2014 ANNUAL REPORT
STOCK TR ANSFER AGENT AND
SHAREHOLDER ASSISTANCE
Wells Fargo Shareowner Services
P.O. Box 64854
St. Paul, MN 55164-0854
or
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120-4100
Toll-Free Number: (866) 557-8699
TDD: Hearing impaired can use
a relay service
Outside the U.S.: (651) 450-4064
Website: www.shareowneronline.com
DIVIDEND REINVESTMENT
for
a
dividend
Torchmark maintains
reinvestment plan
all holders
of its common stock. Under the plan,
shareholders may reinvest all or part of
their dividends in additional shares of
common stock and may also make periodic
additional cash payments of up to $3,000
toward the purchase of Torchmark stock.
Participation is voluntary. More information
on the plan may be obtained from the
Stock Transfer Agent by calling toll-free
(866) 557-8699 or by writing: Torchmark
Corporation, c/o Wells Fargo Shareowner
Services, P.O. Box 64874, St. Paul,
MN 55164-0874 or 1110 Centre Pointe
Curve, Suite 101, Mendota Heights, MN
55120-4100.
AUTOMATIC DEPOSIT
OF DIVIDENDS
Automatic deposit of dividends is available
to shareholders who wish
to have
their dividends directly deposited into
the financial institution of their choice.
Authorization forms may be obtained from
the Stock Transfer Agent by calling toll-free
(866) 557-8699.
PRINCIPAL EXECUTIVE OFFICE
3700 South Stonebridge Drive
McKinney, Texas 75070
(972) 569-4000
ANNUAL MEETING
OF SHAREHOLDERS
10:00 a.m. CDT, Thursday, April 30, 2015
Corporate Headquarters
3700 South Stonebridge Drive
McKinney, Texas 75070
The proceedings will be webcast live
and in replay on the Investors page of
the Torchmark Corporation website.
The Company’s Annual Meeting will
be conducted in accordance with its
Shareholder Rights Policy. A copy of this
policy can be obtained on the Company’s
website, or by contacting the Corporate
Secretary at the Torchmark Corporation
headquarters address.
INVESTOR RELATIONS
Contact: Mike Majors
Phone: (972) 569-3627
Fax: (972) 569-3282
E-Mail: tmkir@torchmarkcorp.com
INDEPENDENT REGISTERED
PUBLIC ACCOUNTANTS
Deloitte & Touche LLP
2200 Ross Avenue
Suite 1600
Dallas, Texas 75201
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TORCHMARK
CORPOR ATION
WEBSITE
On the home page at
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· TORCHMARK CORPORATION· 1
Financial Highlights*
In thousands, except percentage and per share amounts
OPERATIONS:
Total Premium
Net Operating Income
Annualized Life Premium In Force
Annualized Health Premium In Force**
Diluted Average Shares Outstanding
Net Operating Income as a Return
on Average Common Equity
2014
2013
% CHANGE
$3,183,945
$3,049,690
534,468
2,044,545
947,323
132,640
530,667
1,955,401
887,444
139,564
14.9%
15.5%
4.4
0.7
4.6
6.7
(5.0)
PER COMMON SHARE (ON A DILUTED BASIS):
Net Operating Income
Shareholders‘ Equity at Year End
$4.03
27.91
$3.80
25.85
6.1
8.0
* Certain financial data differ from the comparable GAAP financial data.
Reconciliations to GAAP financial data are presented on pages 14-15.
** Excludes Medicare Part D
Note: All share and per share amounts presented on this page and the
following letter have been retroactively adjusted for stock splits.
2· TORCHMARK CORPORATION·
leTTeR TO sHAReHOldeRs*
2014 was another good year for Torchmark. Strong
marketing efforts in each of our distribution channels
led to double-digit net life and health sales growth,
and return on equity was 14.9%, which is among
the highest in our peer group.
Torchmark’s success can be attributed in large part
to several unique elements of our business model
that differentiate us from other life insurers and have
helped generate outstanding results in both good
and bad economies over the years. These elements
are discussed below:
Market
We operate in niches of the vastly underinsured
middle-income market.
Products
We sell basic protection products that serve a
significant consumer need and are not impacted by
equity or credit market fluctuations.
Controlled Distribution
Our products are sold primarily through exclusive
agencies and direct response marketing.
Margins and Cash Flows
Our control over administrative and acquisition
costs helps generate high underwriting margins and
facilitates the growth we’re seeing in our exclusive
agencies. Our highly persistent block of inforce
business produces very consistent, strong free cash
flows year in and year out. Approximately 90% of
our revenues each year come from inforce policies
sold in prior years.
Return of Excess Capital to Shareholders
Torchmark consistently returns excess capital to its
shareholders as a result of the substantial free cash
flow generated each year. We have returned 77%
of our net income to shareholders through share
repurchases and dividends since 1986.
* Certain financial data differ from the comparable GAAP financial data. Reconciliations to GAAP financial data are presented on pages 14-15.
leTTeR TO sHAReHOldeRs · TORCHMARK CORPORATION· 3
Torchmark’s consistent growth in operating income
per share and book value per share is demonstrated
in the following charts.
NET OPERATING INCOME PER SHARE*
Compound Annual Growth Rate 10 Year – 7.9%, 5 Year – 9.8%
$5.00
$4.00
$3.00
$2.00
$2.04*
$2.22*
$2.28
$4.03
$3.80
$3.45
$3.00
$2.75
$2.45
$2.53
$1.00
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
* Values prior to 2007 are not restated for the effect of accounting
standards ASU 2010-26 due to lack of information.
BOOK VALUE PER SHARE
(EXCLUDING NET UNREALIZED GAINS OR
LOSSES ON FIXED MATURITIES)*
Compound Annual Growth Rate 10 Year – 8.6%, 5 Year – 9.3%
$27.91
$25.85
$23.49
$21.31
$19.87
$17.88
$14.78*
$14.77
$15.79
$13.51*
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
0
2005
2006
2014
2009
* Values prior to 2007 are not retroactively adjusted for the effect of ASU
2010-26.
2008
2007
2010
2013
2012
2011
Torchmark has also long been among the leaders of
its peers in return on equity.
4· TORCHMARK CORPORATION· leTTeR TO sHAReHOldeRs
RETURN ON EQUITY
(EXCLUDING NET UNREALIZED GAINS OR
LOSSES ON FIXED MATURITIES)*
15.9%*
15.8%*
15.8%*
15.3%*
13.8%*
15.5%
15.5%
14.3%*
14.7%
14.9%
20%
15%
10%
5%
0
2005
2006
2014
2009
* Values prior to 2011 are not retroactively adjusted for the effect of ASU
2010-26.
