Document
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, 2016
 
 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from _________to_________
Commission File Number 1-8052
TORCHMARK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
 
63-0780404
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
3700 South Stonebridge Drive, McKinney, Texas
 
75070
(Address of principal executive offices)
 
(Zip Code)
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” and “smaller reporting 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
 
¨
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 29, 2016
 
 
Common Stock,
$1.00 Par Value
 
119,768,489
 

Table of Contents

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

Table of Contents

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

TORCHMARK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
 
June 30,
2016
 
December 31,
2015
Assets

 
 
Investments:

 

Fixed maturities—available for sale, at fair value (amortized cost: 2016—$13,778,254 ;2015–$13,251,871)
$
15,440,090

 
$
13,758,024

Policy loans
501,555

 
492,462

Other long-term investments
58,377

 
38,438

Short-term investments
48,581

 
54,766

Total investments
16,048,603

 
14,343,690

Cash
49,678

 
61,383

Accrued investment income
216,443

 
209,915

Other receivables
358,686

 
344,552

Deferred acquisition costs
3,698,449

 
3,617,135

Goodwill
441,591

 
441,591

Other assets
509,790

 
522,104

Assets related to discontinued operations
250,800

 
312,843

Total assets
$
21,574,040

 
$
19,853,213

Liabilities and Shareholders’ Equity

 

Liabilities:

 

Future policy benefits
$
12,544,683

 
$
12,245,811

Unearned and advance premiums
72,649

 
67,021

Policy claims and other benefits payable
265,712

 
272,898

Other policyholders’ funds
96,184

 
95,988

Total policy liabilities
12,979,228

 
12,681,718

Current and deferred income taxes payable
1,887,091

 
1,450,888

Other liabilities
349,631

 
380,158

Short-term debt
286,011

 
490,129

Long-term debt (estimated fair value: 2016–$1,278,375; 2015–$856,291)
1,133,928

 
743,733

Liabilities related to discontinued operations
60,393

 
51,035

Total liabilities
16,696,282

 
15,797,661

Commitments and Contingencies

 

Preferred stock, par value $1 per share–Authorized 5,000,000 shares; outstanding: -0- in 2016 and in 2015
—

 
—

Common stock, par value $1 per share–Authorized 320,000,000 shares; outstanding: (2016–130,218,183 issued, less 10,365,271 held in treasury and 2015–130,218,183 issued, less 7,848,231 held in treasury)
130,218

 
130,218

Additional paid-in capital
489,726

 
482,284

Accumulated other comprehensive income
989,157

 
231,947

Retained earnings
3,817,666

 
3,614,369

Treasury stock, at cost
(549,009
)
 
(403,266
)
Total shareholders’ equity
4,877,758

 
4,055,552

Total liabilities and shareholders’ equity
$
21,574,040

 
$
19,853,213

See accompanying Notes to Condensed Consolidated Financial Statements.

1
Table of Contents

TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands except per share data)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016(1)
 
2015(2)
 
2016(1)
 
2015(2)
Revenue:
 
 
 
 
 
 
 
Life premium
$
548,590

 
$
520,038

 
$
1,092,741

 
$
1,033,380

Health premium
237,252

 
232,409

 
472,949

 
461,082

Other premium
13

 
37

 
25

 
78

Total premium
785,855

 
752,484

 
1,565,715

 
1,494,540

Net investment income
201,642

 
194,823

 
398,695

 
386,419

Realized investment gains
4,005

 
2,613

 
4,298

 
2,732

Other income
382

 
691

 
803

 
1,360

Total revenue
991,884

 
950,611

 
1,969,511

 
1,885,051

Benefits and expenses:
 
 
 
 
 
 
 
Life policyholder benefits
369,342

 
347,364

 
732,202

 
687,065

Health policyholder benefits
153,261

 
151,198

 
306,036

 
299,227

Other policyholder benefits
8,882

 
9,754

 
18,220

 
19,799

Total policyholder benefits
531,485

 
508,316

 
1,056,458

 
1,006,091

Amortization of deferred acquisition costs
117,245

 
111,738

 
236,051

 
222,398

Commissions, premium taxes, and non-deferred acquisition costs
62,854

 
59,132

 
124,456

 
116,237

Other operating expense
57,846

 
55,588

 
115,275

 
110,951

Interest expense
23,110

 
19,114

 
42,479

 
38,174

Total benefits and expenses
792,540

 
753,888

 
1,574,719

 
1,493,851

 
 
 
 
 
 
 
 
Income before income taxes
199,344

 
196,723

 
394,792

 
391,200

Income taxes
(60,050
)
 
(64,196
)
 
(121,924
)
 
(127,895
)
Income from continuing operations
139,294

 
132,527

 
272,868

 
263,305

 
 
 
 
 
 
 
 
Discontinued operations:



 
 
 
 
 
Income (loss) from discontinued operations, net of tax
(865
)
 
(5,417
)
 
(10,406
)
 
(14,547
)
Net income
$
138,429

 
$
127,110

 
$
262,462

 
$
248,758

 
 
 
 
 
 
 
 
Basic net income per share:
 
 
 

 
 
 
Continuing operations
$
1.16

 
$
1.05

 
$
2.26

 
$
2.08

Discontinued operations
(0.01
)
 
(0.04
)
 
(0.09
)
 
(0.11
)
Total basic net income per common share
$
1.15

 
$
1.01

 
$
2.17

 
$
1.97

 
 
 
 
 
 
 
 
Diluted net income per share:
 
 
 

 
 
 
Continuing operations
$
1.13

 
$
1.04

 
$
2.22

 
$
2.06

Discontinued operations
—

 
(0.04
)
 
(0.09
)
 
(0.12
)
Total diluted net income per common share
$
1.13

 
$
1.00

 
$
2.13

 
$
1.94

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.14

 
$
0.14

 
$
0.28

 
$
0.27

(1) Due to the adoption of ASU 2016-09, certain balances related to excess tax benefits from stock compensation were adjusted prospectively as described in Note 2—New Accounting Standards.
(2) Certain prior year balances were adjusted to give effect to discontinued operations as described in Note 5—Discontinued Operations.
See accompanying Notes to Condensed Consolidated Financial Statements.

2
Table of Contents

TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
138,429

 
$
127,110

 
$
262,462

 
$
248,758

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during period
695,984

 
(935,288
)
 
1,161,141

 
(668,706
)
Reclassification adjustment for (gains) losses on securities included in net income
(3,983
)
 
(1,479
)
 
(4,296
)
 
(1,598
)
Reclassification adjustment for amortization of (discount) and premium
(1,204
)
 
(1,599
)
 
(2,568
)
 
(3,271
)
Foreign exchange adjustment on securities recorded at fair value
593

 
1,295

 
1,048

 
(1,263
)
Unrealized gains (losses) on securities
691,390

 
(937,071
)
 
1,155,325

 
(674,838
)
Unrealized gains (losses) on other investments
1,225

 
(3,470
)
 
1,883

 
(2,327
)
Total unrealized investment gains (losses)
692,615

 
(940,541
)

1,157,208


(677,165
)
Less applicable (taxes) benefits
(242,401
)
 
328,996

 
(404,990
)
 
236,865

Unrealized investment gains (losses), net of tax
450,214

 
(611,545
)
 
752,218

 
(440,300
)
 
 
 
 
 
 
 
 
Unrealized gains (losses) attributable to deferred acquisition costs
(2,681
)
 
2,953

 
(5,450
)
 
3,605

Less applicable (taxes) benefits
938

 
(1,034
)
 
1,907

 
(1,262
)
Unrealized gains (losses) attributable to deferred acquisition costs, net of tax
(1,743
)
 
1,919

 
(3,543
)
 
2,343

 
 
 
 
 
 
 
 
Foreign exchange translation adjustments, other than securities
5,382

 
(4,845
)
 
7,142

 
(13,536
)
Less applicable (taxes) benefits
(1,898
)
 
1,774

 
(2,438
)
 
4,503

Foreign exchange translation adjustments, other than securities, net of tax
3,484

 
(3,071
)
 
4,704

 
(9,033
)
 
 
 
 
 
 
 
 
Pension adjustments
2,656

 
3,653

 
5,894

 
7,472

Less applicable (taxes) benefits
(929
)
 
(1,278
)
 
(2,063
)
 
(2,615
)
Pension adjustments, net of tax
1,727

 
2,375

 
3,831

 
4,857

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
453,682

 
(610,322
)
 
757,210

 
(442,133
)
Comprehensive income (loss)
$
592,111

 
$
(483,212
)
 
$
1,019,672

 
$
(193,375
)
See accompanying Notes to Condensed Consolidated Financial Statements.

3
Table of Contents

TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(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, 2015
 
$
—

 
$
134,218

 
$
457,613

 
$
997,452

 
$
3,376,846

 
$
(268,663
)
 
$
4,697,466

Other Comprehensive income (loss)
 

 

 

 
(442,133
)
 
248,758

 

 
(193,375
)
Common dividends declared ($0.27 per share)
 

 

 

 

 
(34,004
)
 

 
(34,004
)
Acquisition of treasury stock
 

 

 

 

 

 
(211,567
)
 
(211,567
)
Stock-based compensation
 

 

 
8,189

 

 
(2,132
)
 
8,983

 
15,040

Exercise of stock options
 

 

 
10,989

 

 
(20,753
)
 
42,260

 
32,496

Balance at June 30, 2015
 
$
—

 
$
134,218

 
$
476,791

 
$
555,319

 
$
3,568,715

 
$
(428,987
)
 
$
4,306,056

 
 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

Balance at January 1, 2016
 
$
—

 
$
130,218

 
$
482,284

 
$
231,947

 
$
3,614,369

 
$
(403,266
)
 
$
4,055,552

Other 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





4
Table of Contents

TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
 
Six Months Ended June 30,
 
2016
 
2015
Cash provided from operating activities
$
604,935

 
$
454,121

 
 
 
 
Cash provided from (used for) investing activities:
 
 
 
Investments sold or matured:
 
 
 
Fixed maturities available for sale—sold
51,299

 
14,287

Fixed maturities available for sale—matured, called, and repaid
92,475

 
213,989

Other long-term investments
1,394

 
431

Total long-term investments sold or matured
145,168

 
228,707

Acquisition of investments:
 
 
 
Fixed maturities—available for sale
(651,267
)
 
(541,875
)
Other long-term investments
(21,762
)
 
(1,886
)
Total investments acquired
(673,029
)
 
(543,761
)
Net (increase) in policy loans
(9,093
)
 
(7,844
)
Net (increase) decrease in short-term investments
6,185

 
(12,813
)
Net change in payable or receivable for securities
(711
)
 
4,980

Additions to property and equipment
(6,740
)
 
(13,949
)
Investment in low-income housing interests
(9,260
)
 
(11,954
)
Cash from (used for) investing activities
(547,480
)
 
(356,634
)
 
 
 
 
Cash provided from (used for) financing activities:
 
 
 
Issuance of common stock
25,286

 
21,507

Cash dividends paid to shareholders
(33,478
)
 
(33,306
)
Repayment of 6.375% Notes
(250,000
)
 
—

Issuance of Term Loan
100,000

 
—

Issuance of 6.125% Junior Subordinated Debentures
300,000

 
—

Issue expenses of debt offering
(9,638
)
 
—

Net borrowing (repayment) of commercial paper
45,010

 
148,970

Excess tax benefit from stock option exercises(1)
—

 
10,989

Acquisition of treasury stock
(202,975
)
 
(211,567
)
Net receipts (payments) from deposit-type product
(38,193
)
 
(42,815
)
Cash provided from (used for) financing activities
(63,988
)
 
(106,222
)
 
 
 
 
Effect of foreign exchange rate changes on cash
(5,172
)
 
5,565

Net increase (decrease) in cash
(11,705
)
 
(3,170
)
Cash at beginning of year
61,383

 
66,019

Cash at end of period
$
49,678

 
$
62,849

(1) Due to the prospective adoption of ASU 2016-09, the excess tax benefits from stock option exercises of $7 million at June 30, 2016 were presented as a component of operating activities in the same manner as other cash flows related to income taxes. The 2015 balance of $11 million, under the previous guidance, remains in the financing activities section. See further discussion at Note 2—New Accounting Standards.



