GLOBE LIFE INC. - FORM 10-Q - August 8, 2017

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EX-32.1 - EXHIBIT 32.1 - GLOBE LIFE INC.tmk201710-qq2exhbit321.htm
EX-31.3 - EXHIBIT 31.3 - GLOBE LIFE INC.tmk201710-qq2exhibit313.htm
EX-31.2 - EXHIBIT 31.2 - GLOBE LIFE INC.tmk201710-qq2exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - GLOBE LIFE INC.tmk201710-qq2exhibit311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
 
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2017
 
 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from _________to_________
Commission File Number 1-8052
torchmarklogocolora01rgba14.jpg
TORCHMARK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
 
63-0780404
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
3700 South Stonebridge Drive, McKinney, Texas
 
75070
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (972) 569-4000
NONE
Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes    ý            No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes   ý            No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   ¨              No   ý
Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the last practicable date.
 
CLASS
 
OUTSTANDING AT July 31, 2017
 
 
Common Stock,
$1.00 Par Value
 
116,320,319
 


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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
1,149,673

 
$
487,566

 
$
6

 

 

 


 

$
1,637,245

Net investment income

 

 

 
$
421,058

 

 


 

421,058

Other income

 

 

 

 
$
878

 
$
(69
)
 
(2)
809

    Total revenue
1,149,673

 
487,566

 
6

 
421,058

 
878

 
(69
)
 

2,059,112

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Policy benefits
779,844

 
314,330

 
17,923

 

 

 
2,094

 
(3)
1,114,191

Required interest on reserves
(299,477
)
 
(38,242
)
 
(24,812
)
 
362,531

 

 

 

—

Required interest on DAC
92,149

 
11,649

 
352

 
(104,150
)
 

 

 

—

Amortization of acquisition costs
198,378

 
48,343

 
1,308

 

 

 

 

248,029

Commissions, premium taxes, and non-deferred acquisition costs
87,346

 
42,853

 
18

 


 


 
(69
)
 
(2)
130,148

Insurance administrative expense (1)


 


 


 


 
103,325

 


 

103,325

Parent expense


 


 


 


 
4,898

 


 

4,898

Stock compensation expense


 


 


 


 
16,546

 


 

16,546

Interest expense


 


 


 
41,855

 


 


 

41,855

Total expenses
858,240

 
378,933

 
(5,211
)
 
300,236

 
124,769

 
2,025

 
 
1,658,992

Subtotal
291,433

 
108,633

 
5,217

 
120,822

 
(123,891
)
 
(2,094
)
 
 
400,120

Non-operating items
 
 
 
 
 
 
 
 
 
 
2,094

 
(3)
2,094

Measure of segment profitability (pretax)
$
291,433

 
$
108,633

 
$
5,217

 
$
120,822

 
$
(123,891
)
 
$
—

 
 
402,214

Deduct applicable income taxes
 
 
(121,361
)
Segment profits after tax
 
 
280,853

Add back income taxes applicable to segment profitability
 
 
121,361

Add (deduct) realized investment gains (losses)
 
   
(6,453
)
Add (deduct) administrative settlements (3)
 
 
(2,094
)
Pretax income from continuing operations per Condensed Consolidated Statements of Operations
 
   
$
393,667


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




24
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 10—Business Segments (continued)

 
Six Months Ended June 30, 2016
 
Life
 
Health
 
Annuity
 
Investment
 
Other &
Corporate
 
Adjustments
 
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
1,092,741

 
$
472,949

 
$
25

 
 
 
 
 
 
 

$
1,565,715

Net investment income


 


 


 
$
398,695

 
 
 
 
 

398,695

Other income


 


 


 


 
$
887

 
$
(84
)
 
(2)
803

Total revenue
1,092,741

 
472,949

 
25

 
398,695

 
887

 
(84
)
 
 
1,965,213

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Policy benefits
732,202

 
306,036

 
18,220

 


 


 


 

1,056,458

Required interest on reserves
(285,636
)
 
(36,327
)
 
(25,598
)
 
347,561

 


 


 

—

Required interest on DAC
88,678

 
11,508

 
429

 
(100,615
)
 


 


 

—

Amortization of acquisition costs
188,202

 
44,467

 
3,382

 


 


 


 

236,051

Commissions, premium taxes, and non-deferred acquisition costs
81,391

 
43,129

 
20

 


 


 
(84
)
 
(2)
124,456

Insurance administrative expense (1)


 


 


 


 
96,881

 


 

96,881

Parent expense


 


 


 


 
4,405

 


 

4,405

Stock compensation expense


 


 


 


 
13,989

 


 

13,989

Interest expense


 


 


 
42,479

 


 


 

42,479

Total expenses
804,837

 
368,813

 
(3,547
)

289,425

 
115,275

 
(84
)
 
 
1,574,719

Subtotal
287,904

 
104,136

 
3,572

 
109,270

 
(114,388
)
 
—

 
 
390,494

Non-operating items
 
 
 
 
 
 
 
 
 
 
—

 
 
—

Measure of segment profitability (pretax)
$
287,904

 
$
104,136

 
$
3,572

 
$
109,270

 
$
(114,388
)
 
$
—

 
 
390,494

Deduct applicable income taxes
 
 
(120,420
)
Segment profits after tax
 
 
270,074

Add back income taxes applicable to segment profitability
 
 
120,420

Add (deduct) realized investment gains (losses)
 
  
4,298

Pretax income from continuing operations per Condensed Consolidated Statements of Operations
 
  
$
394,792


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





25
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 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Life insurance underwriting margin
$
147,329

 
$
143,604

 
$
291,433

 
$
287,904

Health insurance underwriting margin
55,256

 
52,621

 
108,633

 
104,136

Annuity underwriting margin
2,607

 
1,941

 
5,217

 
3,572

Excess investment income
61,534

 
54,597

 
120,822

 
109,270

Other insurance:
 
 
 
 
 
 
 
Other income
427

 
422

 
878

 
887

Administrative expense
(51,412
)
 
(48,413
)
 
(103,325
)
 
(96,881
)
Corporate and adjustments
(11,016
)
 
(9,433
)
 
(21,444
)
 
(18,394
)
Segment profits before tax
204,725

 
195,339

 
402,214

 
390,494

Applicable taxes
(62,543
)
 
(58,649
)
 
(121,361
)
 
(120,420
)
Segment profits after tax
142,182

 
136,690

 
280,853

 
270,074

Discontinued operations (after tax)
(90
)
 
(865
)
 
(3,727
)
 
(10,406
)
Net operating income
142,092

 
135,825

 
277,126

 
259,668

Reconciling items, net of tax:
 
 
 
 
 
 
 
Realized gains (losses)—investments (after tax)
(458
)
 
2,604

 
(1,951
)
 
2,794

Administrative settlements (after tax)
(1,361
)
 
—

 
(1,361
)
 
—

Net income
$
140,273

 
$
138,429

 
$
273,814

 
$
262,462

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        


26

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 and six month periods ended June 30, 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. 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. 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. 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 six 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 six months of 2017 with the first six months of 2016. Net income per diluted common share increased 8% to $2.29 from $2.13. Included in net income were after-tax realized losses of $2.0 million in 2017 compared with gains of $2.8 million 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% or $10.8 million to $281 million for the six months ended June 30, 2017 compared with $270 million for the same 2016 period.
Total premium income rose 5% in 2017 to $1.6 billion. Total net sales increased 2% to $284 million, when compared with the same period in 2016. First-year collected premium was $225 million for the 2017 period, compared with $227 million for the 2016 period.
Life insurance premium income grew 5% to $1.1 billion. Life net sales were flat when compared with the same period in 2016. First-year collected life premium grew 1% during the first six months of 2017 to $160 million over the same period in 2016. Life underwriting margin as a percentage of premium was down to 25% from 26% as a result of higher Globe Life Direct Response policy obligations. Underwriting income increased 1% to $291 million when compared with the same period in 2016.
Health insurance premium income increased 3% to $488 million over the prior year total of $473 million. Health net sales rose 8% to $70 million for the six month period. First-year collected health premium fell 4% to $66 million. Health margins were flat at 22%. Underwriting income increased 4% to $109 million for the first six months of 2017.
Insurance administrative expenses were up 6.7% in 2017 when compared with the prior year period. These expenses were 6.3% as a percentage of premium during the first six months of 2017 compared with 6.2% a year earlier. The

27

increase in administrative expenses was primarily due to an increase in other employee costs and investments in information technology.
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 13% in 2017 to $1.01 from $0.89 in the same period last year, while the dollar amount of excess investment income increased 11% to $121 million. Net investment income rose $22 million or 6% to $421 million in 2017, below the 7% growth in our average investment portfolio at amortized cost. The average effective yield earned on the fixed maturity portfolio, which represented 96% of our investments at amortized cost, decreased to 5.70% in the 2017 period from 5.81% in the prior period. Required interest rose 5% or $11 million to $258 million, in line with the growth in average net policy liabilities. Financing costs decreased 1% to $42 million. Please refer to the discussion under Capital Resources for more information on debt and interest expense.
In the first six months of 2017, we invested new money in fixed maturity securities at an effective annual yield of 4.91%, compared with 4.87% in the same period of 2016. These new investments had an average rating of BBB+ and an average life to maturity of twenty-two years. Approximately 95% of the fixed-maturity portfolio at amortized cost was investment grade at June 30, 2017. Cash and short-term investments were $192 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 $1.7 billion during the first six months of 2017 due primarily to changes in market interest rates.
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 7, 2017. 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 six month periods ended June 30, 2017 and 2016.