2008
2007
2013
2012
2011
2010
Competition
There has been a great deal of discussion concerning
competition in the middle-income space. While we
are aware of more activity by other insurers, we have
not seen an adverse impact on our business.
We will continue to maintain awareness and
monitor competitive activity in our marketplace,
but we don’t anticipate that competition will have
a significant impact on our ability to grow our
distribution channels and maintain our margins.
As previously indicated, we operate in niches of
the middle-income market in a very cost-efficient
manner. In addition, we have more than fifty years of
experience with many of our current products in this
market. This experience, along with the tremendous
amount of market data we have accumulated,
provides us a significant advantage over potential
competitors. We believe we are well positioned to
meet any emerging competition and to grow our
distribution channels in the future.
In addition, the middle-income market is vastly
underinsured with a real need for basic life insurance
protection. We continue
to see substantial
opportunity in the middle-income marketplace,
with or without increased competition.
INsuRANCe OPeRATIONs
dIsTRIBuTION CHANNels
COMPONENTS OF NET OPERATING
INCOME - 2014
($ in millions, except per share data)
2007
Underwriting Income
Excess Investment Income
Tax and Parent Expenses
Net Operating Income
$610
225
(301)
$534
Per share
$4.60
1.70
(2.27)
$4.03
income
Underwriting
represents premiums
less policy benefits, acquisition costs, and
administrative expenses. Due to our high profit
margins, underwriting
income generates a
significant portion of our net operating income.
Underwriting income was approximately 74% of
pre-tax operating income in 2014.
COMPONENTS OF UNDERWRITING
INCOME - 2014
($ in millions)
Underwriting Margin
Life
Health
Part D
Other
$
$556
199
27
5
as % of
Premium
28.3%
22.9%
7.8%
Administrative Expenses net of
Other Income
(177)
5.6%
Underwriting Income
$610
19.2%
Torchmark operates through several distribution
channels, each serving a particular niche. The
following chart illustrates the relative sizes of our
distribution channels.
Total
787
24.7%
HEALTH
2014 TOTAL UNDERWRITING MARGIN
23%
18%
36%
5%
3%
15%
American Income
Direct Response
General Agency
Liberty National
Family Heritage
Medicare Part D
LIFE AND HEALTH NET SALES*
($ in millions)
2014
2013
% Increase
LIFE
American Income
Direct Response
Liberty National
Other Distribution
$172
158
34
14
$153
144
31
11
Total Life
$378
$339
General Agency
$84
$41
Family Heritage
Direct Response
Liberty National
American Income
47
23
18
9
44
4
15
7
Total Health
$181
$111
13
10
11
23
12
102
8
440
22
31
63
* Net sales is defined as annualized premium issued, net of
cancellations in the first 30 days after issue, except for Direct
Response where net sales is annualized premium issued at
the time the first full premium is paid after any introductory
offer period has expired. The health sales above do not include
Medicare Part D.
leTTeR TO sHAReHOldeRs · TORCHMARK CORPORATION· 5
AMeRICAN INCOMe lIFe
American Income is the largest and most profitable
of our distribution channels. As a union company
with a unionized sales force, AIL enjoys a strong
niche position due to its history and relationship
with organized labor. Despite shrinking union
membership levels over the past ten years,
American Income’s producing agent count grew
from 2,090 to over 6,400 from the end of 2004
to the end of 2014. While there is still significant
opportunity within the union market, our emphasis
on customer referrals and other affinity groups has
expanded AIL’s marketing reach. Today, less than
30% of new sales come directly from union leads.
AMERICAN INCOME - LIFE PREMIUM
($ in millions)
10-Year Compound Annual Growth Rate - 8.2%
$766
$715
$664
sharp focus on recruiting and training, and a new
senior life insurance product took hold in 2014 and
should provide continued momentum in 2015.
glOBe lIFe dIReCT ResPONse
Direct Response is our second largest distribution
channel. As shown in the following chart, life
premiums have increased at a compound annual
growth rate of 6.1% over the past ten years.
Underwriting margins were consistently in a range
of 23 to 25% during that period.
DIRECT RESPONSE - LIFE PREMIUM
($ in millions)
10-Year Compound Annual Growth Rate - 6.1%
$800
$700
$600
$500
$702
$664
$630
$567
$594
$537
$511
$484
$457
$608
$561
$400
$424
$508
$474
$440
$409
$380
$300
$200
$100
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
$800
$700
$600
$500
$400
$300
$200
$100
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
As can be seen in the previous chart, life premiums
have grown steadily at a ten-year compound
annual growth rate of 8.2%. During that same
time, underwriting margins as a percentage of
premiums ranged consistently from 31 to 33%.
We are very optimistic regarding American Income’s
long-term growth prospects. Net life sales grew
13% in 2014 as the agent count increased 21%.
Changes in the agency compensation system, a
6· TORCHMARK CORPORATION· leTTeR TO sHAReHOldeRs
Direct Response net life sales increased 10% in
2014, driven by an increase in electronic media
activity. Electronic media primarily includes the
Internet, mobile applications, social media, and
inbound phone calls.
The Direct Response unit began as a direct mail-
only operation in the 1960s and was supplemented
first by insert media in the 1990s, and then by
electronic media in recent years. This evolution has
been the result of a continual effort to expand our
distribution footprint and find new ways to reach
consumers in our marketplace.
While we have historically enjoyed a competitive
advantage in Direct Response due to the efficiencies
of our state-of-the-art direct mail facilities, we
maintain that advantage in the Internet era due
to having more than 50 years of direct response
marketing experience in the middle-income market
and the tremendous amount of market data we
have accumulated over that period.
In addition, our direct mail, insert media, and
electronic media operations are intertwined and
support each other, providing a comprehensive
marketing program that we don’t believe our
competitors have. This multi-faceted approach gives
consumers more ways to inquire and provides us
with the ability to monetize those inquiries through
multiple channels. If an initial inquiry doesn’t result
in a sale, we continue to reach the consumer with
additional solicitations.
To further expand our consumer outreach, we
continue
to explore cost-beneficial branding
opportunities to help provide enhanced credibility
and drive additional traffic to each of our Direct
Response channels. We fully expect continued
innovation to sustain long-term growth in our
Direct Response operations.