See accompanying Notes to Condensed Consolidated Financial Statements.

5
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)



Note 1—Significant Accounting Policies
Basis of Presentation: The accompanying condensed consolidated financial statements of Torchmark Corporation (Torchmark or alternatively, the Company) have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all of the annual disclosures required by accounting principles generally accepted in the United States of America (GAAP). However, in the opinion of management, these statements include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the condensed consolidated financial position at June 30, 2016, and the condensed consolidated results of operations, comprehensive income, and cash flows for the periods ended June 30, 2016 and 2015. 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 26, 2016.
Note 2—New Accounting Standards

Accounting Pronouncements Adopted

ASU 2014-15: In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (ASU 2014-15). This accounting standard requires management to perform interim and annual assessments of the entity's ability to continue its business operations within one year of the date of issuance of its financial statements. The Company must then provide certain disclosure if there is substantial doubt about its ability to continue as a going concern. As of January 1, 2016, the Company adopted this standard with no impact to the financial statements.
ASU 2016-09: In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09) to simplify certain aspects of accounting for share-based payment award transactions including: (a) income tax consequences; (b) classification in the statement of cash flows; and (c) accounting for forfeitures. Torchmark elected to early adopt this standard as of January 1, 2016, as permitted. This new accounting standard primarily affects Torchmark's computations of net income and diluted shares outstanding and thus earnings per share.

While the intent of the adoption of this guidance is simplification, inherent changes in future share prices and volume of stock option exercises are expected to result in increased volatility in net income and earnings per share in future periods. As provided by the new standard, the adoption is prospective and thus will impact only 2016 and future periods.

Below is a listing of the effects of the adoption of this guidance:
•
Condensed consolidated statement of operations: For the three months ended June 30, 2016, the Company recorded $5 million in excess tax benefits as a component of income taxes, which resulted in an increase in net income as compared with the three months ended June 30, 2015 when the excess tax benefits of $6 million were recorded as a component of additional paid-in capital on the balance sheet. For the six months ended June 30, 2016, the Company recorded $7 million in excess tax benefits as a component of income taxes as compared with $11 million recorded as a component of additional paid-in-capital on the balance sheet for the same period in the prior year.
•
Weighted average diluted shares: The weighted average diluted shares outstanding were adjusted to exclude excess tax benefits from the assumed proceeds in the diluted shares calculation. This change resulted in diluted weighted average shares outstanding of 122.7 million for the quarter ended June 30, 2016, as compared with 121.9 million under the previous guidance. For the six months ended June 30, 2016, the weighted average diluted shares outstanding were 123.0 million as compared with 122.3 million under the previous guidance.
•
Earnings per share: The adoption resulted in a $0.03 increase in earnings per share for the three months ended June 30, 2016 and a $0.04 increase for the six months ended June 30, 2016.
•
Condensed consolidated statement of cash flows: The excess tax benefits related to share-based payments of $7 million were presented as a component of operating activities in the same manner as other cash flows

6
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)

Note 2—New Accounting Standards (continued)


related to income taxes. In prior years, the excess tax benefits were reclassified from operating activities to financing activities. The prior period amounts were not adjusted.
Accounting Pronouncements Not Yet Adopted
ASU 2016-02: In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842), (ASU 2016-02) which requires all lessees to report a right-of-use asset and a lease liability for most leases. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. The standard will become effective for the Company beginning January 1, 2019 and will require recognizing and measuring leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the standard to determine its impact.
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 (ASU 2016-13) 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. The 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.

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, 2016 and 2015.
Components of Accumulated Other Comprehensive Income
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2015
 
 
Available
for Sale
Assets
 
Deferred
Acquisition
Costs
 
Foreign
Exchange
 
Pension
Adjustments
 
Total
Balance at April 1, 2015
 
$
1,261,518

 
$
(10,334
)
 
$
11,424

 
$
(96,967
)
 
$
1,165,641

Other comprehensive income (loss) before reclassifications, net of tax
 
(609,544
)
 
1,919

 
(3,071
)
 
—

 
(610,696
)
Reclassifications, net of tax
 
(2,001
)
 
—

 
—

 
2,375

 
374

Other comprehensive income (loss)
 
(611,545
)
 
1,919

 
(3,071
)
 
2,375

 
(610,322
)
Balance at June 30, 2015
 
$
649,973

 
$
(8,415
)
 
$
8,353

 
$
(94,592
)
 
$
555,319


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 (continued)



Components of Accumulated Other Comprehensive Income
    
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
Available
for Sale
Assets
 
Deferred
Acquisition
Costs
 
Foreign
Exchange
 
Pension
Adjustments
 
Total
Balance at January 1, 2015
 
$
1,090,273

 
$
(10,758
)
 
$
17,386

 
$
(99,449
)
 
$
997,452

Other comprehensive income (loss) before reclassifications, net of tax
 
(437,135
)
 
2,343

 
(9,033
)
 
117

 
(443,708
)
Reclassifications, net of tax
 
(3,165
)
 
—

 
—

 
4,740

 
1,575

Other comprehensive income (loss)
 
(440,300
)
 
2,343

 
(9,033
)
 
4,857

 
(442,133
)
Balance at June 30, 2015
 
$
649,973

 
$
(8,415
)
 
$
8,353

 
$
(94,592
)
 
$
555,319

                                                                                                                                                           
Reclassifications out of Accumulated Other Comprehensive Income are presented below for the three and six month periods ended June 30, 2016 and 2015.
Reclassification Adjustments
  
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
Affected line items in the
Statement of Operations
 
 
2016
 
2015
 
2016
 
2015
 
Unrealized investment gains (losses) on available for sale assets:
 
 
 
 
 
 
 
 
 
 
Realized (gains) losses
 
$
(3,983
)
 
$
(1,479
)
 
$
(4,296
)
 
$
(1,598
)
 
Realized investment gains (losses)
Amortization of (discount) premium
 
(1,204
)
 
(1,599
)
 
(2,568
)
 
(3,271
)
 
Net investment income
Total before tax
 
(5,187
)
 
(3,078
)
 
(6,864
)
 
(4,869
)
 
 
Tax
 
1,815

 
1,077

 
2,402

 
1,704

 
Income Taxes
Total after tax
 
(3,372
)
 
(2,001
)
 
(4,462
)
 
(3,165
)
 
 
Pension adjustments:
 
 
 
 
 
 
 
 
 
 
Amortization of prior service cost
 
120

 
82

 
240

 
163

 
Other operating expenses
Amortization of actuarial gain (loss)
 
2,431

 
3,571

 
4,863

 
7,128

 
Other operating expenses
Total before tax
 
2,551

 
3,653

 
5,103

 
7,291

 
 
Tax
 
(893
)
 
(1,278
)
 
(1,786
)
 
(2,551
)
 
Income Taxes
Total after tax
 
1,658

 
2,375

 
3,317

 
4,740

 
 
Total reclassifications (after tax)
 
$
(1,714
)
 
$
374

 
$
(1,145
)
 
$
1,575

 
 


8
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)


Note 4—Investments
Portfolio Composition:
A summary of fixed maturities available for sale by cost or amortized cost and estimated fair value at June 30, 2016 is as follows:
Portfolio Composition as of June 30, 2016
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value(1)
 
% of Total
Fixed
Maturities(2)
Bonds:
 
 
 
 
 
 
 
 
 
U.S. Government direct, guaranteed, and government-sponsored enterprises
$
380,528


$
33,040


$
(432
)

$
413,136


3
States, municipalities, and political subdivisions
1,277,303


184,320


(199
)

1,461,424


10
Foreign governments
22,468


2,773


—


25,241


—
Corporates, by sector:













Financial
2,800,108


388,055


(48,336
)

3,139,827


20
Utilities
1,950,172


377,501


(7,370
)

2,320,303


15
Energy
1,566,871


114,956


(83,315
)

1,598,512


10
Other corporate sectors
5,250,898


701,948


(55,123
)

5,897,723


39
Total corporates
11,568,049


1,582,460


(194,144
)

12,956,365


84
Collateralized debt obligations
62,174


13,617


(11,728
)

64,063


—
Other asset-backed securities
56,914


1,989


—


58,903


—
Redeemable preferred stocks, by sector:













Financial
382,195


52,900


(4,754
)

430,341


3
Utilities
28,623


1,994


—


30,617


—
Total redeemable preferred stocks
410,818


54,894


(4,754
)

460,958


3
Total fixed maturities
$
13,778,254


$
1,873,093


$
(211,257
)

$
15,440,090


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


9
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)

Note 4—Investments (continued)

A schedule of fixed maturities available for sale by contractual maturity date at June 30, 2016 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.
 
Amortized
Cost
 
Fair Value
Fixed maturities available for sale:
 
 
 
Due in one year or less
$
48,012

 
$
48,366

Due from one to five years
612,267

 
666,057

Due from five to ten years
1,047,056

 
1,175,885

Due from ten to twenty years
4,027,521

 
4,622,554

Due after twenty years
7,922,723

 
8,802,523

Mortgage-backed and asset-backed securities
120,675

 
124,705

 
$
13,778,254

 
$
15,440,090

Selected information about sales of fixed maturities available for sale is as follows.
Six Months Ended June 30,
 
2016
 
2015
Proceeds from sales
$
51,299

 
$
14,287

Gross realized gains
3,556

 
82

Gross realized losses
(214
)
 
(104
)

10
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)

Note 4—Investments (continued)

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, 2016 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
 
$
18


$
413,118


$
—


$
413,136

States, municipalities, and political subdivisions
 
—


1,461,424


—


1,461,424

Foreign governments
 
—


25,241


—


25,241

Corporates, by sector:
 











Financial
 
—


3,076,036


63,791


3,139,827

Utilities
 
12,008


2,168,991


139,304


2,320,303

Energy
 
—


1,569,212


29,300


1,598,512

Other corporate sectors
 
—


5,560,953


336,770


5,897,723

Total corporates
 
12,008


12,375,192


569,165


12,956,365

Collateralized debt obligations
 
—


—


64,063


64,063

Other asset-backed securities
 
—


58,903


—


58,903

Redeemable preferred stocks, by sector:
 











Financial
 
10,168


420,173


—


430,341

Utilities
 
—


30,617


—


30,617

Total redeemable preferred stocks
 
10,168


450,790


—


460,958

Total fixed maturities
 
$
22,194


$
14,784,668


$
633,228


$
15,440,090

Percent of total
 
0.1
%
 
95.8
%
 
4.1
%
 
100
%

11
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)

Note 4—Investments (continued)

The following table represents an analysis of changes in fair value measurements using significant unobservable inputs (Level 3).
Analysis of Changes in Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
 
 
Six Months Ended June 30, 2016
 
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
%
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
Collateralized
Debt
Obligations
 
Corporates(1)
 
Total
Balance at January 1, 2015
$
63,232

 
$
512,714

 
$
575,946

Total gains or losses:
 
 
 
 
 
Included in realized gains/losses
—

 
—

 
—

Included in other comprehensive income
13,531

 
(8,426
)
 
5,105

Acquisitions
—

 
19,400

 
19,400

Sales
—

 
—

 
—

Amortization
2,810

 
7

 
2,817

Other(2)
(5,905
)
 
(1,666
)
 
(7,571
)
Transfers in and/or out of Level 3(3)
—

 
—

 
—

Balance at June 30, 2015
$
73,668

 
$
522,029

 
$
595,697

Percent of total fixed maturities
0.5
%
 
3.7
%
 
4.2
%
(1) Includes redeemable preferred stocks.
(2) Includes capitalized interest, foreign exchange adjustments, and principal repayments.
(3) Considered to be transferred at the end of the period. Transfers into Level 3 occur when observable inputs are no longer available. Transfers out of Level 3 occur when observable inputs become available.