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

 
Six Months Ended June 30,
 
2017
 
2016
 
Shares
 
Amount
 
Average
Price
 
Shares
 
Amount
 
Average
Price
Purchases with:

 

 

 

 

 

Excess cash flow at the Parent Company
2,147

 
$
163,216

 
$
76.03

 
2,940

 
$
163,079

 
$
55.46

Option exercise proceeds
528

 
40,540

 
76.78

 
685

 
39,896

 
58.27

Total
2,675

 
$
203,756

 
$
76.18

 
3,625

 
$
202,975

 
$
55.99

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



28

A detailed discussion of our operations by component segment follows.
Life insurance, comparing the first six months of 2017 with the first six months of 2016. Life insurance is our predominant segment, representing 70% of premium income and 72% of insurance underwriting margin in the first six 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 5% to $1.1 billion. The following table presents Torchmark’s life insurance premium by distribution channel.
Life Insurance
Premium
(Dollar amounts in thousands)
 
Six Months Ended June 30,

Increase
 
2017

2016

(Decrease)
 
Amount

% of
Total

Amount

% of
Total

Amount

%
American Income Exclusive Agency
$
488,469

 
42
 
$
446,643

 
41
 
$
41,826

 
9

Globe Life Direct Response
413,782

 
36
 
398,608

 
37
 
15,174

 
4

Liberty National Exclusive Agency
137,076

 
12
 
135,600

 
12
 
1,476

 
1

Other Agencies
110,346

 
10
 
111,890

 
10
 
(1,544
)
 
(1
)
Total Life Premium
$
1,149,673

 
100
 
$
1,092,741

 
100
 
$
56,932

 
5

Net sales, an indicator of new business production, were flat when compared with the same period in 2016. An analysis of life net sales by distribution channel is presented below.
Life Insurance
Net Sales
(Dollar amounts in thousands)
 
Six Months Ended June 30,

Increase
 
2017
 
2016
 
(Decrease)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
%
American Income Exclusive Agency
$
110,151

 
52
 
$
105,601

 
50
 
$
4,550

 
4

Globe Life Direct Response
75,725

 
35
 
81,611

 
38
 
(5,886
)
 
(7
)
Liberty National Exclusive Agency
22,713

 
11
 
19,872

 
9
 
2,841

 
14

Other Agencies
5,149

 
2
 
6,415

 
3
 
(1,266
)
 
(20
)
Total Life Net Sales
$
213,738

 
100
 
$
213,499

 
100
 
$
239

 
—

First-year collected life premium, defined earlier in this report, was $160 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)
 
Six Months Ended June 30,

Increase
 
2017

2016

(Decrease)
 
Amount

% of
Total

Amount

% of
Total

Amount

%
American Income Exclusive Agency
$
89,723

 
56
 
$
85,866

 
54
 
$
3,857

 
4

Globe Life Direct Response
48,838

 
31
 
52,345

 
33
 
(3,507
)
 
(7
)
Liberty National Exclusive Agency
16,163

 
10
 
14,350

 
9
 
1,813

 
13

Other Agencies
5,016

 
3
 
5,956

 
4
 
(940
)
 
(16
)
Total
$
159,740

 
100
 
$
158,517

 
100
 
$
1,223

 
1


29

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. This agency is the largest contributor to life premium and underwriting margin of any distribution channel. This group produced premium income of $488 million, an increase of 9%. First-year collected premium was $90 million, an increase of 4%. Net sales rose 4% to $110 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 7% to 6,861 for the six months ended June 30, 2017 compared with 6,403 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 an 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 4% to $414 million, representing 36% of Torchmark’s total life premium in the first six months of 2017. Net sales of $76 million for this group decreased 7%. First-year collected premium decreased 7% to $49 million. This unit has experienced declining underwriting margins in recent periods primarily due to higher mortality experience for certain issue years than was originally expected when the policies were issued, resulting in higher policy obligations. As previously noted, we are refining our marketing efforts in order to improve our underwriting profit. The sales and first-year collected premium declines were expected as we have refined our marketing efforts in a manner intended to optimize underwriting profits.
The Liberty National Exclusive Agency markets individual and group life insurance to middle-income customers. Life premium income for this agency was $137 million in the first six months of 2017 compared with $136 million for the same period in 2016. First-year collected premium increased 13% to $16 million. Net sales for the Liberty National Agency increased 14% to $23 million. The increases in first-year collected premium and net sales are the largest percentage increases of any of Torchmark's life distribution channels.
The Liberty National average agent count increased 17% to 1,912 for the six months ended June 30, 2017 compared with 1,641 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 $110 million of life premium income, or 10% of Torchmark’s total in the first six months of 2017, but contributed only 2% of net sales for the period.

30

Life Insurance
Summary of Results
(Dollar amounts in thousands)
 
 
Six Months Ended June 30,
 
Increase
 
2017

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

%
Premium and policy charges
$
1,149,673

 
100
 
$
1,092,741

 
100
 
$
56,932

 
5
Net policy obligations
480,367

 
42
 
446,566

 
41
 
33,801

 
8
Commissions and acquisition expense
377,873

 
33
 
358,271

 
33
 
19,602

 
5
Insurance underwriting income before other income and administrative expense
$
291,433

 
25
 
$
287,904

 
26
 
$
3,529

 
1
Life insurance underwriting income before insurance administrative expense was $291 million in the first six months of 2017, compared with $288 million for the same period in 2016. As a percentage of premium, underwriting margins declined to 25% from 26%. The decrease in underwriting margin as a percentage of premium was due to the higher Globe Life Direct Response net policy obligations previously discussed.
Health insurance, comparing the first six months of 2017 with the first six 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 3% to $488 million in the 2017 period. Medicare Supplement premium increased 1% to $241 million, while other limited-benefit health premium increased 5% to $246 million.
Health net sales increased 8% to $70 million. Medicare Supplement net sales increased 9% to $27 million in 2017. Limited-benefit net sales increased 8% to $44 million. Health first-year collected premium fell 4% to $66 million as a result of lower group sales in 2016. Group sales can vary significantly from period to period.


31


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

Health Insurance
Premium
(Dollar amounts in thousands)
 
Six Months Ended June 30,

Increase
 
2017

2016

(Decrease)
 
Amount

% of
Total

Amount

% of
Total

Amount

%
United American Independent Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
$
5,883

 
 
 
$
6,535

 
 
 
$
(652
)
 
(10
)
Medicare Supplement
177,330

 
 
 
171,309

 
 
 
6,021

 
4

 
183,213

 
38
 
177,844

 
38
 
5,369

 
3

Family Heritage Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
124,433

 
 
 
115,928

 
 
 
8,505

 
7

Medicare Supplement
—

 
 
 
—

 
 
 
—

 
—

 
124,433

 
25
 
115,928

 
24
 
8,505

 
7

Liberty National Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
72,158

 
 
 
70,962

 
 
 
1,196

 
2

Medicare Supplement
27,380

 
 
 
31,446

 
 
 
(4,066
)
 
(13
)
 
99,538

 
20
 
102,408

 
22
 
(2,870
)
 
(3
)
American Income Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
43,303

 
 
 
41,017

 
 
 
2,286

 
6

Medicare Supplement
138

 
 
 
168

 
 
 
(30
)
 
(18
)
 
43,441

 
9
 
41,185

 
9
 
2,256

 
5

Direct Response
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
302

 
 
 
354

 
 
 
(52
)
 