Liberty has now opened 11 new offices in the last
two years outside its traditional southeastern area.
We believe continued expansion into more heavily
populated areas is the key to Liberty’s growth. The
strong growth in the number of middle managers
in 2014 will help provide momentum and facilitate
future expansion. We are very pleased with
Liberty’s performance and
to
continued success.
forward
look
FAMIly HeRITAge lIFe
Family Heritage operates in a niche by selling
supplemental health products with a unique return-
of-premium feature in non-urban areas. Due to this
return-of-premium feature, these products have a
longer average life, higher margins and produce
more investment income than other supplemental
health products.
Net health sales increased 8% in 2014, while the
agent count increased 13%. Family Heritage’s
continued transition to a culture that heavily
emphasizes agent recruiting as well as sales has
begun to take hold. We believe Family Heritage’s
future prospects are very promising.
lIBeRTy NATIONAl lIFe
uNITed AMeRICAN
Last year we reported on the structural changes
that have been made over the past several years
to convert Liberty from a fixed cost sales model
to a variable cost model. This was a significant
change from the way Liberty conducted business
in the past, but was necessary to sustain long-term
profitable growth.
We began to see positive results from the
transformation of Liberty in 2014. Life sales
increased 11% and health sales
increased
22% in 2014, due to growth in agent count and
improvements in agent productivity.
United American sells
individual and group
Medicare Supplement and Medicare Part D
(Part D) products through independent agents and
our Direct Response unit. As we’ve said many
times, we view the Medicare Supplement and Part
D businesses in an opportunistic manner. While
our primary focus is on life insurance, we will take
Medicare Supplement and Part D business so long
as the margins are acceptable.
leTTeR TO sHAReHOldeRs · TORCHMARK CORPORATION· 7
INVesTMeNT OPeRATIONs
COMPONENTS OF NET OPERATING
INCOME - 2014
($ in millions, except per share data)
Underwriting Income
Excess Investment Income
Tax and Parent Expenses
Net Operating Income
Per share
$4.60
1.70
(2.27)
$4.03
$610
225
(301)
$534
Excess investment income is net investment
income less the required interest on the net policy
liabilities and the interest on our debt. Approximately
27% of pre-tax operating income was produced by
excess investment income.
EXCESS INVESTMENT INCOME - 2014
($ in millions)
Net Investment Income
Required Interest on Net Policy Liabilities
Interest on Debt
Excess Investment Income
$758
(457)
(76)
$225
In the last five years, declining interest rates
have been a headwind. Early in 2014, we were
encouraged by an increase in interest rates.
However, subsequent declines in new-money
income.
yields have pressured
Despite
income
this, excess
increased in 2014 for the first time since 2010.
We expect that excess investment income will
soon begin to grow at about the same rate as
our invested assets in the future.
investment
investment
Our Medicare Supplement sales grew from $41
million in 2013 to $83 million in 2014. The increase
was primarily due to the addition of an unusual
number of large groups and a 39% increase in our
individual Medicare Supplement sales. While our
group Medicare Supplement business has grown
significantly over the last several years, sales
fluctuations from year to year can be significant
due to the impact of large groups.
Our Part D business provides only about 3% of
our underwriting margin. However, this business
produced some unexpected margin volatility in 2014
due primarily to the impact of new, very expensive
hepatitis C drugs that were required to be covered
by the Centers for Medicare and Medicaid Services
in February 2014, well after our 2014 pricing was
finalized. While the margins were less than we
initially anticipated, Part D still generated $27 million
of underwriting margin in 2014.
We chose to participate in the Part D program for
several reasons:
• To complement and protect our existing
Medicare Supplement business. We were
concerned many consumers would prefer
to have coverage with one carrier. For that
reason, we also believed that having Part D
would enhance the marketability of both our
group and individual Medicare Supplement
programs.
• We knew that the exposure to underwriting
losses was very minimal due to government-
backed
cost-sharing
arrangements built into the design of the
program.
reinsurance
and
• This business requires relatively little capital
on an ongoing basis.
Moving forward, we will work to minimize
Part D volatility. As such, we don’t expect Part D to
become a significant part of our operations.
8· TORCHMARK CORPORATION· leTTeR TO sHAReHOldeRs
INVESTMENT PORTFOLIO - DECEMBER 31, 2014
Invested Assets ($ in millions)
BELOW INVESTMENT GRADE BONDS
As a Percent of Fixed Maturities*
$
% of Total
10.0%
Fixed Maturities (at amortized cost)
$12,824
96%
Equities
Policy Loans
Other Investments
Total
1
472
26
0
4
0
$13,323
100%
We maintain a conservative investment approach.
We invest long in fixed-rate securities (investment
grade corporate bonds) because these investments
best match our fixed-rate long-term liabilities.
Despite the current low-rate environment, we do
not intend to relax our credit standards. Because
of our high underwriting margins, we don’t need
to stretch for yield to generate operating income.
There has been a significant amount of interest in
energy sector investments due to recent declines
in oil prices. We believe the risk of losses in our
energy portfolio in the foreseeable future is minimal
for the following reasons:
• Over 96% of our energy holdings are
investment grade.
• Less than 10% of our energy portfolio is in the
oil field services and drilling sectors.
• Our energy portfolio has net unrealized gains
of approximately $194 million.
The energy portfolio information above is as of the end of
February, 2015.
We have thoroughly analyzed each of the
investments in our energy portfolio and while we
may see some downgrades, we believe that the
companies we have invested in have the ability to
withstand lower oil prices for an extended duration.
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0
8.0%
8.1%
8.1%
8.3%
7.5%
7.4%
6.4%
4.9%
4.5%
4.4%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
* Excluding net unrealized gains and losses
Our below investment grade (BIG) bonds make up
4.4% of our fixed maturity portfolio at amortized
cost. This is the lowest concentration we’ve had
since 1998. Because of our relatively low portfolio
leverage, the ratio of BIG bonds to equity, excluding
unrealized gains on fixed maturities, is only 15% -
lower than most of our peers.
Interest Rate Environment
While low interest rates have a negative impact
on our investment income, we are not concerned
about an impact on our balance sheet should new
money rates remain low for an extended period.