12
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)

Note 4—Investments (continued)

Other-Than-Temporary Impairments:

Based on the Company's evaluation of its fixed maturities available for sale in an unrealized loss position in accordance with the other-than-temporary impairment (OTTI) policy, the Company concluded that there were no other-than-temporary impairments during the three or six month periods ended June 30, 2016 and 2015, respectively.

As of quarter end, previously written down securities remaining in the portfolio were carried at a fair value of $56 million, or less than 1% of the fair value of the fixed maturity available for sale portfolio. Torchmark is continuously monitoring the market conditions impacting its portfolio. Additionally, Torchmark has the ability and intent to hold these investments to recovery, and does not expect to be required to sell any of its securities.

Unrealized Loss Analysis:

The following table discloses information about fixed maturities available for sale in an unrealized loss position.
 
 
Less than
Twelve
Months
 
Twelve
Months
or Longer
 
Total
Number of issues (CUSIP numbers) held:
 
 
 
 
 
 
As of June 30, 2016
 
43

 
126

 
169

As of December 31, 2015
 
480

 
75

 
555


Torchmark’s entire fixed maturity portfolio consisted of 1,573 issues at June 30, 2016 and 1,565 issues at December 31, 2015. The weighted average quality rating of all unrealized loss positions as of June 30, 2016 was BB+.

13
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)

Note 4—Investments (continued)

The following table discloses unrealized investment losses by class and major sector of fixed maturities available for sale at June 30, 2016 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, 2016
 
 
 
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
 
$
39


$
—


$
1,543


$
(432
)

$
1,582

 
$
(432
)
States, municipalities and political subdivisions
 
—


—


699


(9
)

699

 
(9
)
Corporates, by sector:
 












 
 
 
Financial
 
67,965


(6,462
)

80,657


(4,848
)

148,622

 
(11,310
)
Utilities
 
—


—


101,395


(7,370
)

101,395

 
(7,370
)
Energy
 
141,343


(4,750
)

336,085


(40,163
)

477,428

 
(44,913
)
Other corporate sectors
 
70,799


(3,130
)

194,464


(11,226
)

265,263

 
(14,356
)
Total corporates
 
280,107

 
(14,342
)
 
712,601

 
(63,607
)
 
992,708

 
(77,949
)
Redeemable preferred stocks, by sector:
 












 
 
 
Financial
 
3,995


(5
)

—


—


3,995

 
(5
)
Total redeemable preferred stocks
 
3,995

 
(5
)
 
—

 
—

 
3,995

 
(5
)
Total investment grade securities
 
284,141

 
(14,347
)
 
714,843

 
(64,048
)
 
998,984

 
(78,395
)
Below investment grade securities:
 












 
 
 
Bonds:
 












 
 
 
States, municipalities and political subdivisions
 
—


—


363


(190
)

363

 
(190
)
Corporates, by sector:
 












 
 
 
Financial
 
—


—


68,751


(37,026
)

68,751

 
(37,026
)
Energy
 
22,465


(1,337
)

98,134


(37,065
)

120,599

 
(38,402
)
Other corporate sectors
 
77,363


(11,922
)

159,670


(28,845
)

237,033

 
(40,767
)
Total corporates
 
99,828

 
(13,259
)
 
326,555

 
(102,936
)
 
426,383

 
(116,195
)
Collateralized debt obligations
 
—


—


8,272


(11,728
)

8,272

 
(11,728
)
Redeemable preferred stocks, by sector:
 












 
 
 
Financial
 
—


—


22,394


(4,749
)

22,394

 
(4,749
)
Total redeemable preferred stocks
 
—

 
—

 
22,394

 
(4,749
)
 
22,394

 
(4,749
)
Total below investment grade securities
 
99,828

 
(13,259
)
 
357,584

 
(119,603
)
 
457,412

 
(132,862
)
Total fixed maturities
 
$
383,969

 
$
(27,606
)
 
$
1,072,427

 
$
(183,651
)
 
$
1,456,396

 
$
(211,257
)


14
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)


Note 5—Discontinued Operations

At December 31, 2015, Torchmark met the criteria to account for its Medicare Part D Prescription Drug Plan business as a discontinued operation. Historically, the business was a reportable segment. Subsequent to the end of the quarter and effective July 1, 2016, Torchmark entered into an agreement to sell its Medicare Part D Prescription Drug Plan business to SilverScript Insurance Company, a subsidiary of CVS Health Corporation (collectively, the "Buyer"). Management believes this sale will allow the Company to better focus on its core protection life and health insurance businesses, and provide additional capital.

The initial purchase price was based on the number of enrollees as of the end of the second quarter and will be adjusted based on the number of enrollees as of January 1, 2017 as determined by Center for Medicare Services (CMS) in March 2017. The net proceeds from the sale, including selling costs, are expected to approximate the $17 million of deferred acquisition costs related to the Medicare Part D business as of June 30, 2016. Accordingly, the net impact of the sale on Torchmark’s financial statements is expected to be insignificant.

Torchmark will retain certain assets and liabilities related to the Medicare Part D business including all corresponding profits or losses for the 2016 plan year. The Buyer will assume the rights and obligations related to the business for all subsequent plan years. To ensure an orderly transition, Torchmark will administer the plans for the remainder of 2016, and the Buyer will be responsible for administration of the plans beginning in 2017. The remaining assets and liabilities reflected on the Torchmark balance sheet related to discontinued operations are receivables and payables that are expected to be settled in the ordinary course of business during 2016 and 2017.

At June 30, 2016, Torchmark recorded the business as a discontinued operation. The net assets related to discontinued operations at June 30, 2016 and December 31, 2015 were as follows:

 
June 30, 
 2016
 
December 31, 2015
Assets:



Due premiums
$
8,107


$
8,041

Risk sharing receivable
301


—

Other receivables(1)
225,708


287,765

Deferred acquisition costs
16,684


17,037

Total assets related to discontinued operations
250,800


312,843





Liabilities:



Unearned and advance premiums
3,150


806

Policy claims and other benefits payable
12,751


12,309

Risk sharing payable
23,536


23,837

Current and deferred income taxes payable
18,155


13,604

Other
2,801


479

Total liabilities related to discontinued operations
60,393


51,035





Net assets
$
190,407


$
261,808

(1) At June 30, 2016, receivables included $201 million from Centers for Medicare and Medicaid Services (CMS) and $25 million from drug manufacturer rebates. At December 31, 2015, the comparable amounts were $193 million and $95 million, respectively.

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, 2016 and 2015 was as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 



Health premium
$
56,774

 
$
83,083

 
$
111,473


$
171,175


 
 
 
 



Benefits and expenses:
 
 
 
 



Health policyholder benefits
51,871

 
83,977

 
113,352


178,099

Amortization of deferred acquisition costs
932

 
1,166

 
1,940


1,769

Commissions, premium taxes, and non-deferred acquisition expenses
3,792

 
4,886

 
8,901


11,049

Other operating expense
1,510

 
1,389

 
3,290


2,638

Total benefits and expenses
58,105

 
91,418

 
127,483

 
193,555


 
 
 
 



Income (loss) before income taxes for discontinued operations
(1,331
)
 
(8,335
)
 
(16,010
)
 
(22,380
)
Income taxes
466

 
2,918

 
5,604


7,833

Income (loss) from discontinued operations
$
(865
)
 
$
(5,417
)
 
$
(10,406
)
 
$
(14,547
)

Operating cash flows of the discontinued operations for the six months ended June 30, 2016 and 2015 were as follows:
 
Six Months Ended 
 June 30,
 
2016
 
2015
Net cash provided from (used for) discontinued operations
$
60,995

 
$
(86,112
)


16
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)


Note 6—Income Taxes

The effective income tax differed from the expected 35% rate as shown below:
 
Three Months Ended June 30,
 
2016
 
%
 
2015
 
%
Expected income taxes
$
69,770

 
35.0

 
$
68,853

 
35.0

Increase (reduction) in income taxes resulting from:
 
 
 
 
 
 
 
Low income housing investments
(4,829
)
 
(2.4
)
 
(4,724
)
 
(2.4
)
Share-based awards
(4,194
)
 
(2.2
)
 
—

 
—

Other
(697
)
 
(0.4
)
 
67

 
—

Income tax expense from continuing operations
$
60,050

 
30.0

 
$
64,196

 
32.6

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2016

%

2015

%
Expected income taxes
$
138,177


35.0


$
136,920


35.0

Increase (reduction) in income taxes resulting from:







Low income housing investments
(9,657
)

(2.4
)

(9,447
)

(2.4
)
Share-based awards
(6,166
)
 
(1.6
)
 
—

 
—

Other
(430
)

(0.1
)

422


0.1

Income tax expense from continuing operations
$
121,924

 
30.9

 
$
127,895

 
32.7


The effective income tax rates for the three and six months ended June 30, 2016 differed from the effective income tax rates for the same periods ended June 30, 2015 primarily as a result of the Company adopting ASU 2016-09 as of January 1, 2016. As a result of the adoption, the excess tax benefits related to share-based awards are now recorded through income tax expense rather than additional paid-in capital. See Note 2—New Accounting Standards for further discussion.

17
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)


Note 7—Debt Transactions

Issuance of long term debt. On April 5, 2016, Torchmark completed the issuance and sale of $300 million in aggregate principal 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 to repay the $250 million outstanding principal, plus accrued interest of $8 million, on the 6.375% Senior Notes that were due June 15, 2016. The remaining proceeds will be used for general corporate purposes, including capital or other financing at our insurance subsidiaries, if necessary.

Term loan agreement. On May 17, 2016, Torchmark amended its credit facility to include, as a part of the facility, the issuance of a $100 million term loan and to extend the maturity date of the entire credit facility to May 2021. The term loan will be repaid on a redemption schedule which provides for quarterly installments that escalate each annual period with a balloon payment of $75 million due in May 2021. Interest is computed and paid monthly at 125 basis points plus 1 month LIBOR. In accordance with the agreement, Torchmark is subject to certain covenants regarding capitalization. As of June 30, 2016, the Company was in full compliance with these covenants.