(15
)
Medicare Supplement
36,639

 
 
 
35,230

 
 
 
1,409

 
4

 
36,941

 
8
 
35,584

 
7
 
1,357

 
4

Total Health Premium
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
246,079

 
50
 
234,796

 
50
 
11,283

 
5

Medicare Supplement
241,487

 
50
 
238,153

 
50
 
3,334

 
1

Total
$
487,566

 
100
 
$
472,949

 
100
 
$
14,617

 
3


32

Presented below is a table of health net sales by distribution channel.
Health Insurance
Net Sales
(Dollar amounts in thousands)
 
Six Months Ended June 30,

Increase
 
2017

2016

(Decrease)
 
Amount

% of
Total

Amount

% of
Total

Amount

%
United American Independent Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
$
276

 
 
 
$
334

 
 
 
$
(58
)
 
(17
)
Medicare Supplement
24,142

 
 
 
22,059

 
 
 
2,083

 
9

 
24,418

 
35
 
22,393

 
34
 
2,025

 
9

Family Heritage Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
27,528

 
 
 
24,176

 
 
 
3,352

 
14

Medicare Supplement
—

 
 
 
—

 
 
 
—

 
—

 
27,528

 
39
 
24,176

 
37
 
3,352

 
14

Liberty National Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
9,302

 
 
 
9,841

 
 
 
(539
)
 
(5
)
Medicare Supplement
—

 
 
 
4

 
 
 
(4
)
 
(100
)
 
9,302

 
13
 
9,845

 
15
 
(543
)
 
(6
)
American Income Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
6,572

 
 
 
6,187

 
 
 
385

 
6

Medicare Supplement
—

 
 
 
—

 
 
 
—

 
—

 
6,572

 
9
 
6,187

 
10
 
385

 
6

Direct Response
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
—

 
 
 
—

 
 
 
—

 
—

Medicare Supplement
2,585

 
 
 
2,456

 
 
 
129

 
5

 
2,585

 
4
 
2,456

 
4
 
129

 
5

Total Net Sales
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
43,678

 
62
 
40,538

 
62
 
3,140

 
8

Medicare Supplement
26,727

 
38
 
24,519

 
38
 
2,208

 
9

Total
$
70,405

 
100
 
$
65,057

 
100
 
$
5,348

 
8


33

The following table presents health insurance first-year collected premium by distribution channel.
Health Insurance
First-Year Collected Premium
(Dollar amounts in thousands)
 
Six Months Ended June 30,

Increase
 
2017

2016

(Decrease)
 
Amount

% of
Total

Amount

% of
Total

Amount

%
United American Independent Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
$
228

 
 
 
$
309

 
 
 
$
(81
)
 
(26
)
Medicare Supplement
25,812

 
 
 
32,006

 
 
 
(6,194
)
 
(19
)
 
26,040

 
40

 
32,315

 
47

 
(6,275
)
 
(19
)
Family Heritage Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
21,912

 
 
 
20,091

 
 
 
1,821

 
9

Medicare Supplement
—

 
 
 
—

 
 
 
—

 
—

 
21,912

 
33

 
20,091

 
29

 
1,821

 
9

Liberty National Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
8,243

 
 
 
7,850

 
 
 
393

 
5

Medicare Supplement
2

 
 
 
1

 
 
 
1

 
100

 
8,245

 
13

 
7,851

 
12

 
394

 
5

American Income Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
6,842

 
 
 
6,416

 
 
 
426

 
7

Medicare Supplement
—

 
 
 
—

 
 
 
—

 
—

 
6,842

 
10

 
6,416

 
9

 
426

 
7

Direct Response
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
—

 
 
 
—

 
 
 
—

 
—

Medicare Supplement
2,689

 
 
 
2,099

 
 
 
590

 
28

 
2,689

 
4

 
2,099

 
3

 
590

 
28

Total First-Year Collected Premium


 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
37,225

 
57

 
34,666

 
50

 
2,559

 
7

Medicare Supplement
28,503

 
43

 
34,106

 
50

 
(5,603
)
 
(16
)
Total
$
65,728

 
100

 
$
68,772

 
100

 
$
(3,044
)
 
(4
)

A discussion of health operations by distribution channel follows:
The UA Independent Agency consists of independent agencies appointed with Torchmark who may also sell for other companies. The UA Independent Agency was Torchmark’s largest health agency in terms of health premium income. Premium income was $183 million, representing 38% of Torchmark’s total health premium. Net sales were $24 million, or 35% of Torchmark’s health sales. This agency primarily produces Medicare Supplement insurance, with Medicare Supplement premium income of $177 million. The UA Independent Agency represents approximately 73% of all Torchmark Medicare Supplement premium and 90% of Medicare Supplement net sales. Medicare Supplement premium in this agency rose 4%. Total health premium increased 3%. Net sales of the Medicare Supplement product increased 9% in 2017 due primarily to an increase in group sales. As noted earlier, Group Medicare Supplement sales have historically fluctuated from period to period.
The Family Heritage Agency primarily markets limited-benefit supplemental health insurance in non-urban areas. Most of their policies include a cash-back feature, such as a return of premium whereby any excess of premiums over claims paid is returned to the policyholder at the end of a specified period stated within the insurance policy. Management expects to grow this agency by continuing the incorporation of Torchmark’s agent recruiting programs. The Family Heritage Agency contributed $28 million and $24 million in net sales in the six months of 2017 and 2016, respectively. Health premium income was $124 million for the six month period of 2017, representing 25% of Torchmark’s health premium compared with $116 million or 24% of health premium in the prior year period. The average agent count was 965 for the six months ended June 30, 2017 compared with 880 for the same period in 2016, an increase of 10%.

34

The Liberty National Exclusive Agency represented 20% of all Torchmark health premium income at $100 million in the six months of 2017. The Liberty Agency markets limited-benefit health supplemental products consisting primarily of critical illness insurance. Much of Liberty’s health business is now generated through worksite marketing targeting small businesses of 10 to 25 employees. In 2017, health premium income in the Liberty Agency declined $3 million to $100 million from prior year premium. Liberty’s health premium decline has been due primarily to its declining Medicare Supplement block.
Other distribution. Certain of our other distribution channels market health products, although their main emphasis is on life insurance. On a combined basis, they accounted for 17% of health premium in the 2017 period. The American Income Exclusive Agency primarily markets accident plans. The Direct Response unit markets primarily Medicare Supplements to employer or union-sponsored groups. Direct Response added $3 million of Medicare Supplement net sales in 2017.

The following table presents underwriting margin data for health insurance.
Health Insurance
Summary of Results
(Dollar amounts in thousands)
 
Six Months Ended June 30,
 
Increase
 
2017
 
2016
 
(Decrease)
 
Amount
 
% of
Premium
 
Amount
 
% of
Premium
 
Amount
 
%
Premium and policy charges
$
487,566

 
100
 
$
472,949

 
100
 
$
14,617

 
3
Net policy obligations
276,088

 
57
 
269,709

 
57
 
6,379

 
2
Commissions and acquisition expense
102,845

 
21
 
99,104

 
21
 
3,741

 
4
Insurance underwriting income before other income and administrative expense
$
108,633

 
22
 
$
104,136

 
22
 
$
4,497

 
4
Underwriting income for health insurance totaled $109 million in 2017, an increase of 4% when compared with the same period in 2016. As a percentage of health premium, underwriting margins for the six months ended June 30, 2017 were 22%, same as the year ago quarter.
Annuities. Annuities represent an insignificant part of our business and are not expected to be an important part of our marketing strategy going forward.


35

Operating expenses, comparing the first six months of 2017 with the first six months of 2016. Operating expenses consist of insurance administrative expenses and Parent Company expenses. Also included is stock compensation expense, which is viewed by us as a parent company expense. Insurance administrative expenses relate to premium income for a given period; therefore, we measure those expenses as a percentage of premium income. Total expenses are measured as a percentage of total revenues. An analysis of operating expenses is shown below.