The products we sell are not interest-sensitive
and therefore are accounted for using interest rate
assumptions that are locked in for the life of the
business. Due to the high underwriting margins we
generate, we don’t believe a reasonable scenario
exists where we would have to increase reserves
or write-off deferred acquisition costs due to an
extended low interest rate environment.
leTTeR TO sHAReHOldeRs · TORCHMARK CORPORATION· 9
We would like to see an increase in interest rates
because of the positive effect that it would have
on our investment income. We’re not concerned
about the possibility of unrealized losses generated
by significant rate increases, as we have the intent
and more importantly, the ability, to hold our
investments to maturity.
FREE CASH FLOW
($ in Millions)
$367*
$364
$355
$377
$355
-$365
$353
$343
$340
$300
$281
$269
$400
$350
$300
$250
$200
$150
$100
$50
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
*Excludes $305 of free cash flow from the sale of United Investors.
2015
Estimate
Free cash flow is the cash available to the parent
company after fully funding all operating needs of
the insurance subsidiaries, servicing debt, and paying
shareholder dividends. As can be seen in the above
chart, Torchmark consistently generates strong free
cash flow due to our high underwriting margins and
the high persistency of our inforce block. Free cash
flow has grown from $1.09 per share at the end of
2004 to $2.83 per share at the end of 2014. If we
include shareholder dividends, total distributable cash
flow (free cash plus dividends) has grown from $1.29
per share to $3.32 per share over that same period.
We carefully consider possible uses of the free
cash including share repurchases, acquisitions
or strategic alliances, increased dividends, debt
reduction, and investment in corporate bonds.
Historically, though, share repurchases have been
the primary use of free cash flow.
10· TORCHMARK CORPORATION· leTTeR TO sHAReHOldeRs
SHARE REPURCHASES
Average
Price
No. of Shares
(in 000’s)
Total Spent
(in millions)
P/E
Ratio†
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
$52.42
$43.48
$32.13
$27.78
$23.78
$10.12
$24.83
$29.06
$25.54
$23.62
7,155
8,280
11,219
28,347
8,560
4,613
17,185
13,837
12,544
12,706
$375
$360
$360
$788
$204
$47
$427
$402
$320
$300
13.0
11.4
9.3
9.3
8.7
4.0
10.1
12.7
11.5
11.6
† Values prior to 2007 are not restated for the effect of accounting
standard ASU 2010-26 due to lack of information
Since we began our share repurchase program
in 1986, we have repurchased stock every year
except 1995, the year after we acquired American
Income. Over the last 29 years, we have spent
$6.1 billion to repurchase 77% of the Company’s
outstanding shares.
We have returned approximately 77% of our net
income to shareholders since 1986 in the form of
share repurchases and dividends. As can be seen
in the chart below, that percentage has been 83%
over the last ten years.
RETURN TO SHAREHOLDERS
($ in millions)
Share
Repurchases
Dividends
Paid
(A) Total
Cash
Returned
(B) Net
Income
(A)/(B)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
$375
$360
$360
$788
$204
$47
$427
$402
$320
$300
$65
$61
$56
$49
$50
$47
$49
$50
$48
$46
$440
$421
$416
$837
$254
$94
$476
$452
$368
$346
$543
$528
$529
81%
80%
79%
$497
168%
$499
$383
$427
$497
$519
$495
51%
24%
111%
91%
71%
70%
83%
10-Year Total
$4,104
$4,917
We remain committed to returning capital to our
shareholders. In the absence of better alternatives,
we will continue to achieve this through share
repurchases and dividends.
Conclusion
We are more enthusiastic about our distribution
channels than we have been in quite a few years
and we believe the middle-income market we
serve provides unlimited opportunity. Torchmark
is competitively well positioned to deliver strong
earnings growth and financial stability that should
create substantial shareholder value for years to
come, regardless of general economic conditions.
Thank you for your investment in Torchmark.
LARRY HUTCHISON
Co-Chairman and
Chief Executive Officer
GARY COLEMAN
Co-Chairman and
Chief Executive Officer
leTTeR TO sHAReHOldeRs· TORCHMARK CORPORATION· 11
Torchmark cautions you that this Letter to Shareholders may contain forward-looking statements within the meaning of the federal securities law.
These prospective statements reflect management’s current expectations, but are not guarantees of future performance. Accordingly, please refer
to Torchmark’s cautionary statement regarding forward-looking statements and the business environment in which the Company operates, contained
in the Company’s Form 10-K for the period ended December 31, 2014, found on the following pages and on file with the Securities and Exchange
Commission. Torchmark specifically disclaims any obligation to update or revise any forward-looking statement because of new information, future
developments or otherwise.
12· TORCHMARK CORPORATION· leTTeR TO sHAReHOldeRs
dIReCTORs
CHARLES E. ADAIR
Partner of Cordova Ventures
Montgomery, Alabama
MARILYN A. ALEXANDER
Principal of Alexander and Friedman, LLC
Laguna Beach, California
DAVID L. BOREN
President of the University of Oklahoma
Norman, Oklahoma
JANE M. BUCHAN
Chief Executive Officer and Managing
Director of Pacific Alternative Asset
Management Company, LLC
Irvine, California
GARY L. COLEMAN
Co-Chairman and Chief Executive
Officer of Torchmark
OFFICeRs
GARY L. COLEMAN
Co-Chairman and Chief Executive Officer
LARRY M. HUTCHISON
Co-Chairman and Chief Executive Officer
ARVELIA M. BOWIE
Vice President and
Director of Human Resources
JOHN T. DALY
Corporate Actuary
J. MATTHEW DARDEN
Executive Vice President,
Innovations and Business Development
VERN D. HERBEL
Executive Vice President and
Chief Administrative Officer
LARRY M. HUTCHISON
Co-Chairman and Chief Executive
Officer of Torchmark
ROBERT W. INGRAM
Retired Ross-Culverhouse Professor of
Accounting in Culverhouse College of
Commerce, University of Alabama
Gulf Breeze, Florida
LLOYD W. NEWTON
Retired Executive Vice President
Military Engines of Pratt & Whitney,
Retired General, United States Air Force
Lithia, Florida
DARREN M. REBELEZ
Former Executive Vice President and
Chief Operating Officer of
7-Eleven, Inc.
Irving, Texas
LAMAR C. SMITH
Retired Executive Chairman of
Vista Machining Company,
Retired Chief Executive Officer of
First Command Financial Services, Inc.