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
 
2016
 
2015
 
2016
 
2015
Service cost
$
3,894

 
$
3,991

 
$
—

 
$
—

Interest cost
5,432

 
5,004

 
212

 
204

Expected return on assets
(5,782
)
 
(5,323
)
 
—

 
—

Amortization:
 
 
 
 
 
 
 
Prior service cost
120

 
82

 
—

 
—

Actuarial (gain) loss
2,423

 
3,534

 
8

 
37

Direct recognition of expense
—

 
—

 
20

 
151

Net periodic benefit cost
$
6,087

 
$
7,288

 
$
240

 
$
392

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Pension Benefits
 
Other Benefits
 
2016
 
2015
 
2016
 
2015
Service cost
$
7,788

 
$
7,981

 
$
—

 
$
—

Interest cost
10,864

 
10,006

 
424

 
407

Expected return on assets
(11,564
)
 
(10,646
)
 
—

 
—

Amortization:
 
 
 
 
 
 
 
Prior service cost
240

 
163

 
—

 
—

Actuarial (gain)/loss
4,847

 
7,068

 
16

 
60

Direct recognition of expense
—

 
—

 
54

 
327

Net periodic benefit cost
$
12,175

 
$
14,572

 
$
494

 
$
794

 

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, 2016 and the prior-year end.
Pension Assets by Component
 
June 30, 2016
 
December 31, 2015
 
Amount
 
%
 
Amount
 
%
Corporate debt
$
156,603

 
48
 
$
146,381

 
47
Other fixed maturities
281

 
—
 
270

 
—
Equity securities
124,419

 
38
 
123,428

 
40
Short-term investments
22,540

 
7
 
15,593

 
5
Guaranteed annuity contract
17,313

 
5
 
17,082

 
6
Other
5,593

 
2
 
4,842

 
2
Total
$
326,749

 
100
 
$
307,596

 
100
The liability for the funded defined-benefit pension plans was $412 million at June 30, 2016 and $406 million at December 31, 2015. During the six months ended June 30, 2016, the Company made $12 million in cash contributions to the qualified pension plans. Torchmark expects to make total cash contributions to these plans during 2016 in an amount not to exceed $20 million. With respect to the Company’s non-qualified supplemental retirement plan, life insurance policies on the lives of plan participants have been established with an unaffiliated carrier to fund a portion of the Company’s obligations under the plan. These policies, as well as investments deposited with an unaffiliated trustee, were previously placed in a Rabbi Trust to provide for payment of the plan obligations. At June 30, 2016, the combined value of the insurance policies and investments in the Rabbi Trust to support plan liabilities were $84 million, compared with $79 million at year end 2015. Since this plan is non-qualified, the values of the insurance policies and investments are recorded as Other assets in the Condensed Consolidated Balance Sheets and are not included in the chart of plan assets above. The liability for the non-qualified pension plan was $69 million at June 30, 2016 and $67 million at December 31, 2015.
 
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,
 
2016
 
2015
 
2016
 
2015
Basic weighted average shares outstanding
120,479,938

 
125,816,943

 
120,980,372

 
126,465,420

Weighted average dilutive options outstanding
2,267,910

 
1,622,698

 
2,055,407

 
1,553,309

Diluted weighted average shares outstanding
122,747,848

 
127,439,641

 
123,035,779

 
128,018,729

Antidilutive shares
—

 
—

 
18,158

 
—


As discussed earlier in Note 2—New Accounting Standards, the Company adopted ASU 2016-09 on January 1, 2016. The adoption resulted in an adjustment to the weighted average diluted shares outstanding to exclude excess tax benefits from the assumed proceeds in the diluted shares calculation. This change has been applied prospectively and resulted in diluted weighted average shares outstanding of 122.7 million for the quarter ended June 30, 2016, as compared with 121.9 million under the previous guidance. For the six months ended June 30, 2016, the diluted weighted average shares outstanding were 123.0 million as compared with 122.3 million under the previous guidance.




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




Note 10—Business Segments
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. We believe this presentation facilitates a more meaningful analysis of the Company’s underwriting and investment performance as the underwriting results are based on premiums, claims, and expenses and are not affected by unanticipated fluctuations in investment yields.
 
As noted, Torchmark’s “core operations” are insurance and investment management. The insurance segments issue policies for which premiums are collected for the eventual payment of policy benefits. In addition to policy benefits, operating expenses are incurred including acquisition costs, administrative expenses, and taxes. Because life and health contracts can be long term, premium receipts in excess of current expenses are invested. Investment activities, conducted by the investment segment, focus on seeking quality investments with a yield and term appropriate to support the insurance product obligations. These investments generally consist of fixed maturities, and, over the long term, the expected yields are taken into account when setting insurance premium rates and product profitability expectations. As a result, fixed maturities are generally held for long periods to support the liabilities, and Torchmark generally expects to hold investments until maturity. Dispositions of investments occur from time to time, generally for reasons such as credit concerns, calls by issuers, or other factors.

Dispositions are sometimes required in order to maintain the Company’s investment policies and objectives. Investments are also occasionally written down as a result of other-than-temporary impairment, as discussed in Note 4—Investments. Torchmark does not actively trade investments. As a result, 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

20
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)

Note 10—Business Segments (continued)

the 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.
 
Reconciliation of Segment Operating Information to the Consolidated Statement of Operations
 
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

Nonoperating 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 per Consolidated Statements of Operations
 
   
$
199,344


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

21
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)

Note 10—Business Segments (continued)

 
Three Months Ended June 30, 2015 (3)
 
Life
 
Health
 
Annuity
 
Investment
 
Other &
Corporate
 
Adjustments
 
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
520,038

 
$
232,409

 
$
37

 
 
 
 
 
 
 
 
$
752,484

Net investment income
 
 
 
 
 
 
$
194,823

 
 
 
 
 
 
194,823

Other income
 
 
 
 
 
 
 
 
$
742

 
$
(51
)
 
(2)
691

Total revenue
520,038

 
232,409

 
37


194,823

 
742

 
(51
)
 
 
947,998

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Policy benefits
347,364

 
151,198

 
9,754

 
 
 
 
 
 
 
 
508,316

Required interest on reserves
(137,430
)
 
(17,151
)
 
(13,387
)
 
167,968

 
 
 
 
 
 
—

Required interest on DAC
43,139

 
5,690

 
294

 
(49,123
)
 
 
 
 
 
 
—

Amortization of acquisition costs
88,737

 
20,740

 
2,261

 
 
 
 
 
 
 
 
111,738

Commissions, premium taxes, and non-deferred acquisition costs
38,851

 
20,320

 
12

 
 
 
 
 
(51
)
 
(2)
59,132

Insurance administrative expense (1)
 
 
 
 
 
 
 
 
45,474

 
 
 
 
45,474

Parent expense
 
 
 
 
 
 
 
 
2,312

 
 
 
 
2,312

Stock compensation expense
 
 
 
 
 
 
 
 
7,802

 
 
 
 
7,802

Interest expense
 
 
 
 
 
 
19,114

 
 
 
 
 
 
19,114

Total expenses
380,661

 
180,797

 
(1,066
)
 
137,959

 
55,588

 
(51
)
 
 
753,888

Subtotal
139,377

 
51,612

 
1,103

 
56,864

 
(54,846
)
 
—

 
 
194,110

Nonoperating items
 
 
 
 
 
 
 
 
 
 
—

 
 
—

Measure of segment profitability (pretax)
$
139,377

 
$
51,612

 
$
1,103

 
$
56,864

 
$
(54,846
)
 
$
—

 
 
194,110

Deduct applicable income taxes
 
 
(63,282
)
Segment profits after tax
 
 
130,828

Add back income taxes applicable to segment profitability
 
 
63,282

Add (deduct) realized investment gains (losses)
 
   
2,613

Pretax income per Consolidated Statements of Operations
 
   
$
196,723


(1) Administrative expense is not allocated to insurance segments.
(2) Elimination of intersegment commission.
(3) Certain prior year balances were adjusted to give effect to discontinued operations as described in Note 5—Discontinued Operations.


22
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)

Note 10—Business Segments (continued)

 
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

Nonoperating 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 per Consolidated Statements of Operations
 
   
$
394,792


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


23
Table of Contents
TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)

Note 10—Business Segments (continued)

 
Six Months Ended June 30, 2015 (3)
 
Life

Health

Annuity

Investment

Other &
Corporate

Adjustments

 
Consolidated
Revenue:














Premium
$
1,033,380


$
461,082


$
78












$
1,494,540

Net investment income









$
386,419









386,419

Other income












$
1,464


$
(104
)

(2)
1,360

Total revenue
1,033,380

 
461,082

 
78

 
386,419

 
1,464

 
(104
)
 
 
1,882,319

Expenses:



















 
Policy benefits
687,065


299,227


19,799












1,006,091

Required interest on reserves
(273,615
)

(34,034
)

(26,756
)

334,405









—

Required interest on DAC
85,985


11,358


607


(97,950
)








—

Amortization of acquisition costs
177,265


40,924


4,209












222,398

Commissions, premium taxes, and non-deferred acquisition costs
75,900


40,418


23








(104
)

(2)
116,237

Insurance administrative expense (1)












91,425






91,425

Parent expense












4,485






4,485

Stock compensation expense












15,041






15,041

Interest expense









38,174









38,174

Total expenses
752,600

 
357,893

 
(2,118
)

274,629

 
110,951

 
(104
)
 
 
1,493,851

Subtotal
280,780

 
103,189

 
2,196

 
111,790

 
(109,487
)
 
—

 
 
388,468

Nonoperating items
 
 
 
 
 
 
 
 
 
 
—

 
 
—

Measure of segment profitability (pretax)
$
280,780

 
$
103,189

 
$
2,196

 
$
111,790

 
$
(109,487
)
 
$
—

 
 
388,468

Deduct applicable income taxes
 
 
(126,939
)
Segment profits after tax
 
 
261,529

Add back income taxes applicable to segment profitability
 
 
126,939

Add (deduct) realized investment gains (losses)
 
  
2,732

Pretax income per Consolidated Statements of Operations
 
  
$
391,200


(1) Administrative expense is not allocated to insurance segments.
(2) Elimination of intersegment commission.
(3) Certain prior year balances were adjusted to give effect to discontinued operations as described in Note 5—Discontinued Operations.




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

Note 10—Business Segments (continued)

The following 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,
 
2016
 
2015
 
2016
 
2015
Life insurance underwriting margin
$
143,604

 
$
139,377

 
$
287,904


$
280,780

Health insurance underwriting margin
52,621

 
51,612

 
104,136


103,189

Annuity underwriting margin
1,941

 
1,103

 
3,572


2,196

Excess investment income
54,597

 
56,864

 
109,270


111,790

Other and corporate:
 
 
 
 



Other income
422

 
742

 
887


1,464

Administrative expense
(48,413
)
 
(45,474
)
 
(96,881
)

(91,425
)
Corporate and adjustments
(9,433
)
 
(10,114
)
 
(18,394
)

(19,526
)
Pre-tax total
195,339

 
194,110

 
390,494

 
388,468

Applicable taxes
(58,649
)
 
(63,282
)
 
(120,420
)

(126,939
)
After-tax total, before discontinued operations
136,690

 
130,828

 
270,074

 
261,529

Discontinued operations (after tax)(1)
(865
)
 
(5,417
)
 
(10,406
)

(14,547
)
After-tax total, after discontinued operations
135,825

 
125,411

 
259,668

 
246,982

Reconciling items, net of tax:
 
 
 
 



Realized gains (losses) - Investments
2,604

 
1,699

 
2,794


1,776

Net income
$
138,429

 
$
127,110

 
$
262,462

 
$
248,758


(1) Income (loss) from discontinued operations (after tax) is included for purpose of reconciling to net income.