Operating Expenses Selected Information
(Dollar amounts in thousands)
 
Six Months Ended June 30,
 
2017
 
2016

Amount
 
% of
Premium
 
Amount
 
% of
Premium
Insurance administrative expenses:
 
 
 
 
 
 
 
Salaries
$
46,834

 
2.9
 
$
44,437

 
2.8
Other employee costs
17,236

 
1.0
 
14,838

 
0.9
Information technology costs
12,765

 
0.8
 
11,854

 
0.8
Legal costs
4,021

 
0.2
 
4,471

 
0.3
Other administrative costs
22,469

 
1.4
 
21,281

 
1.4
Total insurance administrative expenses
103,325

 
6.3
 
96,881

 
6.2
 
 
 
 
 
 
 
 
Parent company expense
4,898

 
 
 
4,405

 
 
Stock compensation expense
16,546

 
 
 
13,989

 
 
Total operating expenses, per Condensed Consolidated Statements of Operations
$
124,769

 
 
 
$
115,275

 
 
 
 
 
 
 
 
 
 
Insurance administrative expenses:
 
 
 
 
 
 
 
Increase (decrease) over prior year
6.7
%
 
 
 
6.0
%
 
 
Total operating expenses:

 
 
 

 
 
Increase (decrease) over prior year
8.2
%
 
 
 
3.9
%
 
 
Insurance administrative expenses of $103 million were up 6.7% in 2017 when compared with the prior year period of $97 million. As a percentage of total premium, insurance administrative expenses were 6.3% in 2017 compared with 6.2% in 2016. Total operating expenses increased 8.2% after an increase of 3.9% in 2016. The increase in other employee costs was due primarily to higher pension expense driven by lower interest rates. The increase in information technology costs was due to investments that will enhance our customer experience, improve or data analytics capabilities, improve our ability to react quickly to future changes and bolster our information security programs.
The increase in stock compensation expense was primarily due to higher expense associated with equity awards, reflecting Torchmark's higher share price as compared with the same period a year ago.
Investments (excess investment income), comparing the first six months of 2017 with the first six months of 2016. We manage our capital resources including investments, debt, and cash flow through the investment segment. Excess investment income represents the profit margin attributable to investment operations. It is the measure that we use to evaluate the performance of the investment segment as described in Note 10—Business Segments. It 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.”
We also view excess investment income per diluted common share as an important and useful measure to evaluate the performance of the investment segment. It is defined as excess investment income divided by the total diluted weighted average shares outstanding, representing the contribution by the investment segment to the consolidated earnings per share of the Company. Since implementing our share repurchase program in 1986, we have used $6.9 billion of cash flow to repurchase Torchmark shares (average split-adjusted price per diluted common share of $15.76) after determining that the repurchases provided a greater return than other investment alternatives. Share repurchases reduce excess investment income because of the foregone earnings on the cash that would otherwise have been invested in interest-bearing assets, but they also reduce the number of shares outstanding. In order to put all capital

36

resource uses on a comparable basis, we believe that excess investment income per diluted share is an appropriate measure of the investment segment.
The following table summarizes Torchmark’s investment income, excess investment income, and excess investment income per diluted common share.
Excess Investment Income
(Dollar amounts in thousands)
 
Six Months Ended 
 June 30,
 
Increase
(Decrease)
 
2017
 
2016
 
Amount
 
%
Net investment income
$
421,058

 
$
398,695

 
$
22,363

 
6

Interest on net insurance policy liabilities:
 
 
 
 
 
 
 
Interest on reserves
(362,531
)
 
(347,561
)
 
(14,970
)
 
4

Interest on deferred acquisition costs
104,150

 
100,615

 
3,535

 
4

Net required interest
(258,381
)
 
(246,946
)
 
(11,435
)
 
5

Financing costs
(41,855
)
 
(42,479
)
 
624

 
(1
)
Excess investment income
$
120,822

 
$
109,270

 
$
11,552

 
11

 
 
 
 
 
 
 
 
Excess investment income per diluted share
$
1.01

 
$
0.89

 
$
0.12

 
13

 
 
 
 
 
 
 
 
Average invested assets (at amortized cost)
$
15,185,776

 
$
14,250,106

 
$
935,670

 
7

Average net insurance policy liabilities(1)
9,247,438

 
8,846,244

 
401,194

 
5

Average debt and preferred securities (at amortized cost)
1,498,943

 
1,339,263

 
159,680

 
12

(1) Interest bearing policy liabilities, net of deferred acquisition costs and excluding the attributed unrealized gains and losses thereon.

Excess investment income for the 2017 period increased 11% to $121 million when compared to $109 million in the same period in 2016. The higher than normal increase in excess investment income is primarily attributed to two factors: 1) higher interest expense incurred in 2016 that related to the debt issued in April 2016 prior to the maturity, in June 2016, of the refinanced debt, and 2) the increase in net investment income due to the decline in the negative impact of delays of receiving Medicare Part D reimbursements. On a per diluted common share basis, excess investment income increased 13%, higher than the percentage increase in the dollar amount of excess investment income as a result of our share repurchase program.
Net investment income increased $22 million or 6% in 2017, below the 7% increase in average invested assets (with fixed maturities at amortized cost) over the same period last year. Net investment income has been negatively impacted during recent years by low interest rates on new investments and the turnover of higher yielding assets in the portfolio. As such, growth in net investment income has been slower than the growth in mean invested assets in recent years. The effective annual yield earned on the fixed maturity portfolio was 5.70% in the first six months of 2017, compared with 5.81% a year earlier. The decrease in the overall portfolio yield during recent periods is due primarily to reinvesting proceeds from calls and maturities at yield rates lower than the yields earned on bonds before they were called or matured. We currently expect that the average annual turnover of fixed maturity assets during the next five years will not exceed 1% to 2% of the portfolio and that this turnover will not have a material negative impact on investment income.
Should interest rates rise, especially long-term rates, Torchmark's net investment income would benefit due to higher interest rates on new purchases. While such a rise in interest rates could adversely affect the fair value of the fixed maturities portfolio, we could withstand an increase in interest rates of approximately 90 to 95 basis points before the net unrealized gains on our fixed maturity portfolio as of June 30, 2017 would be eliminated. Should interest rates increase further than that, we would not be concerned with potential interest rate driven unrealized losses in our fixed maturity portfolio because we have the intent and, more importantly, the ability, to hold our fixed maturities to maturity.
Required interest on net insurance policy liabilities reduces net investment income as it is the amount of net investment income considered by management necessary to “fund” net insurance policy liabilities, which is the net of the benefit reserve liability and deferred acquisition cost asset. As such, it is removed from the investment segment

37

and applied to the insurance segments to offset the effect of the interest required by the insurance segments. As discussed in Note 10, management believes this provides a more meaningful analysis of the investment and insurance segments. Required interest is based on the actuarial interest assumptions used to discount the benefit reserve liability and to amortize the deferred acquisition costs for our insurance policies in force. The great majority of our life and health insurance policies are fixed interest-rate protection policies, not investment products, and are accounted for under current accounting guidance for long-duration insurance products which mandates that interest rate assumptions for a particular block of business be “locked in” for the life of that block. Each calendar year, we set the discount rate to be used to calculate the benefit reserve liability and deferred acquisition cost asset for all insurance policies issued that year. That rate is based on the new money yields that we expect to earn on cash flow received in the future from policies of that issue year, and cannot be changed. The discount rate used for policies issued in the current year has no impact on the in force policies issued in prior years as the rates of all prior issue years are also locked in. As such, the overall discount rate for the entire in force block is a weighted average of the discount rates being used from all issue years. Changes in the overall weighted-average discount rate over time are caused by changes in the mix of the reserves and the deferred acquisition cost asset by issue year on the entire block of in force business. Business issued in the current year has very little impact on the overall weighted-average discount rate due to the size of our in force business.
Required interest on net insurance policy liabilities increased $11 million or 5% to $258 million, in line with the growth in average net interest-bearing insurance policy liabilities.
Financing costs on our debt were slightly lower in the first six months of 2017 at $42 million. This is reflective of higher interest expense incurred in 2016 that related to the debt issued in April 2016 prior to the maturity, in June 2016, of the refinanced debt.
More information concerning debt can be found in the Capital Resources section of this report.
Analysis of Financing Costs
(Dollar amounts in thousands)
 
Six Months Ended 
 June 30,
 
Increase
(Decrease)
 
2017
 
2016
 
Amount
 
%
Interest on funded debt
$
36,714

 
$
39,319

 
$
(2,605
)
 
(7
)
Interest on term loan
1,082

 
96

 
986

 
*

Interest on short term debt
4,057

 
3,062

 
995

 
32

Other
2

 
2

 
—

 
—

Financing costs
$
41,855

 
$
42,479

 
$
(624
)
 
(1
)
*Percent change is not meaningful.