Fort Worth, Texas
PAUL J. ZUCCONI
Retired Partner of KPMG LLP
Plano, Texas
BEN W. LUTEK
Executive Vice President and
Chief Actuary
W. MICHAEL PRESSLEY
Executive Vice President and
Chief Investment Officer
MICHAEL C. MAJORS
Vice President, Investor Relations
SPENCER H. STONE
Controller
CAROL A. MCCOY
Vice President, Associate Counsel
and Corporate Secretary
JAMES E. MCPARTLAND
Executive Vice President and
Chief Information Officer
R. BRIAN MITCHELL
Executive Vice President and
General Counsel
FRANK M. SVOBODA
Executive Vice President and
Chief Financial Officer
GLENN D. WILLIAMS
Executive Vice President and
Chief Marketing Officer
OFFICeRs OF suBsIdIARIes
AMERICAN INCOME LIFE
ROGER SMITH
Chief Executive Officer and President
GLOBE LIFE
BILL E. LEAVELL
President
UNITED AMERICAN
VERN D. HERBEL
President and Chief Executive Officer
FAMILY HERITAGE LIFE
HOWARD L. LEWIS
Chief Executive Officer
KENNETH J. MATSON
President
LIBERTY NATIONAL LIFE
ROGER SMITH
Chief Executive Officer and President
STEVEN J. DICHIARO
Executive Vice President and
Chief Agency Officer
leTTeR TO sHAReHOldeRs · TORCHMARK CORPORATION· 13
OPeRATINg suMMARy
Unaudited and in thousands except per share amounts
TWELVE MONTHS ENDED DECEMBER 31,
2014
2013
% INCREASE
(DECREASE)
Underwriting Income
Life:
Premium
Net policy obligations
Non-deferred commissions and amortization
Non-deferred acquisition expense
Underwriting margin
Health:
Premium
Net policy obligations
Non-deferred commissions and amortization
Non-deferred acquisition expense
Underwriting margin
Part D underwriting margin
Annuity underwriting margin
Total underwriting margin
Other income
Insurance administration expenses
Underwriting income
Excess Investment Income
Net investment income
Required interest on:
Net policy liabilities:
Policy reserves
Deferred acquisition costs
Debt
Total excess investment income
Corporate expenses
Pre-tax operating income
Income tax
Net Operating Income before stock compensation expense
Stock compensation expense, net of tax
NET OPERATING INCOME
Operating EPS on a diluted basis
Diluted average shares outstanding
Reconciliation of Net Operating Income to Net Income:
Net operating income
Non operating items, net of tax:
Realized gains/(losses) - investments
Guaranty Fund Assessment
Administrative settlements
Family Heritage Life acquisition expense and adjustments
Legal settlement expenses
Net Income
EPS on a diluted basis
$1,966,300
(763,192)
(590,894)
(55,725)
556,489
869,440
(495,416)
(155,779)
(18,926)
199,319
27,266
4,312
787,386
2,354
(179,955)
609,785
758,286
(649,848)
192,779
(76,126)
225,091
(8,159)
826,717
(271,317)
555,400
(20,932)
$534,468
$4.03
132,640
$1,885,332
(719,621)
(573,546)
(47,106)
545,059
863,818
(499,124)
(152,182)
(16,005)
196,507
35,300
3,939
780,805
2,208
(178,898)
604,115
734,650
(625,388)
190,025
(80,461)
218,826
(8,495)
814,446
(267,112)
547,334
(16,667)
$530,667
$3.80
139,564
4%
2%
1%
1%
1%
1%
3%
3%
2%
1%
6%
$534,468
$530,667
15,306
0
(5,316)
0
(1,519)
$542,939
$4.09
3,965
(751)
0
522
(5,931)
$528,472
$3.79
The Operating Summary has been prepared in the manner Torchmark management uses to evaluate the operating results of the company. It differs from the Consolidated
Statement of Operations found in the accompanying SEC Form 10-K.
14· TORCHMARK CORPORATION· OPeRATINg suMMARy
CONdeNsed BAlANCe sHeeT
Unaudited and in thousands except percentage and per share amounts
AT DECEMBER 31,
Assets:
Fixed maturities at amortized cost*
Cash and short-term investments
Mortgages and real estate
Other investments
Deferred acquisition costs*
Goodwill
Other assets
Total assets*
Liabilities and shareholders’ equity:
Policy liabilities
Current and deferred income taxes payable*
Short-term debt
Long-term debt and trust preferred securities
Other liabilities
Shareholders’ equity, excluding ASC 320 *+
Total liabilities and shareholders’ equity
Actual shares outstanding:
Basic
Diluted
Book value (shareholders’ equity, excluding ASC 320) per diluted share
Net operating income as a return on average equity, excluding ASC 320
Average equity, excluding ASC 320
Debt to capital ratio, excluding ASC 320
2014
12,823,612
81,901
203
483,832
3,488,332
441,591
1,242,362
18,561,833
12,130,353
1,218,751
238,398
992,130
359,118
3,623,083
18,561,833
127,930
129,812
27.91
14.9%
3,577,014
25.4%
$
$
$
$
$
$
2013
12,488,875
113,833
203
463,775
3,348,000
441,591
955,560
17,811,837
11,647,995
1,152,607
229,070
990,865
261,898
3,529,402
17,811,837
134,252
136,537
25.85
15.5%
3,422,983
25.7%
$
$
$
$
$
$
Reconciliation of Torchmark management’s view of selected financial measures to comparable GAAP measures*:
Shareholders’ equity, excluding fair value adjustments*
$
3,623,083
$
3,529,402
Effect of fair value adjustments*:
Increase fixed maturities
Decrease deferred acquisition costs
Current and deferred income taxes payable
Shareholders’ equity*
Other comparable GAAP measures:
Fixed maturities
Deferred acquisition costs
Total assets
Shareholders’ equity
Current and deferred income taxes payable
Book value (shareholders’ equity) per diluted share
Net income as a return on average equity
Average equity
Debt to capital ratio
1,669,448
(16,551)
(578,514)
4,697,466
14,493,060
3,471,781
20,214,730
4,697,466
1,797,265
36.19
12.5%
4,340,254
20.8%
$
$
$
390,258
(10,351)
(132,967)
3,776,342
12,879,133
3,337,649
18,191,744
3,776,342
1,285,574
27.66
13.2%
4,008,378
24.4%
$
$
$
*The Condensed Balance Sheet, Excluding ASC 320 has been prepared in the manner Torchmark management, industry analysts, rating agencies and financial institutions use to
evaluate the financial position of the company. It differs from the Consolidated Balance Sheet found in the accompanying SEC Form 10-K.