25
Table of Contents

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. The measures of profitability described in Note 10—Business Segments 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—Business Segments 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, 2016 and 2015. 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.
A discussion of operations by each segment follows later in this report. These discussions compare the first six months of 2016 with the same period of 2015, unless otherwise noted. The following discussions are presented in the manner we view our operations, as described in Note 10—Business Segments.
Highlights, comparing the first six months of 2016 with the first six months of 2015. Net income per diluted common share increased 10% to $2.13 from $1.94. Included in net income in 2016 were after-tax realized investment gains of $3 million compared with gains of $2 million in 2015. Realized investment gains and losses are presented more fully under the caption Realized Gains and Losses in this report.
We use three statistical measures as indicators of future premium growth: “annualized premium in force", "net sales", and “first-year collected premium.” Annualized premium in force is defined as the premium income that would be received over the following twelve months at any given date on all active policies if those policies remain in force throughout the twelve month period. Annualized premium in force is an indicator of potential growth in premium revenue. Net sales is defined as annualized premium issued, net of cancellations in the first thirty days after issue, except for Globe Life Direct Response, where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer has expired. Annualized premium issued is the gross premium that would be received during the policies’ first year in force, assuming that none of the policies lapsed or terminated. Although lapses and terminations will occur, we believe that net sales is a useful indicator of the rate of acceleration of premium growth. First-year collected premium is the premium collected during the reporting period for all policies in their first policy year. First-year collected premium takes lapses into account in the first policy year when lapses are more likely to occur, and thus is a useful indicator of how much new premium is expected to be added to premium income in the future.
Total premium income rose 5% in 2016 to $1.6 billion. Total net sales increased 1% to $279 million, when compared with the same period in 2015. First-year collected premium was $227 million for the 2016 period, compared with $228 million for the 2015 period.
Life insurance premium income grew 6% to $1.1 billion. Life net sales increased 1% to $213 million when compared with the same period in 2015. First-year collected life premium grew 6% during the first six months of 2016 to $159 million over the same period in 2015. Life underwriting margin as a percentage of premium was down to 26% as a result of higher than expected Globe Life Direct Response policy obligations, partially offset by lower than expected policy obligations at American Income and Liberty national. Underwriting income increased to $288 million for the first six months of 2016, compared with $281 million for the same period in 2015.
Health insurance premium income increased 3% to $473 million over the prior year total of $461 million. Health net sales rose 2% to $65 million for the six month period. First-year collected health premium fell 12% to $69 million as a result of a high level of group sales in the third and fourth quarters of 2014 that affected the 2015 first-year collected premium. Health margins were flat at 22%, with underwriting income of $104 million for the first six months of 2016.
Insurance administrative expenses were up 6.0% in 2016 when compared with the prior year period. The increase in administrative expenses is primarily due to investments in information technology that will standardize and streamline operations and enhance the customer experience.

26
Table of Contents

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 for further details. It increased 2% in 2016 to $0.89 from $0.87, while the dollar amount of excess investment income decreased to $109 million. The increase in per share excess investment income resulted from share purchases over the period, as discussed later in this report. Net investment income rose $12 million or 3% to $399 million in 2016, below the 5% growth in our average investment portfolio at amortized cost. The decrease was primarily attributed to the lower interest rate environment. The average effective yield on the fixed maturity portfolio, which represented 96% of our investments at amortized cost, decreased to 5.81% in the 2016 period from 5.86% in the prior period. Required interest rose 4% or $10 million to $247 million, in line with growth in average net policy liabilities. Financing costs increased 11% 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 2016, we invested new money in our fixed-maturity portfolio at an effective annual yield on new investments of 4.87%, compared with 4.59% in the same period of 2015. New investments were made with an average rating of BBB+ and an average life to maturity of twenty-five years. Approximately 94% of the portfolio at amortized cost was investment grade at June 30, 2016. Cash and short-term investments were $98 million at that date, compared with $116 million at December 31, 2015.
The net unrealized gain position in our fixed-maturity portfolio grew from $506 million at December 31, 2015 to $1.7 billion during the first six months of 2016, primarily due to a decrease in Treasury rates during 2016. The fixed-maturity portfolio contains no commercial mortgage-backed securities. We have no direct investments in residential mortgages, nor are we a party to any derivative contracts, including credit default swaps. We do not participate in securities lending and we have no off-balance sheet investments.
We have an on-going share repurchase program which began in 1986 which is reviewed quarterly and is reaffirmed by the Board of Directors on an annual basis. The program was reaffirmed on August 4, 2016. With no specified authorization amount, we determine the amount of repurchases based on the amount of our excess cash flow, general market conditions, and other alternative uses. These purchases are made at the Parent 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. 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, 2016 and 2015.

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

 
Six Months Ended June 30,
 
2016
 
2015
 
Shares

Amount

Average
Price

Shares

Amount

Average
Price
Purchases with:











Excess cash flow
2,940


$
163,079


$
55.46


3,209


$
176,337


$
54.96

Option exercise proceeds
685


39,896


58.27


640


35,230


55.04

Total
3,625


$
202,975


$
55.99


3,849


$
211,567


$
54.97

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



27
Table of Contents

A detailed discussion of our operations by component segment follows.
Life insurance, comparing the first six months of 2016 with the first six months of 2015. Life insurance is our predominant segment, representing 70% of premium income and 73% of insurance underwriting margin in the first six months of 2016. In addition, investments supporting the reserves for life business generate the majority of excess investment income attributable to the investment segment. Life insurance premium income increased 6% to $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
 
2016

2015

(Decrease)
 
Amount

% of
Total

Amount

% of
Total

Amount

%
American Income Exclusive Agency
$
446,643

 
41
 
$
409,047

 
40
 
$
37,596

 
9

Globe Life Direct Response
398,608

 
37
 
375,891

 
36
 
22,717

 
6

Liberty National Exclusive Agency
135,600

 
12
 
136,058

 
13
 
(458
)
 
—

Other Agencies
111,890

 
10
 
112,384

 
11
 
(494
)
 
—

Total Life Premium
$
1,092,741

 
100
 
$
1,033,380

 
100
 
$
59,361

 
6

Net sales, defined earlier in this report as an indicator of new business production, increased 1% to $213 million. 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
 
2016
 
2015
 
(Decrease)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
%
American Income Exclusive Agency
$
105,601

 
50
 
$
97,356

 
46
 
$
8,245

 
8

Globe Life Direct Response
81,611

 
38
 
89,443

 
42
 
(7,832
)
 
(9
)
Liberty National Exclusive Agency
19,872

 
9
 
17,821

 
9
 
2,051

 
12

Other Agencies
6,415

 
3
 
7,179

 
3
 
(764
)
 
(11
)
Total Life Net Sales
$
213,499

 
100
 
$
211,799

 
100
 
$
1,700

 
1

First-year collected life premium, defined earlier in this report, was $159 million in the 2016 period, rising 6%. 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
 
2016

2015

(Decrease)
 
Amount

% of
Total

Amount

% of
Total

Amount

%
American Income Exclusive Agency
$
85,866

 
54
 
$
76,028

 
51
 
$
9,838

 
13

Globe Life Direct Response
52,345

 
33
 
54,266

 
36
 
(1,921
)
 
(4
)
Liberty National Exclusive Agency
14,350

 
9
 
13,696

 
9
 
654

 
5

Other Agencies
5,956

 
4
 
5,993

 
4
 
(37
)
 
(1
)
Total
$
158,517

 
100
 
$
149,983

 
100
 
$
8,534

 
6



28
Table of Contents

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 other affinity groups and referrals to help ensure sustainable growth. The life business of this agency is Torchmark’s highest margin life business and it is the largest contributor to life premium of any distribution channel at 41% of Torchmark’s total. This group produced premium income of $447 million, an increase of 9%. First-year collected premium was $86 million, an increase of 13%. Net sales rose 8% to $106 million. Sales growth in our captive agencies is generally dependent on growth in the size of the agency force. The American Income Agency's average agent count decreased 1% to 6,403 for the six months ended June 30, 2016 compared with 6,460 for the same period in 2015. The average agent count is based on the actual count at the end of each week during the period. Sales increased despite the decline in agent count due to increased agent productivity. The American Income Agency has been focusing on growing and strengthening middle management to support sustainable growth of the agency force. To accomplish this, they have placed an increased emphasis on agent training programs and financial incentives that appropriately reward agents at all levels for helping develop and train personnel. The agency continues to provide 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 each individual’s level of experience and responsibility.
The Globe Life Direct Response Unit offers adult and juvenile life insurance through a variety of direct-to-consumer marketing approaches, which include direct mailings, insert media, and electronic media. These different approaches support and complement one another in the unit’s efforts to reach the consumer. The Globe Life Direct Response channel’s growth over the years has been fueled by constant innovation. In recent years, electronic media production has grown rapidly as management has aggressively increased marketing activities related to internet and mobile technology, and has focused on driving traffic to the inbound call center. We continually introduce new initiatives in this unit in an attempt to increase response rates.
While the juvenile market is an important source of sales, it also is a vehicle to reach the parents and grandparents of juvenile policyholders, who are more likely to respond favorably to a Globe Life Direct Response solicitation for life coverage on themselves than is the general adult population. Also, both juvenile policyholders and their parents are low acquisition-cost targets for sales of additional coverage over time.
Globe Life Direct Response’s life premium income rose 6% to $399 million, representing 37% of Torchmark’s total life premium in the first six months of 2016. Net sales of $82 million for this group decreased 9%. The sales decline was expected as we reduced insert media circulation to eliminate less profitable segments. First-year collected premium decreased 4% to $52 million.
The Liberty National Exclusive Agency markets individual and group life insurance to middle-income customers. Life premium income for this agency was $136 million in both the 2016 and 2015 periods. First-year collected premium increased 5% to $14 million.
Net sales for the Liberty National Agency increased 12% to $20 million. This is the largest percentage increase of any of Torchmark's distributions channels. The Liberty average agent count increased 9% to 1,641 for the six months ended June 30, 2016 compared with 1,507 for the same period in 2015. 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 $112 million of life premium income, or 10% of Torchmark’s total in the first six months of 2016, but contributed only 3% of net sales for the period.

29
Table of Contents

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

Increase
 
2016

2015

(Decrease)
 
Amount

% of
Premium

Amount

% of
Premium

Amount

%
Premium and policy charges
$
1,092,741

 
100
 
$
1,033,380

 
100
 
$
59,361

 
6
Net policy obligations
446,566

 
41
 
413,450

 
40
 
33,116

 
8
Commissions and acquisition expense
358,271

 
33
 
339,150

 
33
 
19,121

 
6
Insurance underwriting income before other income and administrative expense
$
287,904

 
26
 
$
280,780

 
27
 
$
7,124

 
3
Life insurance underwriting income before insurance administrative expense was $288 million in the first six months of 2016, compared with $281 million for the same period in 2015. As a percentage of premium, underwriting margins declined to 26% from 27%. The decrease in underwriting margin as a percentage of premium was due to higher Globe Life Direct Response policy obligations, partially offset by lower than expected policy obligations at American Income and Liberty National. The higher than anticipated obligations in the Globe Life Direct Response Unit primarily relate to policies issued since 2011 where additional prescription information was used in the underwriting process for certain business in order to improve the overall mortality. To date, improvements in actual mortality have been less than expected, causing higher than expected net policy obligations. The lower obligations at American Income and Liberty National were attributed to lower claims.
Health insurance, comparing the first six months of 2016 with the first six months of 2015. 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 2016 period, while the health underwriting margin accounted for 26% of total underwriting margin, reflective of the lower underwriting margin as a percent 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 $473 million in the 2016 period. Medicare Supplement premium increased 3% to $238 million, while other limited-benefit health premium increased 3% to $235 million.
Health net sales increased 2% to $65 million. Medicare Supplement net sales increased 1% to $25 million in 2016. Limited-benefit net sales increased 3% to $41 million. Health first-year collected premium fell 12% to $69 million as a result of a high level of group sales in the third and fourth quarters of 2014 that affected the 2015 first-year collected premium. Group sales can vary significantly from period to period.