Investments (acquisitions), comparing the first six months of 2017 with the first six months of 2016. Torchmark’s investment policy calls for investing primarily in investment grade fixed maturities that meet our quality and yield objectives. We generally prefer to invest in securities with longer maturities because they more closely match the long-term nature of our policy liabilities. We believe this strategy is appropriate because our cash flows from operations and invested assets are positive, stable and predictable. If longer-term securities that meet our quality and yield objectives are not available, we do not relax our quality objectives, but instead, consider investing in shorter or lower yielding securities, taking into consideration the slope of the yield curve and other factors.
The following table summarizes selected information for fixed maturity purchases. The effective annual yield shown is the yield calculated to the “worst call date.” For non-callable bonds, the worst-call date is always the maturity date. For callable bonds, the worst-call date is the call date that produces the lowest yield (or the maturity date, if the yield calculated to the maturity date is lower than the yield calculated to each call date).


38

Fixed Maturity Acquisitions Selected Information
(Dollar amounts in thousands)
 
 
Six Months Ended 
 June 30,
 
2017
 
2016
Cost of acquisitions:

 

Corporate securities
$
670,856

 
$
635,530

Other
5,792

 
15,737

Total fixed maturity acquisitions
$
676,648

 
$
651,267

 
 
 
 
Effective annual yield(1)
4.91
%
 
4.87
%
Average life (in years, to next call)
21.6

 
24.4

Average life (in years, to maturity)
22.5

 
24.7

Average rating
BBB+

 
BBB+

(1) Total fixed maturity acquisitions include $0.0 million of unsettled trades.
(1) Tax-equivalent basis, where the yield on tax-exempt securities, is adjusted to produce a yield equivalent to the pretax yield on taxable securities.
Acquisitions in both periods consisted primarily of corporate bonds, with securities spanning a diversified range of issuers, industry sectors, and geographical regions. All of the acquired securities were investment grade.
Investments (portfolio composition). The composition of the investment portfolio at book value on June 30, 2017 was as follows:
Invested Assets at June 30, 2017
(Dollar amounts in thousands)
 

Amount

% of
Total
Fixed maturities (at amortized cost)
$
14,651,551

 
96
Policy loans
516,064

 
3
Other long-term investments(1)
55,028

 
—
Short-term investments
94,387

 
1
Total
$
15,317,030

 
100
(1) Includes equities available for sale at amortized cost.
Approximately 96% of our investments at book value are in a diversified fixed-maturity portfolio, the same percentage as at year end. Policy loans, which are secured by policy cash values, make up approximately 3% of our investments. We also have insignificant investments in equity securities and other long-term investments. Because fixed maturities represent such a significant portion of our investment portfolio, the remainder of the discussion of portfolio composition will focus on fixed maturities.


39

Fixed Maturities. The following table summarizes certain information about the major corporate sectors and security types held in our fixed maturity portfolio at June 30, 2017.

Fixed Maturities by Sector
At June 30, 2017
(Dollar amounts in thousands)
 

Below Investment Grade
 
Total Fixed Maturities
 
% of Total Fixed Maturities
 
 
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 
At Amortized Cost
At Fair Value
 
 
Corporates:
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance - life, health, P&C
$
58,330

$
2,903

$
(2,395
)
$
58,838

 
$
1,999,531

$
314,293

$
(3,500
)
$
2,310,324

 
14
14
 
Banks
41,532

643

(5,848
)
36,327

 
747,955

100,858

(6,718
)
842,095

 
5
5
 
Other financial
74,956

—

(18,022
)
56,934

 
752,316

57,059

(20,940
)
788,435

 
5
5
 
Total financial
174,818

3,546

(26,265
)
152,099

 
3,499,802

472,210

(31,158
)
3,940,854

 
24
24
 
Utilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Electric
20,778

1,140

—

21,918

 
1,442,893

266,741

(3,246
)
1,706,388

 
10
11
 
Gas and water
—

—

—

—

 
494,931

49,809

(325
)
544,415

 
3
3
 
Total utilities
20,778

1,140

—

21,918

 
1,937,824

316,550

(3,571
)
2,250,803

 
13
14
 
Industrial - Energy
 
 
 
 
 
 
 
 
 
 
 
 
 
Pipelines
40,607

606

(2,230
)
38,983

 
857,108

95,796

(5,860
)
947,044

 
6
6
 
Exploration and production
28,930

786

(404
)
29,312

 
531,394

52,764

(6,856
)
577,302

 
4
4
 
Oil field services
33,874

—

(5,409
)
28,465

 
83,738

8,906

(5,409
)
87,235

 
1
1
 
Refiner
—

—

—

—

 
62,927

13,100

—

76,027

 
—
—
 
Driller
54,602

—

(17,827
)
36,775

 
54,602

—

(17,827
)
36,775

 
—
—
 
Total energy
158,013

1,392

(25,870
)
133,535

 
1,589,769

170,566

(35,952
)
1,724,383

 
11
11
 
Industrial - Basic materials
 
 
 
 
 
 
 
 
 
 
 
 
 
Chemicals
—

—

—

—

 
527,099

47,507

(270
)
574,336

 
4
4
 
Metals and mining
68,087

3,528

(328
)
71,287

 
389,939

58,195

(328
)
447,806

 
3
3
 
Forestry products and paper
—

—

—

—

 
112,443

15,251

—

127,694

 
1
1
 
Total basic materials
68,087

3,528

(328
)
71,287

 
1,029,481

120,953

(598
)
1,149,836

 
8
8
 
Industrial - Consumer, non-cyclical
—

—

—

—

 
1,693,788

161,669

(6,761
)
1,848,696

 
11
11
 
Other industrials
47,271

1,908

(24
)
49,155

 
1,346,850

164,331

(1,794
)
1,509,387

 
9
9
 
Industrial -
Transportation
26,565

473

(123
)
26,915

 
539,041

76,731

(1,302
)
614,470

 
4
4
 
Other corporate sectors
116,539

3,700

(5,562
)
114,677

 
1,238,347

128,019

(9,562
)
1,356,804

 
8
8
 
Total corporates
612,071

15,687

(58,172
)
569,586

 
12,874,902

1,611,029

(90,698
)
14,395,233

 
88
89
 
Other fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Government (U.S., municipal, and foreign)
306

—

—

306

 
1,589,606

138,231

(1,880
)
1,725,957

 
11
10
 
Collateralized debt obligations
59,871

16,677

(10,303
)
66,245

 
59,871

16,677

(10,303
)
66,245

 
—
—
 
Other asset-backed securities
—

—

—

—

 
125,454

3,551

(15
)
128,990

 
1
1
 
Mortgage-backed securities(1)
—

—

—

—

 
1,718

144

(1
)
1,861

 
—
—
 
Total fixed maturities
$
672,248

$
32,364

$
(68,475
)
$
636,137

 
$
14,651,551

$
1,769,632

$
(102,897
)
$
16,318,286

 
100
100
(1) Includes GNMA's.


40

At June 30, 2017, fixed maturities had a fair value of $16.3 billion, compared with $15.2 billion at December 31, 2016. The net unrealized gain position in the fixed-maturity portfolio increased from $1.1 billion at December 31, 2016 to $1.7 billion at June 30, 2017. The June 30, 2017 net unrealized gain consisted of gross unrealized gains of $1.8 billion offset by $103 million of gross unrealized losses, compared with the December 31, 2016 net unrealized gain which consisted of a gross unrealized gain of $1.3 billion and a gross unrealized loss of $216 million.
Corporate securities, which consist of bonds and redeemable preferred stocks, were the largest component of the fixed maturity portfolio, representing 88% of amortized cost and 89% of fair value. The remainder of the portfolio is invested primarily in securities issued by the U.S. government and U.S. municipalities. The Company holds insignificant amounts in foreign government bonds, collateralized debt obligations, asset-backed securities, and agency mortgage-backed securities. Corporate securities are diversified over a variety of industry sectors and issuers; the total fixed maturity portfolio consisted of 596 issuers. The net unrealized gain of the fixed maturity portfolio increased $609 million from December 31, 2016.
An analysis of the fixed maturity portfolio at June 30, 2017 by a composite quality rating is shown in the table below. The composite quality rating for each security is the average of the security’s ratings as assigned by Moody’s Investor Service, Standard & Poor’s, Fitch Ratings, and Dominion Bond Rating Service, LTD. The ratings assigned by these four nationally recognized statistical rating organizations are evenly weighted when calculating the average. The composite quality rating is created using a methodology developed by Torchmark Corporation using ratings from the various rating agencies noted above (It should be noted that the composite quality rating is not a Standard & Poor's credit rating. Standard and Poor's does not sponsor, endorse or promote the composite quality rating and shall not be liable for any use of the composite quality rating.) Included in the chart below are private placement fixed maturity holdings of $594 million at amortized cost ($615 million at fair value). The ratings for these holdings were assigned by the third party managers of those securities.