+Formerly known as FAS 115
CONdeNsed BAlANCe sHeeT · TORCHMARK CORPORATION· 15
16· TORCHMARK CORPORATION·
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
‘ 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: 001-08052
TORCHMARK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
3700 South Stonebridge Drive, McKinney, TX
(Address of principal executive offices)
63-0780404
(I.R.S. Employer
Identification No.)
75070
(Zip Code)
972-569-4000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $1.00 par value per share
Common Stock, $1.00 par value per share
CUSIP
891027104
891027104
Name of each exchange on
which registered
New York Stock Exchange
The International Stock Exchange, London, England
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ‘ No È
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 È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ‘
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 (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes È No ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer È
‘
Non-accelerated filer
(Do not check if a smaller reporting company)
‘
Accelerated filer
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 È
As of June 30, 2014,
the aggregate market value of
the registrant’s common stock held by non-affiliates of
the registrant was
$7,156,116,413 based on the closing sale price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Common Stock, $1.00 par value per share
Outstanding at February 13, 2015
127,107,471 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Proxy Statement for the Annual Meeting of Stockholders to be
held April 30, 2015 (Proxy Statement)
Parts Into Which Incorporated
Part III
TORCHMARK CORPORATION
INDEX
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5. Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10. Directors, Executive Officers, and Corporate Governance . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships
and Director
Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
and Related Transactions
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
1
6
12
12
13
13
14
16
17
52
53
108
108
108
111
111
111
111
111
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . .
112
PART I.
PART II.
PART III.
PART IV.
PART I
Item 1. Business
Torchmark Corporation (Torchmark) is an insurance holding company incorporated in Delaware in
1979. Its primary subsidiaries are American Income Life Insurance Company (American Income), Liberty
National Life Insurance Company (Liberty National), Globe Life And Accident
Insurance Company
(Globe), United American Insurance Company (United American), and Family Heritage Life Insurance
Company of America (Family Heritage).
Torchmark’s website is: www.torchmarkcorp.com. Torchmark makes available free of charge through
its website, its annual report on Form 10-K, its quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports as soon as reasonably practicable after they have been
electronically filed with or furnished to the Securities and Exchange Commission.
The following table presents Torchmark’s business by primary marketing distribution method.
Primary
Distribution Method
Company
American Income
Exclusive Agency
Direct Response
American Income Life
Insurance Company
Waco, Texas
Globe Life And Accident
Insurance Company
Oklahoma City, Oklahoma
Family Heritage
Exclusive Agency
Liberty National
Exclusive Agency
United American
Independent Agency
Family Heritage Life
Insurance Company of
America
Cleveland, Ohio
Liberty National Life
Insurance Company
McKinney, Texas
United American
Insurance Company
McKinney, Texas
Products and Target Markets
Distribution
Individual life and supplemental health
insurance marketed to union and credit
union members.
6,434 producing agents in
the U.S., Canada, and New
Zealand.
Individual life and supplemental health
insurance including juvenile and senior life
coverage, Medicare Supplement, and
Medicare Part D marketed to middle-
income Americans.
Direct mail, internet,
television, magazine;
nationwide.
Supplemental limited-benefit health
insurance to middle-income families.
785 captive agents in the
U.S.
Individual life and supplemental health
insurance marketed to middle-income
families.
Medicare Supplement and Medicare Part D
coverage to Medicare beneficiaries and, to
a lesser extent, supplemental limited-
benefit health coverage to people under
age 65.
1,498 producing agents in
the U.S.
3,161 independent
producing agents in the U.S.
Additional information concerning industry segments may be found in Management’s Discussion and
Analysis and in Note 14—Business Segments in the Notes to the Consolidated Financial Statements.
1
Life Insurance
Insurance
Torchmark’s insurance subsidiaries write a variety of nonparticipating ordinary life insurance
products. These include traditional and interest sensitive whole-life insurance, term life insurance, and
other life insurance. The following table presents selected information about Torchmark’s life products.
Annualized Premium in Force
(Amounts in thousands)
2013
2014
2012
Whole life:
Traditional . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,296,403 $1,235,904 $1,213,304
63,290
Interest-sensitive . . . . . . . . . . . . . . . . . . . . . . .
551,583
Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66,840
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54,490
619,782
73,870
58,549
591,628
69,320
$2,044,545 $1,955,401 $1,895,017
The distribution methods for life insurance products include sales by direct response, exclusive
agents and independent agents. These methods are described in more depth in the Distribution Method
chart earlier in this report. The following table presents life annualized premium in force by distribution
method.
Annualized Premium in Force
(Amounts in thousands)
2013
2012
2014
Direct response . . . . . . . . . . . . . . . . . . . . . . . . . . $ 721,261 $ 688,866 $ 659,026
Exclusive agents:
American Income . . . . . . . . . . . . . . . . . . . . . .
Liberty National . . . . . . . . . . . . . . . . . . . . . . . .
Independent agents:
United American . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
807,935
285,201
15,831
214,317
749,165
287,079
17,846
212,445
705,417
295,396
19,533
215,645
$2,044,545 $1,955,401 $1,895,017
Health Insurance
Torchmark offers supplemental limited-benefit health insurance products that include primarily cancer
and accident plans. These policies are designed to supplement health coverage that applicants already
own. Medicare Supplements are also offered to enrollees in the traditional fee-for-service Medicare
program. Medicare Supplement plans are standardized by federal regulation and are designed to pay
deductibles and co-payments not paid by Medicare. We also offer Medicare Part D prescription drug
insurance.
2
The following table presents supplemental health annualized premium in force information for the
three years ended December 31, 2014 by product category.
Annualized Premium in Force
(Amounts in thousands)
2013
2014
2012
Amount
$ 488,142
459,181
316,089
% of
Total
39
36
25
Amount
$ 435,788
451,656
322,763
% of
Total
36
37
27
Amount
$ 450,812
451,941
325,749
% of
Total
37
37
26
Medicare Supplement . . . . . . .
Limited-benefit plans . . . . . . . .
Medicare Part D . . . . . . . . . . . .
Total Health . . . . . . . . . . .
$1,263,412
100
$1,210,207
100
$1,228,502
100
The following table presents supplemental health annualized premium in force for the three years
ended December 31, 2014 by marketing (distribution) method.
Annualized Premium in Force
(Amounts in thousands)
2013
2014
2012
Direct response . . . . . . . . . . . . . . . . . . . . . . . . . . $
Exclusive agents:
Liberty National . . . . . . . . . . . . . . . . . . . . . . . .