30
Table of Contents


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
 
2016

2015

(Decrease)
 
Amount

% of
Total

Amount

% of
Total

Amount

%
United American Independent Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
$
6,535

 
 
 
$
8,378

 
 
 
$
(1,843
)
 
(22
)
Medicare Supplement
171,309

 
 
 
162,499

 
 
 
8,810

 
5

 
177,844

 
38
 
170,877

 
37
 
6,967

 
4

Family Heritage Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
115,928

 
 
 
108,429

 
 
 
7,499

 
7

Medicare Supplement
—

 
 
 
—

 
 
 
—

 
—

 
115,928

 
24
 
108,429

 
23
 
7,499

 
7

Liberty National Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
70,962

 
 
 
72,134

 
 
 
(1,172
)
 
(2
)
Medicare Supplement
31,446

 
 
 
34,536

 
 
 
(3,090
)
 
(9
)
 
102,408

 
22
 
106,670

 
23
 
(4,262
)
 
(4
)
American Income Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
41,017

 
 
 
39,549

 
 
 
1,468

 
4

Medicare Supplement
168

 
 
 
204

 
 
 
(36
)
 
(18
)
 
41,185

 
9
 
39,753

 
9
 
1,432

 
4

Direct Response
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
354

 
 
 
505

 
 
 
(151
)
 
(30
)
Medicare Supplement
35,230

 
 
 
34,848

 
 
 
382

 
1

 
35,584

 
7
 
35,353

 
8
 
231

 
1

Total Health Premium
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
234,796

 
50
 
228,995

 
50
 
5,801

 
3

Medicare Supplement
238,153

 
50
 
232,087

 
50
 
6,066

 
3

Total
$
472,949

 
100
 
$
461,082

 
100
 
$
11,867

 
3


31
Table of Contents

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
 
2016

2015

(Decrease)
 
Amount

% of
Total

Amount

% of
Total

Amount

%
United American Independent Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
$
334

 
 
 
$
395

 
 
 
$
(61
)
 
(15
)
Medicare Supplement
22,059

 
 
 
21,648

 
 
 
411

 
2

 
22,393

 
34
 
22,043

 
35
 
350

 
2

Family Heritage Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
24,176

 
 
 
25,077

 
 
 
(901
)
 
(4
)
Medicare Supplement
—

 
 
 
—

 
 
 
—

 
—

 
24,176

 
37
 
25,077

 
39
 
(901
)
 
(4
)
Liberty National Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
9,841

 
 
 
8,474

 
 
 
1,367

 
16

Medicare Supplement
4

 
 
 
40

 
 
 
(36
)
 
(90
)
 
9,845

 
15
 
8,514

 
13
 
1,331

 
16

American Income Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
6,187

 
 
 
5,490

 
 
 
697

 
13

Medicare Supplement
—

 
 
 
—

 
 
 
—

 
—

 
6,187

 
10
 
5,490

 
9
 
697

 
13

Direct Response
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
—

 
 
 
—

 
 
 
—

 
—

Medicare Supplement
2,456

 
 
 
2,633

 
 
 
(177
)
 
(7
)
 
2,456

 
4
 
2,633

 
4
 
(177
)
 
(7
)
Total Net Sales
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
40,538

 
62
 
39,436

 
62
 
1,102

 
3

Medicare Supplement
24,519

 
38
 
24,321

 
38
 
198

 
1

Total
$
65,057

 
100
 
$
63,757

 
100
 
$
1,300

 
2


32
Table of Contents

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
 
2016

2015

(Decrease)
 
Amount

% of
Total

Amount

% of
Total

Amount

%
United American Independent Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
$
309

 
 
 
$
339

 
 
 
$
(30
)
 
(9
)
Medicare Supplement
32,006

 
 
 
35,303

 
 
 
(3,297
)
 
(9
)
 
32,315

 
47

 
35,642

 
46

 
(3,327
)
 
(9
)
Family Heritage Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
20,091

 
 
 
19,286

 
 
 
805

 
4

Medicare Supplement
—

 
 
 
—

 
 
 
—

 
—

 
20,091

 
29

 
19,286

 
25

 
805

 
4

Liberty National Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
7,850

 
 
 
7,344

 
 
 
506

 
7

Medicare Supplement
1

 
 
 
110

 
 
 
(109
)
 
(99
)
 
7,851

 
12

 
7,454

 
9

 
397

 
5

American Income Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
6,416

 
 
 
5,437

 
 
 
979

 
18

Medicare Supplement
—

 
 
 
—

 
 
 
—

 
—

 
6,416

 
9

 
5,437

 
7

 
979

 
18

Direct Response
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
—

 
 
 
1

 
 
 
(1
)
 
(100
)
Medicare Supplement
2,099

 
 
 
10,323

 
 
 
(8,224
)
 
(80
)
 
2,099

 
3

 
10,324

 
13

 
(8,225
)
 
(80
)
Total First-Year Collected Premium


 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
34,666

 
50

 
32,407

 
41

 
2,259

 
7

Medicare Supplement
34,106

 
50

 
45,736

 
59

 
(11,630
)
 
(25
)
Total
$
68,772

 
100

 
$
78,143

 
100

 
$
(9,371
)
 
(12
)

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 $178 million, representing 38% of Torchmark’s total health premium. Net sales were $22 million, or 34% of Torchmark’s health sales. This agency primarily produces Medicare Supplement insurance, with Medicare Supplement premium income of $171 million. The UA Independent Agency represents approximately 72% of all Torchmark Medicare Supplement premium and 90% of Medicare Supplement net sales. Medicare Supplement premium in this agency rose 5%. Total health premium increased 4%. Net sales of the Medicare Supplement product increased 2% in 2016; individual sales were up 7%, but group sales declined 11%. 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 through geographic expansion and continuing incorporation of Torchmark’s recruiting programs. The Family Heritage Agency contributed $24 million in net sales in the six months of 2016, compared with $25 million for the same period in 2015, a decrease of 4%. Health premium income was $116 million for the six month period of 2016, representing 24% of Torchmark’s health premium compared with $108 million or 23% of health premium

33
Table of Contents

in the prior year period. The average agent count was 880 for the six months ended June 30, 2016 compared with 872 for the same period in 2015, an increase of 1%.
The Liberty National Exclusive Agency represented 22% of all Torchmark health premium income at $102 million in the six months of 2016. 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 2016, health premium income in the Liberty Agency declined $4 million to $102 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 16% of health premium in the 2016 period. The American Income Exclusive Agency primarily markets accident plans. The Direct Response markets primarily Medicare Supplements to employer or union-sponsored groups. Direct Response added $2 million of Medicare Supplement net sales in 2016.

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
 
2016

2015

(Decrease)
 
Amount

% of
Premium

Amount

% of
Premium

Amount

%
Premium and policy charges
$
472,949


100

$
461,082


100

$
11,867


3
Net policy obligations
269,709


57

265,193


58

4,516


2
Commissions and acquisition expense
99,104


21

92,700


20

6,404


7
Insurance underwriting income before other income and administrative expense
$
104,136


22

$
103,189


22

$
947


1
Underwriting income for health insurance totaled $104 million in 2016, an increase of 1% when compared with the same period in 2015. As a percentage of health premium, underwriting margins were flat for the six months ended June 30, 2016 at 22% when compared with the same period in 2015.
Annuities. Annuities represent an insignificant part of our business and are not expected to be an important part of our marketing strategy going forward.


34

Operating expenses, comparing the first six months of 2016 with the first six months of 2015. 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,
 
2016

2015

Amount

% of
Premium

Amount

% of
Premium
Insurance administrative expenses:







Salaries
$
44,437


2.8

$
43,033


2.9
Other employee costs
14,838


0.9

15,519


1.1
Information technology costs
11,854

 
0.8
 
7,985

 
0.5
Legal costs
4,471


0.3

3,556


0.2
Other administrative costs
21,281


1.4

21,332


1.4
Total insurance administrative expenses
96,881


6.2

91,425


6.1
 
 
 
 
 
 
 
 
Parent company expense
4,405




4,485



Stock compensation expense
13,989




15,041



Total operating expenses, per Condensed Consolidated Statements of Operations
$
115,275




$
110,951



 
 
 
 
 
 
 
 
Insurance administrative expenses:







Increase (decrease) over prior year
6.0
%



4.9
%


Total operating expenses:







Increase (decrease) over prior year
3.9
%



—
%


Insurance administrative expenses were up 6.0% in 2016 when compared with the prior year period. As a percentage of total premium, insurance administrative expenses were 6.2% in 2016, up from 6.1% during the same period last year. Total operating expenses increased 3.9%. The increase in administrative expenses is primarily due to investments in information technology that will standardize and streamline operations and enhance the customer experience. The decline in stock compensation expense was primarily due to lower expense associated with equity awards.
Investments (excess investment income), comparing the first six months of 2016 with the first six months of 2015. 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 in the Notes to the Condensed Consolidated Financial Statements. 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 $6.6 billion of cash flow to repurchase Torchmark shares (average split-adjusted price per diluted common share of $15.20) 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 resource uses on a comparable basis, we believe that excess investment income per diluted share is an appropriate measure of the investment segment.

35
Table of Contents

The following table summarizes Torchmark’s investment income, excess investment income, and excess investment income per diluted share.
Excess Investment Income
(Dollar amounts in thousands)
 
Six Months Ended 
 June 30,

Increase
(Decrease)
 
2016

2015

Amount

%
Net investment income
$
398,695


$
386,419


$
12,276


3

Interest on net insurance policy liabilities:
 
 
 
 
 
 
 
Interest on reserves
(347,561
)
 
(334,405
)
 
(13,156
)
 
4

Interest on deferred acquisition costs
100,615

 
97,950

 
2,665

 
3

Net required interest
(246,946
)

(236,455
)

(10,491
)

4

Financing costs
(42,479
)

(38,174
)

(4,305
)

11

Excess investment income
$
109,270


$
111,790


$
(2,520
)

(2
)
Excess investment income per diluted share
$
0.89


$
0.87


$
0.02


2

 
 
 
 
 
 
 
 
Average invested assets (at amortized cost)
$
14,250,106


$
13,588,446


$
661,660


5

Average net insurance policy liabilities (1)
8,846,244


8,489,267


356,977


4

Average debt and preferred securities (at amortized cost)
1,339,263


1,347,761


(8,498
)

(1
)
(1) Net of deferred acquisition costs, excluding the attributed unrealized gains and losses thereon.