Fixed Maturities by Rating
(Dollar amounts in thousands)
 
 
June 30, 2017

Amortized
Cost
 
%
 
Fair
Value
 
%
Investment grade:
 
 
 
 
 
 
 
AAA
$
666,565

 
5
 
$
697,517

 
4
AA
1,285,494

 
9
 
1,448,598

 
9
A
3,880,713

 
26
 
4,551,686

 
28
BBB+
3,474,938

 
24
 
3,878,168

 
24
BBB
3,147,368

 
21
 
3,467,069

 
21
BBB-
1,524,225

 
10
 
1,639,111

 
10
Investment grade
13,979,303

 
95
 
15,682,149

 
96
Below investment grade:
 
 
 
 
 
 
 
BB
373,552

 
3
 
355,272

 
2
B
161,446

 
1
 
133,937

 
1
Below B
137,250

 
1
 
146,928

 
1
Below investment grade
672,248

 
5
 
636,137

 
4

$
14,651,551

 
100
 
$
16,318,286

 
100
Of the $14.7 billion of fixed maturities at amortized cost as of June 30, 2017, $14.0 billion or 95% were investment grade with an average rating of A-. Below-investment-grade bonds were $672 million with an average rating of B+. Below-investment-grade bonds at amortized cost were 17% of our shareholders’ equity, excluding the effect of unrealized gains and losses on fixed maturities as of June 30, 2017. Overall, the total portfolio was rated BBB+ based on amortized cost, the same as at the end of 2016.
An analysis of the changes in our portfolio of below-investment-grade bonds at amortized cost during the first six months of 2017 is as follows:

41

Below-Investment-Grade Bonds
(Dollar amounts in thousands)
Balance as of December 31, 2016
$
751,144

Downgrades by rating agencies
—

Upgrades by rating agencies
(76,661
)
Disposals
(3,982
)
Amortization and other
1,747

Balance as of June 30, 2017
$
672,248


As noted earlier, our investment policy calls for investing primarily in fixed maturities that are investment grade and meet our quality and yield objectives. Thus, any increases in below-investment-grade issues are typically a result of ratings downgrades of existing holdings. Our investment portfolio does not contain counterparty risks as we are not a party to any derivatives contracts. We also do not participate in securities lending and we have no off-balance sheet investments.

Additional information concerning the fixed-maturity portfolio is as follows:
Fixed Maturity Portfolio Selected Information
 

June 30,
2017
 
December 31, 2016
 
June 30,
2016
Average annual effective yield(1)
5.68%
 
5.74%
 
5.79%
Average life, in years, to:
 
 
 
 
 
Next call(2)
17.4
 
17.6
 
17.8
Maturity(2)
19.2
 
19.8
 
20.1
Effective duration to:
 
 
 
 
 
Next call(2)(3)
10.6
 
10.4
 
10.7
Maturity(2)(3)
11.4
 
11.3
 
11.6

(1) Tax-equivalent basis. The yield on tax-exempt securities is adjusted to produce a yield equivalent to the pretax yield on taxable securities.
(2) Torchmark calculates the average life and duration of the fixed maturity portfolio two ways: (a) based on the next call date which is the next call date for callable bonds and the maturity date for noncallable bonds, and (b) based on the maturity date of all bonds, whether callable or not.
(3) Effective duration is a measure of the price sensitivity of a fixed-income security to a particular change in interest rates.
Realized Gains and Losses, comparing the first six months of 2017 with the first six months of 2016. As discussed in Note 10—Business Segments, our core business of providing insurance coverage requires us to maintain a large and diverse investment portfolio to support our insurance liabilities. From time to time, investments are disposed of or written down prior to maturity, resulting in realized gains or losses. Because these dispositions and write-downs are outside the course of our normal operations, management removes the effects of such gains and losses when evaluating its overall core operating results.

42

The following table summarizes our tax-effected realized gains (losses) by component.
Analysis of Realized Gains (Losses), Net of Tax
(Dollar amounts in thousands, except per share data)
 
 
Six Months Ended June 30,
 
2017
 
2016
 
Amount
 
Per Share
 
Amount
 
Per Share
Fixed maturities:
 
 
 
 
 
 
 
Investment sales
$
—

 
$
—

 
$
2,172

 
$
0.02

Investments called or tendered
390

 
—

 
386

 
—

Investment writedowns (1)
(159
)
 
—

 
—

 
—

Other investments
(2,182
)
 
(0.02
)
 
236

 
—

Total
$
(1,951
)
 
$
(0.02
)
 
$
2,794

 
$
0.02


(1) Written down due to other-than-temporary impairment.
(1) Written down due to other-than-temporary impairment

Financial Condition
Liquidity. Liquidity provides Torchmark with the ability to meet on demand the cash commitments required to support our business operations and meet our financial obligations. Our liquidity is evidenced by positive cash flow, a portfolio of marketable investments, and our line of credit facility.
Insurance subsidiary liquidity. The operations of our insurance subsidiaries have historically generated substantial cash inflows in excess of immediate cash needs. Sources of cash flows for the insurance subsidiaries include primarily premium and investment income. Cash outflows from operations include policy benefit payments, commissions, administrative expenses, and taxes. The funds to provide for policy benefits, the majority of which are paid in future periods, are invested primarily in long-term fixed maturities as they better match the long-term nature of these obligations. In addition to investment income, maturities and scheduled repayments in the investment portfolio are sources of cash. Excess cash available from the insurance subsidiaries’ operations is generally distributed as a dividend to the parent company, subject to regulatory restriction. The dividends are generally paid in amounts equal to the subsidiaries’ prior year statutory net income excluding realized capital gains. While the leading source of the excess cash is investment income, due to our high underwriting margins and effective expense control, a significant portion of the excess cash also comes from underwriting income.
Parent Company liquidity. An important source of Parent Company liquidity is the dividends from the insurance subsidiaries noted above. These dividends are received throughout the year and are used by the Parent Company to pay dividends on common and preferred stock, interest and principal repayment requirements on Parent Company debt, and operating expenses of the Parent Company. In the first six months of 2017, the Parent Company received $201 million of cash dividends from subsidiaries, compared with $167 million in 2016. The increase in cash dividends received from subsidiaries was primarily due to the timing of dividend payments. For the full year 2017, cash dividends from subsidiaries are expected to total approximately $455 million.
Additional sources of liquidity for the Parent Company are cash, intercompany receivables, intercompany borrowings, and a credit facility. At June 30, 2017, the Parent Company had $57 million of invested cash and net intercompany receivables. The credit facility is discussed below.

Credit Facility. We have a credit facility with a group of lenders allowing for unsecured revolving borrowings and stand-by letters of credit up to $750 million, which could be extended up to $1 billion. We may request the extension, however, it is not guaranteed. Up to $250 million in letters of credit can be issued against the facility. The facility serves as a back-up credit line for a commercial paper program under which we may issue commercial paper at any time, with total commercial paper outstanding not to exceed the facility maximum, less any letters of credit issued. Interest on the commercial paper program is charged at variable rates. This facility was amended in May 2016 to extend the maturity date of the facility to May 2021. The amendment also allowed for an additional $100 million term loan to be issued under the facility rate structure. The term loan was issued during 2016 and will be repaid in quarterly escalating installments with a balloon payment of $75 million due in May 2021. Interest on the term loan is computed and paid

43

monthly at 125 basis points plus 1 month LIBOR. In accordance with the agreement, we are subject to certain covenants regarding capitalization. As of June 30, 2017, we were in full compliance with those covenants.