American Income . . . . . . . . . . . . . . . . . . . . . .
Family Heritage . . . . . . . . . . . . . . . . . . . . . . . .
Independent agents:
United American . . . . . . . . . . . . . . . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . . . . . . . . . . . . .
72,659 $
55,270 $
60,206
226,599
71,942
217,742
358,381
947,323
316,089
240,581
71,354
201,054
319,185
887,444
322,763
259,452
73,280
187,979
321,836
902,753
325,749
$1,263,412 $1,210,207 $1,228,502
Annuities
Annuity products include single-premium and flexible-premium deferred annuities. Annuities in each
of the three years ending December 31, 2014 comprised less than 1% of premium.
Pricing
Premium rates for life and health insurance products are established using assumptions as to future
mortality, morbidity, persistency, and expenses. These assumptions are based on Company experience
and projected investment earnings. Revenues for individual
life and health insurance products are
primarily derived from premium income, and, to a lesser extent, through policy charges to the policyholder
account values on annuity products and certain individual
life products. Profitability is affected to the
extent actual experience deviates from the assumptions made in pricing and to the extent investment
income varies from that which is required for policy reserves.
Collections for annuity products and certain life products are not recognized as revenues but are
added to policyholder account values. Revenues from these products are derived from charges to the
account balances for insurance risk and administrative costs. Profits are earned to the extent these
revenues exceed actual costs. Profits are also earned from investment income on the deposits invested
in excess of the amounts credited to policyholder accounts.
3
Underwriting
The underwriting standards of each Torchmark insurance subsidiary are established by
management. Each subsidiary uses information from the application and, in some cases, telephone
interviews with applicants,
inspection reports, pharmacy data, doctors’ statements and/or medical
examinations to determine whether a policy should be issued in accordance with the application, with a
different rating, with a rider, with reduced coverage or rejected.
Reserves
The life insurance policy reserves reflected in Torchmark’s financial statements as future policy
benefits are calculated based on generally accepted accounting principles (GAAP). These reserves, with
premiums to be received in the future and the interest thereon compounded annually at assumed rates,
must be sufficient to cover policy and contract obligations as they mature. Generally, the mortality and
persistency assumptions used in the calculations of reserves are based on Company experience. Similar
reserves are held on most of the health policies written by Torchmark’s insurance subsidiaries, since
these policies generally are issued on a guaranteed-renewable basis. The assumptions used in the
calculation of Torchmark’s reserves are reported in Note 1—Significant Accounting Policies in the Notes
to Consolidated Financial Statements. Reserves for annuity products and certain life products consist of
the policyholders’ account values and are increased by policyholder deposits and interest credited and
are decreased by policy charges and benefit payments.
Investments
The nature, quality, and percentage mix of insurance company investments are regulated by state
laws. The investments of Torchmark insurance subsidiaries consist predominantly of high-quality,
investment-grade securities. Fixed maturities represented 97% of
fair value at
December 31, 2014. (See Note 4—Investments in the Notes to Consolidated Financial Statements and
Management’s Discussion and Analysis.)
investments at
total
Competition
Torchmark competes with other insurance carriers through policyholder service, price, product
design, and sales efforts. While there are insurance companies competing with Torchmark, no individual
company dominates any of Torchmark’s life or health markets.
Torchmark’s health insurance products compete with, in addition to the products of other health
insurance carriers, health maintenance organizations, preferred provider organizations, and other health
care-related institutions which provide medical benefits based on contractual agreements.
Management believes Torchmark companies operate at lower policy acquisition and administrative
expense levels than peer companies. This allows Torchmark to have competitive rates while maintaining
higher underwriting margins.
Regulation
Insurance.
Insurance companies are subject to regulation and supervision in the states in which
they do business. The laws of the various states establish agencies with broad administrative and
supervisory powers which include, among other things, granting and revoking licenses to transact
business, regulating trade practices, licensing agents, approving policy forms, approving certain premium
rates, setting minimum reserve and loss ratio requirements, determining the form and content of required
financial statements, and prescribing the type and amount of investments permitted. They are also
required to file detailed annual reports with supervisory agencies, and records of their business are
Insurance
subject
Commissioners (NAIC),
the
supervisory agencies.
insurance companies are examined periodically by one or more of
to examination at any time. Under
the National Association of
the rules of
4
Risk Based Capital. The NAIC requires a risk based capital formula be applied to all life and health
insurers. The risk based capital formula is a threshold formula rather than a target capital formula. It is
designed only to identify companies that require regulatory attention and is not to be used to rate or rank
companies that are adequately capitalized. All Torchmark insurance subsidiaries are more than
adequately capitalized under the risk based capital formula.
Guaranty Assessments. State guaranty laws provide for assessments from insurance companies to
be placed into a fund which is used, in the event of failure or insolvency of an insurance company, to fulfill
the obligations of that company to its policyholders. The amount which a company is assessed is based
on its proportional share of the premium in each state. Assessments are recoverable to a great extent as
offsets against state premium taxes.
Medicare Part D. The Medicare Part D program is regulated at the federal level by the Centers for
Medicare and Medicaid Services (CMS). This agency periodically examines Torchmark’s participating
subsidiaries.
Holding Company. States have enacted legislation requiring registration and periodic reporting by
insurance companies domiciled within their respective jurisdictions that control or are controlled by other
corporations so as to constitute a holding company system. Torchmark and its subsidiaries have
registered as a holding company system pursuant to such legislation in Indiana, Nebraska, Ohio, and
New York.
Insurance holding company system statutes and regulations impose various limitations on
investments in subsidiaries, and may require prior regulatory approval for material transactions between
insurers and affiliates and for the payment of certain dividends and other distributions.
At the end of 2014, Torchmark had 2,980 employees.
Personnel
5
Item 1A. Risk Factors
Risks Related to Our Business
Product Marketplace and Operational Risks:
The insurance industry is a regulated industry, populated by many firms. We operate in the life and
health insurance sectors of the insurance industry, each with its own set of risks.
The development and maintenance of our various distribution systems are critical to growth
in product sales and profits. Because our life and health insurance sales are primarily made to
individuals, rather than groups, and the face amounts sold are lower than that of policies sold in the
higher income market, the development, maintenance, and retention of adequate numbers of producing
agents and direct response systems to support growth of sales in this market are critical. Adequate
compensation that is competitive with other career opportunities and that also motivates producing agents
to increase sales is critical.
In direct response, continuous development of new offerings and cost
efficiency are key. Less than optimum execution of these strategies may result in reduced sales and
profits.
