. The average effective yield on the fixed maturity portfolio, which represented 96% of our investments at amortized cost, decreased to 5.70% in the 2017 period from 5.83% in the prior period. Required interest rose 4% or $5 million to $128 million, in line with the growth in average net policy liabilities. Financing costs increased 7% to $21 million. Please refer to the discussion under Capital Resources for more information on debt and interest expense.
In the first three months of 2017, we invested new money in fixed maturity securities at an effective annual yield of 4.92%, compared with 5.03% in the same period of 2016. These new investments had an average rating of BBB+ and an average life to maturity of twenty-three years. Approximately 95% of the fixed-maturity portfolio at amortized cost was investment grade at March 31, 2017. Cash and short-term investments were $183 million at that date, compared with $148 million at December 31, 2016.
The net unrealized gain position in our fixed maturity portfolio grew from $1.1 billion at December 31, 2016 to $1.3 billion during the first three months of 2017.
Share Repurchases. We have an on-going share repurchase program which began in 1986 which is reviewed quarterly and is reaffirmed by the Board of Directors on an annual basis. The program was reaffirmed on August 4, 2016. With no specified authorization amount, we determine the amount of repurchases based on the amount of our excess cash flow, general market conditions, and other alternative uses. These purchases are made at the Parent Company with excess cash flow. Excess cash flow is primarily made up of cash received from the insurance subsidiaries less dividends paid to shareholders and interest paid on our debt. See further discussion in the Capital Resources section below. Share purchases are also made with the proceeds from option exercises by current and former employees in order to reduce dilution. The following chart summarizes share purchases for the three month periods ended March 31, 2017 and 2016.

Analysis of Share Purchases
(Dollar amounts in thousands, except per share data) 

 
Three Months Ended March 31,
 
2017
 
2016
 
Shares
 
Amount
 
Average
Price
 
Shares
 
Amount
 
Average
Price
Purchases with:

 

 

 

 

 

Excess cash flow at the Parent Company
1,076

 
$
81,992

 
$
76.18

 
1,503

 
$
80,057

 
$
53.26

Option exercise proceeds
414

 
31,727

 
76.71

 
95

 
5,032

 
53.08

Total
1,490

 
$
113,719

 
$
76.33

 
1,598

 
$
85,089

 
$
53.25

Throughout the remainder of this discussion, share purchases will only refer to those made from excess cash flow.



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A detailed discussion of our operations by component segment follows.
Life insurance, comparing the first three months of 2017 with the first three months of 2016. Life insurance is our predominant segment, representing 70% of premium income and 72% of insurance underwriting margin in the first three months of 2017. In addition, investments supporting the reserves for life business generate the majority of excess investment income attributable to the investment segment. Life insurance premium income increased 6% to $576 million. The following table presents Torchmark’s life insurance premium by distribution channel.
Life Insurance
Premium
(Dollar amounts in thousands)
 
Three Months Ended March 31,

Increase
 
2017

2016

(Decrease)
 
Amount

% of
Total

Amount

% of
Total

Amount

%
American Income Exclusive Agency
$
241,160

 
42
 
$
220,402

 
41
 
$
20,758

 
9

Globe Life Direct Response
210,417

 
36
 
200,001

 
37
 
10,416

 
5

Liberty National Exclusive Agency
68,732

 
12
 
67,892

 
12
 
840

 
1

Other Agencies
55,528

 
10
 
55,856

 
10
 
(328
)
 
(1
)
Total Life Premium
$
575,837

 
100
 
$
544,151

 
100
 
$
31,686

 
6

Net sales, an indicator of new business production, increased 2% to $106 million. An analysis of life net sales by distribution channel is presented below.
Life Insurance
Net Sales
(Dollar amounts in thousands)
 
Three Months Ended March 31,

Increase
 
2017
 
2016
 
(Decrease)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
%
American Income Exclusive Agency
$
53,397