Excess investment income is defined as net investment income less both the required interest attributable to net policy liabilities and the interest on debt. For the 2016 period, excess investment income decreased $3 million or 2% to $109 million when compared with the same period in 2015. On a per common share basis, excess investment income increased 2% as a result of our share repurchase program. Excess investment income has been negatively impacted during recent years by low interest rates and the turnover of higher yielding assets in the portfolio as well as certain aspects of Medicare Part D as discussed below. Excess investment income was also negatively impacted during the period because of the additional interest costs as a result of the issuance of the new 6.125% Junior Subordinated debt security prior to the maturity of the 6.375% Senior Notes as discussed below. Absent the additional financing costs incurred from the security, excess investment income would have increased by 1% over the same period in 2015, or 4% on a per share basis.
Net investment income rose $12 million or 3% in 2016, below the 5% increase in average invested assets (with fixed maturities at amortized cost) over the same period last year. The effective annual yield on the fixed maturity portfolio was 5.81% in the first six months of 2016, compared with 5.86% a year earlier. The reduction in the average portfolio yield rate was primarily a result of lower new money yield rates and reinvesting proceeds from bonds that were called in 2016 at yield rates less than the rates we earned on the bonds before they were called. We currently expect that the average 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.
Net investment income has also been negatively affected in 2016 by the CMS requirement for us to cover Medicare Part D claim costs in the current period that are ultimately the responsibility of the government, but are not reimbursed until the following year. We incurred extensive upfront costs in 2015 that will not be reimbursed by CMS until November 2016. We also experience delays from the time certain claims are paid until related drug rebates are received from various pharmaceutical companies. These delays cause a lag in the timing of investable cash flows that result in lower investment income than would have been earned absent the delays.
Should interest rates rise, especially long-term rates, Torchmark would benefit due to higher net investment income on new purchases. We could withstand an increase in interest rates of approximately 95 to 100 basis points before the net unrealized gains on our fixed maturity portfolio as of June 30, 2016 would be eliminated (assuming there were no credit related valuation declines). 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.

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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” the required interest included in the insurance segments. As such, it is removed from the investment segment and applied to the insurance segments to offset the effect of the required interest from the insurance segments. As discussed in Note 10—Business Segments, management believes this provides a more meaningful analysis of the investment and insurance segments. Required interest is based on the actuarial interest assumptions used in discounting the benefit reserve liability and the amortization of 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 of business. Each calendar year, we set the discount rate to be used to calculate the benefit reserve liability and the amortization of the 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 $10 million or 4% to $247 million, in line with the growth in average net interest-bearing insurance policy liabilities.
Financing costs on our debt increased 11% to $42 million from $38 million for the same period in 2015. The additional interest expense resulted primarily from the issuance of our new 6.125% Junior Subordinated Debt security seventy days before the maturity and repayment of our 6.375% Senior Notes which occurred later during the quarter. 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)
 
2016
 
2015
 
Amount
 
%
Interest on funded debt
$
39,319

 
$
35,577

 
$
3,742

 
11
Interest on term loan
96

 
—

 
96

 
—
Interest on short term debt
3,062

 
2,595

 
467

 
18
Other
2

 
2

 
—

 
—
Financing costs
$
42,479

 
$
38,174

 
$
4,305

 
11


Investments (acquisitions), comparing the first six months of 2016 with the first six months of 2015. Torchmark’s investment policy calls for investing in fixed maturities that are investment grade and 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).


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Table of Contents

Fixed Maturity Acquisitions Selected Information
(Dollar amounts in thousands)
 
 
Six Months Ended 
 June 30,
 
2016

2015
Cost of acquisitions:



Investment-grade corporate securities
$
635,530


$
501,996

Other
15,737


39,879

Total fixed-maturity acquisitions
$
651,267


$
541,875

Effective annual yield(1)
4.87
%
 
4.59
%
Average life, in years to:
 
 
 
Next call
24.4

 
28.4

Maturity
24.7

 
29.6

Average rating
BBB+

 
BBB+


(1) One-year compounded yield on a tax-equivalent basis. 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, 2016 was as follows:
Invested Assets At June 30, 2016
(Dollar amounts in thousands)
 

Amount

% of
Total
Fixed maturities(at amortized cost)
$
13,778,254

 
96
Policy loans
501,555

 
3
Other long-term investments
57,876

 
1
Short-term investments
48,581

 
—
Total
$
14,386,266

 
100
Approximately 96% of our investments at book value are in a diversified fixed-maturity portfolio. 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. As fixed maturities represent such a significant portion of our investment portfolio, the remainder of the discussion of portfolio composition will focus on fixed maturities.


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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, 2016.
Fixed Maturities by Sector
(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
$
58,469


$
3,649


$
(9,222
)

$
52,896


$
1,992,114


$
288,924


$
(20,394
)

$
2,260,644


14
15
 
Banks
41,582


592


(4,749
)

37,425


639,689


89,509


(4,768
)

724,430


5
5
 
Other financial
74,954


—


(27,805
)

47,149


550,500


62,522


(27,928
)

585,094


4
3
 
Total financial
175,005


4,241


(41,776
)

137,470


3,182,303


440,955


(53,090
)

3,570,168


23
23
 
Utilities


























 
Electric
9,644


1,397


—


11,041


1,506,266


317,639


(7,123
)

1,816,782


11
12
 
Gas and water
—


—


—


—


472,529


61,856


(247
)

534,138


3
3
 
Total utilities
9,644


1,397


—


11,041


1,978,795


379,495


(7,370
)

2,350,920


14
15
 
Industrial - Energy


























 
Pipelines
45,407


—


(7,167
)

38,240


833,112


57,916


(29,881
)

861,147


6
6
 
Exploration and production
25,027


—


(2,597
)

22,430


532,286


40,482


(24,769
)

547,999


4
3
 
Oil field services
33,886


—


(9,312
)

24,574


83,767


8,722


(9,312
)

83,177


1
1
 
Refiner
—


—


—


—


63,025


7,836


(27
)

70,834


—
—
 
Driller
54,681


—


(19,326
)

35,355


54,681


—


(19,326
)

35,355


—
—
 
Total energy
159,001


—


(38,402
)

120,599


1,566,871


114,956


(83,315
)

1,598,512


11
10
 
Industrial - Basic materials


























 
Chemicals
—


—


—


—


531,124


46,777


(1,371
)

576,530


4
4
 
Metals and mining
107,126


99


(20,628
)

86,597


405,408


23,592


(27,983
)

401,017


3
3
 
Forestry products and paper
—


—


—


—


112,954


15,314


(8
)

128,260


1
1
 
Total basic materials
107,126


99


(20,628
)

86,597


1,049,486


85,683


(29,362
)

1,105,807


8
8
 
Industrial - Consumer, non-cyclical
13,348


1,520


—


14,868


1,327,666


189,772


(14
)

1,517,424


10
10
 
Other industrials
80,453


30


(7,634
)

72,849


1,142,554


179,042


(11,071
)

1,310,525


9
9
 
Industrial - Transportation
26,784


—


(5,813
)

20,971


573,489


92,769


(6,321
)

659,937


4
4
 
Other corporate sectors
128,725


1,996


(6,691
)

124,030


1,157,703


154,682


(8,355
)

1,304,030


8
8
 
Total corporates
700,086


9,283


(120,944
)

588,425


11,978,867


1,637,354


(198,898
)

13,417,323


87
87
 
Other fixed maturities:
























 
Government (U.S., municipal, and foreign)
553


—


(190
)

363


1,678,712


219,981


(630
)

1,898,063


13
13
 
Collateralized debt obligations
62,174


13,617


(11,728
)

64,063


62,174


13,617


(11,728
)

64,063


—
—
 
Other asset-backed securities
—


—


—


—


54,157


1,790


—


55,947


—
—
 
Mortgage-backed securities(1)
—


—


—


—


4,344


351


(1
)

4,694


—
—
 
Total fixed maturities
$
762,813


$
22,900


$
(132,862
)

$
652,851


$
13,778,254


$
1,873,093


$
(211,257
)

$
15,440,090


100
100
(1) Includes GNMA's.

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At June 30, 2016, fixed maturities had a fair value of $15.4 billion, compared with $13.8 billion at December 31, 2015. The net unrealized gain position in the fixed-maturity portfolio increased from $506 million at December 31, 2015 to $1.7 billion at June 30, 2016, primarily as a result of a decrease in Treasury rates. The June 30, 2016 net unrealized gain consisted of gross unrealized gains of $1.9 billion offset by $211 million of gross unrealized losses, compared with the December 31, 2015 net unrealized gain which consisted of a gross unrealized gain of $1.1 billion and a gross unrealized loss of $564 million.
Corporate securities, which consist of bonds and redeemable preferred stocks, were the largest component of the fixed maturity portfolio, representing 87% at both amortized cost and fair value. The remainder of the portfolio is invested primarily in securities issued by the U.S. government, U.S. municipalities, and foreign governments. The Company holds insignificant amounts in collateralized debt obligations, asset-backed securities, and agency mortgage-backed securities. Corporate securities are diversified over a variety of industry sectors and issuers. At June 30, 2016, the financial, utility, and energy sectors represented approximately 23%, 14%, and 11%, respectively, of fixed maturities at amortized cost and 23%, 15%, and 10%, respectively, of fixed maturities at fair value. Otherwise, no single sector represented more than 10% of the corporate fixed maturity portfolio at either amortized cost or fair value. The total fixed maturity portfolio consists of 573 issuers, with 200 issuers within the financial, utility, and energy sectors.

The net unrealized gain of the fixed maturity portfolio increased $1.2 billion from December 31, 2015. The financial, utility, energy and basic materials sectors experienced increases of $100 million, $176 million, $197 million, and $142 million, respectively, in net unrealized gains from December 31, 2015 to June 30, 2016. The fair values of the financial, utility, energy, and basic materials sectors increased approximately 4%, 7%, 14%, and 21%, respectively, while the fair value of the entire portfolio increased 12% for the period. The current low price of oil and other commodities has had a negative impact on the operations of the companies whose bonds we hold in the energy and basic materials sectors. Oil and several other commodity prices reached multi-year lows during the first quarter of 2016. In the second quarter, the energy and commodities sectors saw an increase in the price of oil and other commodities, but have recently seen a drop again in early third quarter. While a sustained period of low prices might lead to some downgrades in ratings, we do not anticipate any losses from defaults or write-downs in the foreseeable future.
An analysis of the fixed maturity portfolio at June 30, 2016 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 various rating agencies noted above. 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.