Commercial paper outstanding and any amortization payments of the term loan due within one year are included in short-term debt. The remaining balance of the term loan is included in long-term debt.
The following table presents certain information about our commercial paper borrowings.
Credit Facility - Commercial Paper
(Dollar amounts in thousands)
 
 
At
 
 
June 30, 
 2017
 
December 31, 2016
 
June 30, 
 2016
Balance of commercial paper at end of period (par value)
 
$
303,565

 
$
262,850

 
$
285,976

Annualized interest rate
 
1.38
%
 
0.96
%
 
0.87
%
Letters of credit outstanding
 
$
177,000

 
$
177,000

 
$
177,000

Remaining amount available under credit line
 
269,435

 
310,150

 
287,024

 
 
Six Months Ended 
 June 30,
 
 
2017
 
2016
Average balance of commercial paper outstanding during period (par value)
 
$
363,859

 
$
298,636

Daily-weighted average interest rate (annualized)
 
1.17
%
 
0.77
%
Maximum daily amount outstanding during period (par value)
 
$
455,912

 
$
412,676

Our balance of commercial paper outstanding at June 30, 2017 was $304 million compared with $263 million at the previous year end. We have had no difficulties in accessing the commercial paper market under this facility during the six month periods ended June 30, 2017 and 2016.
In summary, Torchmark expects to have readily available funds for the foreseeable future to conduct its operations and to maintain target capital ratios in the insurance subsidiaries through internally generated cash flow and the credit facility. In the unlikely event that more liquidity is needed, the Parent Company could generate additional funds through multiple sources including, but not limited to, the issuance of debt, an additional short-term credit facility, and intercompany borrowing.
Consolidated liquidity. Consolidated net cash inflows from operations were $739 million in the first six months of 2017, compared with $605 million in the same period of 2016. The increase is primarily attributable to timing of cash disbursements and fluctuations in amounts recorded in other liabilities. In addition to cash inflows from operations, our companies received proceeds from maturities, calls, and repayments of fixed maturities available for sale in the amount of $216 million during the 2017 period. As previously noted under the caption Credit Facility, we have in place a line of credit facility. The insurance companies have no additional outstanding credit facilities.
Cash and short-term investments were $192 million at June 30, 2017, compared with $148 million at December 31, 2016. In addition to these liquid assets, the entire $16.3 billion (fair value at June 30, 2017) portfolio of fixed income securities is available for sale in the event of an unexpected need. Approximately 96% of our fixed income securities are publicly traded, freely tradable under SEC Rule 144, or qualified for resale under SEC Rule 144A. We generally expect to hold fixed income securities to maturity, and even though these securities are classified as available for sale, we have the ability and intent to hold any securities which are temporarily impaired until they mature. Our strong cash flows from operations, on-going investment maturities, and credit line availability make any need to sell securities for liquidity highly unlikely.
Capital Resources. Management targets an aggregate capital ratio for its insurance subsidiaries of approximately 325% of Company action level regulatory capital under Risk-Based Capital (RBC), a formula designed by insurance regulatory authorities to monitor the adequacy of capital. The 325% target is considered sufficient for the subsidiaries because of their strong reliable cash flows, the relatively low risk of their product mix, and because that ratio is in line with rating agency expectations for Torchmark. At December 31, 2016, our insurance subsidiaries had an aggregate

44

RBC ratio of approximately 324%. Should we experience impairments and/or ratings downgrades within our fixed maturity portfolio in the future, the ratio could fall below targeted levels. In such a case, management believes more than sufficient liquidity exists at the Parent Company to make additional contributions as necessary to maintain the targeted ratio.
On a consolidated basis, Torchmark’s capital structure consists of short-term debt (comprised of the commercial paper outstanding discussed above, current maturities of the term loan, and current maturities of funded debt), long-term debt (comprised of long-term maturities of funded debt and long term maturities of the term loan), and shareholders’ equity.
The outstanding long-term debt at book value was $1.1 billion at June 30, 2017 and December 31, 2016. An analysis of debt issues outstanding is as follows at June 30, 2017.
Selected Information about Debt Issues
at June 30, 2017
(Dollar amounts in thousands)
Instrument
Year
Due
 
Interest
Rate
 
 
Par
Value
 
Book
Value
 
Fair
Value
Notes
2023
 
7.875%

 
$
165,612

 
$
164,188

 
$
201,788

Senior Notes
2019
 
9.250%

 
292,647

 
291,650

 
331,271

Senior Notes(1)
2022
 
3.800%

 
150,000

 
148,332

 
154,446

Junior Subordinated Debentures
2052
 
5.875%

 
125,000

 
120,945

 
128,400

Junior Subordinated Debentures
2036
 
4.546%
(2) 
 
20,000

 
20,000

 
20,000

Junior Subordinated Debentures
2056
 
6.125%

 
300,000

 
290,431

 
318,720

Term loan(3)
2021
 
2.295%
(4) 
 
99,375

 
99,375

 
99,375

 
 
 
 
 
 
1,152,634

 
1,134,921

 
1,254,000

Less current maturity of term loan(3)
 
 
 
 
 
3,125

 
3,125

 
3,125

Total long-term debt
 
 
 
 
 
1,149,509

 
1,131,796

 
1,250,875


 
 
 
 
 
 
 
 
 
 
Current maturity of term loan(3)
 
 
 
 
 
3,125

 
3,125

 
3,125

Commercial paper
 
 
 
 
 
303,565

 
303,146

 
303,146

Total short term debt
 
 
 
 
 
306,690

 
306,271

 
306,271


 
 
 
 
 
 
 
 
 
 
Total debt
 
 
 
 
 
$
1,456,199

 
$
1,438,067

 
$
1,557,146


(1) An additional $150 million par value and book value is held by insurance subsidiaries that eliminates in consolidation.
(2) Interest paid at 3 month LIBOR plus 330 basis points, resets each quarter.
(3) The current amount of the term loan due of $3.1 million is classified as short term debt.
(4) Interest paid at 1 month LIBOR plus 125 basis points, resets each month.

On April 5, 2016, Torchmark completed the issuance and sale of $300 million aggregate principal amount of Torchmark’s 6.125% Junior Subordinated Debentures due 2056. The Debentures were sold pursuant to Torchmark’s shelf registration statement on Form S-3, filed September 25, 2015. The net proceeds from the sale of the Debentures were $290 million, after giving effect to the underwriting discount and estimated expenses of the offering of the Debentures. Torchmark used the net proceeds from the offering of the Debentures primarily to repay the $250 million outstanding principal amount plus accrued interest of $8 million on its 6.375% Senior Notes that were due June 15, 2016. This resulted in higher interest expense incurred in 2016 that related to the Debenture issued in April 2016 prior to the maturity, in June 2016, of the 6.375% Senior Notes.
As previously noted under the caption Results of Operations in this report, we acquired 2.1 million of our outstanding common shares under our share repurchase program during the first six months of 2017. These shares were acquired at a cost of $163 million (average of $76.03 per share), compared with purchases of 2.9 million shares at a cost of $163 million (average of $55.46 per share) in the first six months of 2016.
On May 18, 2017, the Company announced that it had declared a quarterly dividend of 0.15 per share. This dividend was paid on August 1, 2017.

45

Shareholders’ equity was $5.1 billion at June 30, 2017. This compares with $4.6 billion at December 31, 2016 and $4.9 billion at June 30, 2016. During the six months since December 31, 2016, shareholders’ equity was increased by $395 million of after-tax unrealized gains in the fixed-maturity portfolio as interest rates have decreased over the period. In addition, shareholders' equity was increased by net income of $274 million. Share purchases of $163 million noted above during the period reduced shareholders’ equity.
We are required by GAAP to revalue our available for sale fixed maturity portfolio to fair market value at the end of each accounting period. These changes, net of their associated impact on deferred acquisition costs and income tax, are reflected directly in shareholders’ equity.
While GAAP requires our fixed maturity assets to be revalued, it does not permit interest-bearing insurance policy liabilities supported by those assets to be valued at fair value in a consistent manner, with changes in value applied directly to shareholders’ equity. However, due to the size of both the investment portfolio and our policy liabilities, this inconsistency in measurement can have a material impact on shareholders’ equity. Because of the long-term nature of our fixed maturities and liabilities and the strong cash flows generated by our insurance subsidiaries, we have the intent and ability to hold our securities to maturity. As such, we do not expect to incur realized gains or losses due to fluctuations in the market value of fixed maturities caused by interest rate changes or losses caused by temporarily illiquid markets. Accordingly, management removes the effect of this rule when analyzing Torchmark’s balance sheet, capital structure, and financial ratios in order to provide a more consistent and meaningful portrayal of the Company’s financial position from period to period.
The following table presents selected data related to capital resources. Additionally, the table presents the effect of the GAAP requirement to revalue our fixed maturity assets on relevant items so that investors and other financial statement users may determine its impact on our capital structure.
Selected Financial Data
(Dollar amounts in thousands, except per share data)

At
 
June 30, 2017
 
December 31, 2016
 
June 30, 2016

GAAP
 
Effect of
Accounting
Rule
Requiring
Revaluation(1)
 
GAAP
 
Effect of
Accounting
Rule
Requiring
Revaluation(1)
 