 
51
 
$
50,240

 
48
 
$
3,157

 
6

Globe Life Direct Response
38,731

 
37
 
41,155

 
40
 
(2,424
)
 
(6
)
Liberty National Exclusive Agency
10,946

 
10
 
9,451

 
9
 
1,495

 
16

Other Agencies
2,583

 
2
 
3,000

 
3
 
(417
)
 
(14
)
Total Life Net Sales
$
105,657

 
100
 
$
103,846

 
100
 
$
1,811

 
2

First-year collected life premium, defined earlier in this report, was $80 million in the 2017 period, rising 1% over the same period in 2016. First-year collected life premium by distribution channel is presented in the table below. 
Life Insurance
First-Year Collected Premium
(Dollar amounts in thousands)
 
Three Months Ended March 31,

Increase
 
2017

2016

(Decrease)
 
Amount

% of
Total

Amount

% of
Total

Amount

%
American Income Exclusive Agency
$
44,255

 
55
 
$
41,955

 
53
 
$
2,300

 
5

Globe Life Direct Response
25,169

 
32
 
26,959

 
34
 
(1,790
)
 
(7
)
Liberty National Exclusive Agency
7,934

 
10
 
7,050

 
9
 
884

 
13

Other Agencies
2,619

 
3
 
2,967

 
4
 
(348
)
 
(12
)
Total
$
79,977

 
100
 
$
78,931

 
100
 
$
1,046

 
1


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The American Income Exclusive Agency has historically marketed primarily to members of labor unions. While labor unions are still the core market for this agency, American Income has diversified in recent years by focusing heavily on referrals and other affinity groups to help ensure sustainable growth. The life business of this agency is Torchmark’s highest margin life business and it is the largest contributor to life premium of any distribution channel at 42% of Torchmark’s total. This group produced premium income of $241 million, an increase of 9%. First-year collected premium was $44 million, an increase of 5%. Net sales rose 6% to $53 million. Sales growth in our exclusive agencies is generally dependent on growth in the size of the agency force. The American Income Exclusive Agency's average agent count increased 8% to 6,713 for the three months ended March 31, 2017 compared with 6,206 for the same period in 2016. As is the case with all Torchmark agencies, the average agent count is based on the actual count at the end of each week during the period. The American Income Exclusive Agency has been focusing on growing and strengthening middle management to support sustainable growth of the agency force. To accomplish this, the agency has placed an increased emphasis on agent training programs and financial incentives that appropriately reward agents at all levels for helping develop and train its agents, including more home-office and webinar training programs. These programs are designed to provide each agent, from new recruits to top level managers, coaching and instruction specifically designed for their level of experience and responsibility. We are also making considerable investments in information technology in support of the agency, which are expected to enhance overall productivity of agents and improve agent retention.
The Globe Life Direct Response Unit offers adult and juvenile life insurance through a variety of direct-to-consumer marketing approaches, which include direct mailings, insert media, and electronic media. These different approaches support and complement one another in the unit’s efforts to reach the consumer. The Globe Life Direct Response channel’s growth over the years has been fueled by constant innovation. In recent years, electronic media production has grown rapidly as management has aggressively increased marketing activities related to internet and mobile technology, and has focused on driving traffic to the inbound call center. We continually introduce new initiatives in this unit in an attempt to increase response rates.
While the juvenile market is an important source of sales, it also is a vehicle to reach the parents and grandparents of juvenile policyholders, who are more likely to respond favorably to a Globe Life Direct Response solicitation for life coverage on themselves than is the general adult population. Also, both juvenile policyholders and their parents are low acquisition-cost targets for sales of additional coverage over time.
Globe Life Direct Response’s life premium income rose 5% to $210 million, representing 36% of Torchmark’s total life premium in the first three months of 2017. Net sales of $39 million for this group decreased 6%. The sales decline was expected as we have refined our marketing efforts in a manner intended to optimize underwriting profits. First-year collected premium decreased 7% to $25 million.
The Liberty National Exclusive Agency markets individual and group life insurance to middle-income customers. Life premium income for this agency was $69 million in the first three months of 2017 compared with $68 million for the same period in 2016. First-year collected premium increased 13% to $8 million.Net sales for the Liberty National Agency increased 16% to $11 million. This is the largest percentage increase of any of Torchmark's distribution channels.
The Liberty National average agent count increased 18% to 1,820 for the three months ended March 31, 2017 compared with 1,542 for the same period in 2016. We continue to execute our long term plan to grow this agency through expansion from small town markets in the southeast to more densely populated areas with larger pools of potential agent recruits and customers. Expansion of this agency’s presence into more heavily populated, less-penetrated areas will help create long term agency growth. Additionally, our prospecting training program has helped to improve the ability of agents to develop new worksite marketing business.
The Other Agencies distribution channels primarily include independent agencies selling predominantly life insurance. The Other Agencies contributed $56 million of life premium income, or 10% of Torchmark’s total in the first three months of 2017, but contributed only 2% of net sales for the period.