40
Table of Contents


Fixed Maturities by Rating
(Dollar amounts in thousands)
 
 
June 30, 2016

Amortized
Cost

%

Fair
Value

%
Investment grade:







AAA
$
676,557


5

$
746,594


5
AA
1,348,110


10

1,555,575


10
A
3,880,790


28

4,666,331


30
BBB+
2,869,605


21

3,263,480


21
BBB
2,818,912


20

3,109,409


20
BBB-
1,421,467


10

1,445,850


10
Investment grade
13,015,441


94

14,787,239


96
Below investment grade:







BB
423,775


3

364,554


2
B
222,496


2

165,727


1
Below B
116,542


1

122,570


1
Below investment grade
762,813


6

652,851


4

$
13,778,254


100

$
15,440,090


100
Of the $13.8 billion of fixed maturities at amortized cost as of June 30, 2016, $13.0 billion or 94% were investment grade with an average rating of A-. Below-investment-grade bonds were $763 million with an average rating of B+. Below-investment-grade bonds at amortized cost were 20% of our shareholders’ equity, excluding the effect of unrealized gains and losses on fixed maturities as of June 30, 2016. Overall, the total portfolio was rated A- based on amortized cost, the same as at the end of 2015.
An analysis of the changes in our portfolio of below-investment-grade bonds at amortized cost during the first six months of 2016 is as follows:
Below-Investment-Grade Bonds
(Dollars amounts in thousands)
Balance as of December 31, 2015
$
640,150

Downgrades by rating agencies
129,816

Upgrades by rating agencies
—

Disposals
(9,175
)
Amortization and other
2,022

Balance as of June 30, 2016
$
762,813


Our investment policy is to acquire only investment-grade obligations. Thus, any increases in below-investment-grade issues are a result of ratings downgrades of existing holdings. Our investment portfolio contains no commercial mortgage-backed securities. We have no direct investments in residential mortgages, nor do we have any counterparty risks as we are not a party to any derivative contracts, including credit default swaps. We do not participate in securities lending, we have no off-balance sheet investments, and we have only insignificant exposures to European Sovereign debt consisting of $2 million of German government bonds. Our exposure to Puerto Rican obligations at June 30, 2016 was less than $600 thousand. On June 23, 2016, the United Kingdom voted to depart the European Union (EU) under the referendum commonly referred to as "Brexit." Although the formal separation from the EU will take time, the nature and extent of the effects on interest rates and economic performance are uncertain at this time. We do not expect an increase in other-than-temporary impairments on our limited exposure related to this event.

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

June 30,
2016

December 31, 2015

June 30,
2015
Average annual effective yield (1)
5.79%

5.83%

5.83%
Average life, in years, to:





Next call (2)
17.8

17.8

18.0
Maturity (2)
20.1

20.3

20.6
Effective duration to:





Next call (2)(3)
10.7

10.2

10.6
Maturity (2)(3)
11.6

11.2

11.7

(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 2016 with the first six months of 2015. 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.

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Table of Contents

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 for per share data)
 
 
Six Months Ended June 30,
 
2016

2015
 
Amount

Per Share

Amount

Per Share
Fixed maturities:







Investment sales
$
2,172


$
0.02


$
(14
)

$
—

Investments called or tendered
386


—


1,053


0.01

Other
236


—


737


—

Total
$
2,794


$
0.02


$
1,776


$
0.01



Financial Condition
Liquidity. Liquidity provides Torchmark with the ability to meet on demand the cash commitments required by our business operations and financial obligations. Our liquidity is evidenced by positive cash flow, a portfolio of marketable investments, and the availability of a 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 to meet these long-term 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.
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 2016, the Parent Company received $167 million of cash dividends from subsidiaries, compared with $186 million in 2015. For the full year 2016, cash dividends from subsidiaries are expected to total approximately $430 million.
Additional sources of liquidity for the Parent Company are cash, intercompany receivables, and a credit facility. At June 30, 2016, the Parent Company had $114 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. This facility was amended in May 2016 to include the issuance of a $100 million term loan and to extend the maturity date of the facility to May 2021. Interest on the commercial paper program is charged at variable rates. The term loan 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 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, 2016, we were in full compliance with these 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. At December 31, 2015 we had

43
Table of Contents

$250 million par value of 6.375% Senior Notes which were also classified as short-term debt. This issue was repaid on June 15, 2016.
The following table presents certain information about our commercial paper borrowings.
Credit Facility - Commercial Paper
(Dollar amounts in thousands)
 
 
At


June 30, 
 2016

December 31, 2015

June 30, 
 2015
Balance of commercial paper at end of period (par value)

$
285,976


$
240,544


$
387,500

Annualized interest rate

0.87
%

0.55
%

0.37
%
Letters of credit outstanding

$
177,000


$
177,000


$
198,000

Remaining amount available under credit line

287,024


332,456


164,500

 
 
Six Months Ended 
 June 30,
 
 
2016
 
2015
Average balance of commercial paper outstanding during period (par value)
 
$
298,636


$
331,475

Daily-weighted average interest rate (annualized)
 
0.77
%

0.38
%
Maximum daily amount outstanding during period (par value)
 
$
412,676


$
442,500

Our balance of commercial paper outstanding at June 30, 2016 was $286 million compared with $241 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, 2016 and 2015.
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 $605 million in the first six months of 2016, compared with $454 million in the same period of 2015. 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 $92 million during the 2016 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 $98 million at June 30, 2016, compared with $116 million at December 31, 2015. In addition to these liquid assets, the entire $15.4 billion (fair value at June 30, 2016) 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, investment maturities, and credit line availability make any need to sell securities for liquidity highly unlikely.
Capital Resources. Our insurance subsidiaries maintain capital at a level adequate to support their current operations and meet the requirements of the regulatory authorities and the rating agencies. Our insurance subsidiaries generally target a capital ratio of around 325% of Company Action Level required regulatory capital under Risk-Based Capital (RBC), a measure established by insurance regulatory authorities to monitor the adequacy of capital. The 325% target is considered sufficient because of our insurance companies’ strong reliable cash flows, the relatively low risk of their product mix, and because that ratio exceeds regulatory requirements and has been in line with rating agency expectations for Torchmark. This was slightly below our targeted level of 325%, primarily due to lower than anticipated Part D earnings and fourth quarter downgrades being greater than estimated. While we do not currently anticipate any significant changes to our targeted consolidated RBC level, should we believe that the RBC ratios of the insurance companies are being reduced due to downgrades in their investment portfolios that are temporary and that may reverse

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in the near future, we may choose to temporarily target a lower RBC ratio. Additional capital will become available in 2016 and 2017 from the sale of our Medicare Part D operation, as more fully described in Note 5 — Discontinued Operations, through proceeds on the sale and a reduction in RBC levels. In addition, we have available assets on hand and credit availability at the Parent Company to make additional contributions as necessary to maintain the targeted ratio. As discussed further in the next section below, the Parent Company has approximately $40 million in additional net proceeds of issue costs from the $300 million debt offering in April at its disposal, if necessary, for additional capital or other financing needs of the insurance subsidiaries.
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, 2016 and $744 million at December 31, 2015. An analysis of debt issues outstanding is as follows at June 30, 2016.
Selected Information about Debt Issues
at June 30, 2016
(Dollar amounts in thousands)
Instrument
Year
Due
 
Interest
Rate
 
 
Par
Value
 
Book
Value
 
Fair
Value
Notes
2023
 
7.875%

 
$
165,612

 
$
164,005

 
$
210,400

Senior Notes
2019
 
9.250%

 
292,647

 
291,208

 
349,393

Senior Notes(1)
2022
 
3.800%

 
150,000

 
148,050

 
155,037

Junior Subordinated Debentures
2052
 
5.875%

 
125,000

 
120,914

 
127,850

Junior Subordinated Debentures
2036
 
3.953%
(2) 
 
20,000

 
20,000

 
20,000

Junior Subordinated Debentures
2056
 
6.125%

 
300,000

 
290,376

 
316,320

Term loan(3)
2021
 
1.695%
(4) 
 
100,000

 
100,000

 
100,000

 
 
 
 
 
 
1,153,259

 
1,134,553

 
1,279,000

Less current maturity of term loan(3)
 
 
 
 
 
625

 
625

 
625

Total long-term debt
 
 
 
 
 
1,152,634

 
1,133,928

 
1,278,375


 
 
 
 
 
 
 
 
 
 
Current maturity of term loan(3)
 
 
 
 
 
625

 
625

 
625

Commercial paper
 
 
 
 
 
285,976

 
285,386

 
285,386

Total short term debt
 
 
 
 
 
286,601

 
286,011

 
286,011


 
 
 
 
 
 
 
 
 
 
Total debt
 
 
 
 
 
$
1,439,235

 
$
1,419,939

 
$
1,564,386


(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 $625 thousand 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 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. The remaining proceeds will be used for general corporate purposes, including capital or other financing at our insurance subsidiaries, if necessary.
As previously noted under the caption Results of Operations in this report, we acquired 2.9 million of our outstanding common shares under our share repurchase program during the first six months of 2016. These shares were acquired at a cost of $163 million (average of $55.46 per share), compared with purchases of 3.2 million shares at a cost of $176 million (average of $54.96 per share) in the first six months of 2015.

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On May 20, 2016, the Company announced that it had declared a quarterly dividend of $0.14 per share. This dividend was paid on August 1, 2016.
Shareholders’ equity was $4.9 billion at June 30, 2016. This compares with $4.1 billion at December 31, 2015 and $4.3 billion at June 30, 2015. During the six months since December 31, 2015, shareholders’ equity was increased by $748 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 $262 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 this GAAP requirement on relevant line 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 for per share data)

At
 
June 30, 2016

December 31, 2015

June 30, 2015

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
$
15,440,090

 
$
1,661,836

 
$
13,758,024

 
$
506,153

 
$
14,121,462

 
$
994,544

Deferred acquisition costs (2)
3,698,449

 
(13,319
)
 
3,617,135

 
(7,869
)
 
3,535,277

 
(12,946
)
Total assets
21,574,040

 
1,648,517

 
19,853,213

 
498,284

 
20,061,760

 
981,598

Short-term debt
286,011

 
—

 
490,129

 
—

 
636,862

 
—

Long-term debt
1,133,928

 
—

 
743,733

 
—

 
743,306

 
—

Shareholders' equity
4,877,758

 
1,071,536

 
4,055,552

 
323,885

 
4,306,056

 
638,039

 
 
 
 
 
 
 
 
 
 
 
 
Book value per diluted share
39.87

 
8.76

 
32.71

 
2.62

 
33.94

 
5.03

Debt to capitalization (3)
22.5
%
 
(4.6
)%
 
23.3
%
 
(1.5
)%
 
24.3
%
 
(3.1
)%
 
 
 
 
 
 
 
 
 
 
 
 
Diluted shares outstanding
122,347

 
 
 
123,996

 
 
 
126,878

 
 
Actual shares outstanding
119,853

 
 
 
122,370

 
 
 
125,242

 
 
 
(1) Amount added to (deducted from) comprehensive income to produce the stated GAAP item, per accounting rule ASC 320-10-35-1, formerly SFAS 115.
(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 10.3 times in the 2016 six months, compared with 11.2 times in the 2015 period. Interest coverage is computed by dividing interest expense into the sum of pretax income and interest expense.

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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)
Changing general economic 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 and Medicare Part D insurance);
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)
Our inability to obtain timely and appropriate premium rate increases for health insurance policies due to regulatory delay;
10)
The customer response to new products and marketing initiatives; and
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.


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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, 2016.

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, 2016, 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.
As of the date of this Form 10-Q for the quarter ended June 30, 2016, 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.

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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 has 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, 2016
 
547,726

 
$
54.66

 
547,726

 
 
May 1-31, 2016
 
736,202

 
58.79

 
736,202

 
 
June 1-30, 2016
 
743,082

 
60.10

 
743,082

 
 
At its August 4, 2016 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, 2016

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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 5, 2016
 
 
/s/ Gary L. Coleman
 
 
 
Gary L. Coleman
 
 
 
Co-Chairman and Chief Executive Officer
 
 
 
Date: August 5, 2016
 
 
/s/ Larry M. Hutchison
 
 
 
Larry M. Hutchison
 
 
 
Co-Chairman and Chief Executive Officer
 
 
 
Date: August 5, 2016
 
 
/s/ Frank M. Svoboda
 
 
 
Frank M. Svoboda
 
 
 
Executive Vice President and Chief Financial Officer

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