GAAP
 
Effect of
Accounting
Rule
Requiring
Revaluation(1)
Fixed maturities
$
16,318,286

 
$
1,666,735

 
$
15,245,861

 
$
1,057,811

 
$
15,440,090

 
$
1,661,836

Deferred acquisition costs(2)
3,862,418

 
(11,778
)
 
3,783,158

 
(10,281
)
 
3,698,449

 
(13,319
)
Total assets
22,577,940

 
1,654,957

 
21,436,087

 
1,047,530

 
21,574,040

 
1,648,517

Short-term debt
306,271

 
—

 
264,475

 
—

 
286,011

 
—

Long-term debt
1,131,796

 
—

 
1,133,165

 
—

 
1,133,928

 
—

Shareholders' equity
5,053,416

 
1,075,722

 
4,566,861

 
680,894

 
4,877,758

 
1,071,536

 
 
 
 
 
 
 
 
 
 
 
 
Book value per diluted share
42.55

 
9.06

 
37.76

 
5.63

 
39.87

 
8.76

Debt to capitalization(3)
22.2
%
 
(4.4
)%
 
23.4
%
 
(3.1
)%
 
22.5
%
 
(4.6
)%
 
 
 
 
 
 
 
 
 
 
 
 
Diluted shares outstanding
118,764

 
 
 
120,958

 
 
 
122,347

 
 
Actual shares outstanding
116,259

 
 
 
118,031

 
 
 
119,853

 
 
 
(1) Amount added to (deducted from) comprehensive income to produce the stated GAAP item, per accounting rule ASC 320-10-35-1.
(2) Includes the value of insurance purchased.
(3) Torchmark’s debt covenants require that the effect of this accounting rule be removed to determine this ratio. This ratio is computed by dividing total debt by the sum of total debt and shareholders’ equity.

Interest coverage was 10.4 times in the first six month of 2017, compared with 10.3 times in the 2016 period. Interest coverage is computed by dividing interest expense into the sum of pretax income and interest expense.

46

Cautionary Statements
We caution readers regarding certain forward-looking statements contained in the previous discussion and elsewhere in this document, and in any other statements made by, or on behalf of Torchmark whether or not in future filings with the Securities and Exchange Commission. Any statement that is not a historical fact or that might otherwise be considered an opinion or projection concerning Torchmark or its business, whether express or implied, is meant as and should be considered a forward-looking statement. Such statements represent management’s opinions concerning future operations, strategies, financial results or other developments. We specifically disclaim any obligation to update or revise any forward-looking statement because of new information, future developments, or otherwise.
Forward-looking statements are based upon estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control. If these estimates or assumptions prove to be incorrect, the actual results of Torchmark may differ materially from the forward-looking statements made on the basis of such estimates or assumptions. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments, which may be national in scope, related to the insurance industry generally, or applicable to Torchmark specifically. Such events or developments could include, but are not necessarily limited to:
 
1)
Economic and other conditions leading to unexpected changes in lapse rates and/or sales of our policies, as well as levels of mortality, morbidity, and utilization of health care services that differ from Torchmark’s assumptions;
2)
Regulatory developments, including changes in governmental regulations (particularly those impacting taxes and changes to the Federal Medicare program that would affect Medicare Supplement);
3)
Market trends in the senior-aged health care industry that provide alternatives to traditional Medicare (such as Health Maintenance Organizations and other managed care or private plans) and that could affect the sales of traditional Medicare Supplement insurance;
4)
Interest rate changes that affect product sales and/or investment portfolio yield;
5)
General economic, industry sector or individual debt issuers’ financial conditions that may affect the current market value of securities we own, or that may impair an issuer’s ability to make principal and/or interest payments due on those securities;
6)
Changes in pricing competition;
7)
Litigation results;
8)
Levels of administrative and operational efficiencies that differ from our assumptions;
9)
The ability to obtain timely and appropriate premium rate increases for health insurance policies from our regulators;
10)
The customer response to new products and marketing initiatives;
11)
Reported amounts in the financial statements which are based on management’s estimates and judgments which may differ from the actual amounts ultimately realized; and
12)
Compromise by a malicious actor or other event that causes a loss of secure data from, or inaccessibility to, our computer and other information technology systems.


47

Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no quantitative or qualitative changes with respect to market risk exposure during the six months ended June 30, 2017.
Item 4. Controls and Procedures
Torchmark, under the direction of the Co-Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer, has established disclosure controls and procedures that are designed to ensure that information required to be disclosed by Torchmark in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to Torchmark’s management, including the Co-Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
As of the end of the fiscal quarter completed June 30, 2017, an evaluation was performed under the supervision and with the participation of Torchmark management, including the Co-Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer, of Torchmark’s disclosure controls and procedures (as those terms are defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon their evaluation, the Co-Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer have concluded that Torchmark’s disclosure controls and procedures are effective as of the date of this Form 10-Q. In compliance with Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350), each of these officers executed a Certification included as an exhibit to this Form 10-Q.
For the quarter ended June 30, 2017, there have not been any changes in Torchmark’s internal control over financial reporting or in other factors that could significantly affect this control over financial reporting subsequent to the date of their evaluation which have materially affected, or are reasonably likely to materially affect, Torchmark’s internal control over financial reporting. No material weaknesses in such internal controls were identified in the evaluation and as a consequence, no corrective action was required to be taken.

48

Part II – Other Information
Item 1. Legal Proceedings

Torchmark and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including claims involving tax matters, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of Torchmark’s subsidiaries, employment discrimination, and miscellaneous other causes of action. Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, management does not believe that such litigation will have a material adverse effect on Torchmark’s financial condition, future operating results or liquidity; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future. This bespeaks caution, particularly in states with reputations for high punitive damage verdicts. Torchmark’s management recognizes that large punitive damage awards bearing little or no relation to actual damages continue to be awarded by juries in jurisdictions in which Torchmark and its subsidiaries have substantial business, creating the potential for unpredictable material adverse judgments in any given punitive damage suit.

Torchmark subsidiaries are 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. These audits are being conducted by private entities that have contracted with forty-eight various states through their respective Departments of Revenue, and have not resulted in any financial assessment from any state nor indicated any liability. The audits are wide-ranging and seek large amounts of data regarding claims handling, procedures and payments of contract benefits arising from unreported death claims. No estimate of range can be made at this time for loss contingencies related to possible administrative penalties or amounts that could be payable to the states for the escheatment of abandoned property.

Item 1A. Risk Factors
Torchmark had no material changes to its risk factors.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
(c)    Purchases of Certain Equity Securities by the Issuer and Others
Period
 
(a) Total Number
of Shares
Purchased
 
(b) Average
Price Paid
Per Share
 
(c) Total Number of
Shares Purchased as Part
of Publicly Announced
Plans or Programs
 
(d) Maximum Number
of Shares (or
Approximate Dollar
Amount) that May
Yet Be Purchased
Under the Plans or
Programs
April 1-30, 2017
 
433,840

 
$
76.46

 
433,840

 
 
May 1-31, 2017
 
644,000

 
75.67

 
644,000

 
 
June 1-30, 2017
 
106,870

 
76.12

 
106,870

 
 
At its August 7, 2017 meeting, the Board of Directors reaffirmed the Company’s share repurchase program in amounts and with timing that management, in consultation with the Board, determines to be in the best interest of the Company. The program has no defined expiration date or maximum shares to be repurchased.
Item 6. Exhibits
 
(a)
Exhibits
(31.1)
  
Rule 13a-14(a)/15d-14(a) Certification by Larry M. Hutchison
(31.2)
  
Rule 13a-14(a)/15d-14(a) Certification by Gary L. Coleman
(31.3)
  
Rule 13a-14(a)/15d-14(a) Certification by Frank M. Svoboda
(32.1)
  
Section 1350 Certification by Larry M. Hutchison, Gary L. Coleman, and Frank M. Svoboda
(101)
  
Interactive Data Files for the Torchmark Corporation Form 10-Q for the period ended June 30, 2017

49

SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
TORCHMARK CORPORATION
 
 
 
Date: August 8, 2017
 
 
/s/ Gary L. Coleman
 
 
 
Gary L. Coleman
 
 
 
Co-Chairman and Chief Executive Officer
 
 
 
Date: August 8, 2017
 
 
/s/ Larry M. Hutchison
 
 
 
Larry M. Hutchison
 
 
 
Co-Chairman and Chief Executive Officer
 
 
 
Date: August 8, 2017
 
 
/s/ Frank M. Svoboda
 
 
 
Frank M. Svoboda
 
 
 
Executive Vice President and Chief Financial Officer

50

GLOBE LIFE INC. Reports