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Life Insurance
Summary of Results
(Dollar amounts in thousands)
 
 
Three Months Ended March 31,
 
Increase
 
2017

2016
 
(Decrease)
 
Amount
 
% of
Premium
 
Amount
 
% of
Premium
 
Amount

%
Premium and policy charges
$
575,837

 
100
 
$
544,151

 
100
 
$
31,686

 
6

Net policy obligations
242,254

 
42
 
220,849

 
40
 
21,405

 
10

Commissions and acquisition expense
189,479

 
33
 
179,002

 
33
 
10,477

 
6

Insurance underwriting income before other income and administrative expense
$
144,104

 
25
 
$
144,300

 
27
 
$
(196
)
 

Life insurance underwriting income before insurance administrative expense was $144 million in the first three months of 2017 and 2016. As a percentage of premium, underwriting margins declined to 25% from 27%. The decrease in underwriting margin as a percentage of premium was due to higher Globe Life Direct Response net policy obligations. The higher net policy obligations in the Globe Life Direct Response Unit primarily relate to policies issued in calendar years 2011 through 2015 where additional prescription drug information was used in the underwriting process with an expectation of improved mortality. To date, improvements in actual mortality have been less than originally expected.
Health insurance, comparing the first three months of 2017 with the first three months of 2016. Health insurance sold by Torchmark includes primarily Medicare Supplement insurance, critical illness coverage, accident coverage, and other limited-benefit supplemental health products. In this analysis, all health coverage plans other than Medicare Supplement are classified as limited-benefit plans.
Health premium accounted for 30% of our total premium in the 2017 period. Health underwriting margin accounted for 27% of total underwriting margin, reflective of the lower underwriting margin as a percentage of premium for health compared with life insurance. As noted under the caption Life Insurance, we have emphasized life insurance sales relative to health, due to life’s superior profitability and its greater contribution to excess investment income.

Health premium increased 4% to $245 million in the 2017 period. Medicare Supplement premium increased 3% to $122 million, while other limited-benefit health premium increased 5% to $123 million.
Health net sales increased 6% to $34 million. Medicare Supplement net sales decreased 5% to $13 million in 2017. Limited-benefit net sales increased 14% to $21 million. Health first-year collected premium fell 4% to $32 million as a result of lower group sales in 2016. Group sales can vary significantly from period to period.


28

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The following table is an analysis of our health premium by distribution channel.

Health Insurance
Premium
(Dollar amounts in thousands)
 
Three Months Ended March 31,

Increase
 
2017

2016

(Decrease)
 
Amount

% of
Total

Amount

% of
Total

Amount

%
United American Independent Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
$
3,026

 
 
 
$
3,330

 
 
 
$
(304
)
 
(9
)
Medicare Supplement
89,230

 
 
 
84,720

 
 
 
4,510

 
5

 
92,256

 
37
 
88,050

 
37
 
4,206

 
5

Family Heritage Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
61,576

 
 
 
57,317

 
 
 
4,259

 
7

Medicare Supplement