Economic conditions may materially adversely affect our business and results of operations.
We serve primarily the middle-income market for individual protection life and health insurance and, as a
result, we compete directly with alternative uses of a customer’s disposable income. If disposable income
within this demographic group declines or the use of disposable income becomes more limited, as a
result of a significant, sustained economic downturn or otherwise, then new sales of our insurance
products could become more challenging, and our policyholders may choose to defer paying insurance
premiums or stop paying insurance premiums altogether.
Variations in expected to actual rates of mortality, morbidity, and persistency could materially
negatively affect our results of operations and financial condition. We establish a liability for our
policy reserves to pay future policyholder benefits and claims. These reserves do not represent an exact
calculation of liability, but rather are actuarial estimates based on models that include many assumptions
and projections which are inherently uncertain. The reserve computations involve the exercise of
significant judgment with respect to levels of mortality, morbidity, and persistency as well as the timing of
premium and benefit payments. Even though our actuaries continually test expected-to-actual results,
actual levels that occur may differ significantly from the levels assumed when premium rates were first
set. Accordingly, we cannot determine with precision the ultimate amounts of claims or benefits that we
will pay or the timing of such payments. Significant variations from the levels assumed when policy
reserves are first set could negatively affect our profit margins and income.
A ratings downgrade or other negative action by a rating agency could materially affect our
business, financial condition and results of operations. Various rating agencies review the financial
performance and condition of insurers, including our insurance subsidiaries, and publish their financial
strength ratings as indicators of an insurer’s ability to meet policyholder and contract holder obligations.
These ratings are important to maintaining public confidence in our insurance products. A downgrade or
other negative action by a rating agency with respect to the financial strength ratings of our insurance
subsidiaries could negatively affect us in many ways, including the following: limiting or restricting the
ability of our insurance subsidiaries to pay dividends to us and adversely affecting our ability to sell
insurance products through our independent agencies.
Rating agencies also publish credit ratings for us. Credit ratings are indicators of a debt issuer’s
ability to meet the terms of debt obligations in a timely manner. These ratings are important to our overall
ability to access certain types of liquidity. Actual or anticipated downgrades in our credit ratings, or an
announcement that our ratings are under further review for a downgrade, could potentially have a
negative effect on our operations, by limiting our access to capital markets, increasing the cost of debt,
impairing our ability to raise capital to refinance maturing debt obligations, limiting our capacity to support
growth at our insurance subsidiaries, or making it more difficult to maintain or improve the current
financial strength ratings of our insurance subsidiaries.
6
Ratings reflect only the rating agency’s views and are not recommendations to buy, sell or hold our
securities. Rating agencies assign ratings based upon several factors. While most of the factors relate to
the rated company, some of the factors relate to the views of the rating agency, general economic
conditions and circumstances outside the rated company’s control. In addition, rating agencies use
various models and formulas to assess the strength of a rated company, and from time to time rating
agencies have, in their discretion, altered the models. Changes to the models could impact the rating
agencies’ judgment of the rating to be assigned to the rated company. There can be no assurance that
current credit ratings will remain in effect for any given period of time or that such ratings will not be
lowered, suspended or withdrawn entirely by the rating agencies, if in each rating agency’s judgment,
circumstances so warrant. We cannot predict what actions the rating agencies may take, or what actions
we may take in response to the actions of the rating agencies, which could negatively affect our business,
financial condition and results of operations.
Reputational Risk:
Damage to the reputation of Torchmark or its subsidiaries could affect our ability to conduct
business. Negative publicity published through traditional media, internet, social media, and other public
forums could damage our reputation and adversely impact our agent recruiting efforts, the ability to
market our products, and the persistency of our block of inforce policies.
Life Insurance Marketplace Risk:
Our life products are sold in selected niche markets. We are at risk should any of these
markets diminish. We have two life distribution channels that focus on distinct market niches: labor
union members and sales via direct response solicitation. Deterioration of our relationships with organized
labor or adverse changes in the public’s receptivity to unsolicited direct response marketing could
negatively affect this business.
Health Insurance Marketplace Risks:
The health insurance market is subject to substantial legislative scrutiny. Legislative changes
could impact our Medicare Supplement, Medicare Part D, and other supplemental health businesses. The
nature and timing of any such changes cannot be predicted and could have a material adverse effect on
that business.
Competition in the health market can be significant. Sales of our health insurance products are
subject to competition from other health insurance companies and alternative healthcare providers, such
as those that provide alternatives to traditional Medicare to seniors. In addition, some insurers may be
willing to significantly reduce their profit margins or under price new sales in order to gain market share.
We choose not
to compete for market share based on these terms. Accordingly, changes in the
competitive landscape, including the pricing strategies employed by our competitors, could negatively
impact the future sales of our health insurance products.
An inability to obtain timely and appropriate premium rate increases for the health insurance
policies we sell due to regulatory delay could adversely affect our results of operations and
financial condition. A significant percentage of the health insurance premiums that our insurance
subsidiaries earn is from Medicare Supplement insurance. Medicare Supplement insurance and the terms
under which the premiums for such policies may be increased are highly regulated at both the state and
federal level. As a result, it is characterized by lower profit margins than life insurance and requires strict
administrative discipline and economies of scale for success. Because Medicare Supplement policies are
coordinated with the federal Medicare program, which experiences health care inflation every year,
annual premium rate increases for the Medicare Supplement policies are necessary. Obtaining timely rate
increases is of critical importance to our success in this market. Accordingly, the inability of our insurance
subsidiaries to obtain approval of premium rate increases in a timely manner from state insurance
regulatory authorities in the future could adversely impact their profitability.
7
Investment Risks:
Our investments are subject to market and credit risks. Our invested assets are subject to the
customary risks of defaults, downgrades, and changes in market values. Substantially all of our
investment portfolio consists of fixed-maturity and short-term investments. A significant portion of our
individual
fixed-maturity investments is comprised of corporate bonds, exposing us to the risk that
corporate issuers will not have the ability to make required interest or principal payments on the
investment. Factors that may affect both market and credit risks include interest rate levels, financial
market performance, disruptions in credit markets, general economic conditions, legislative changes,
particular circumstances affecting the businesses or industries of each issuer, and other factors beyond
our control. Additionally, because the majority of our investments are longer-term fixed maturities that we
typically hold until maturity, significant increases in interest rates, widening of credit spreads, or inactive
markets associated with market downturns could cause a material temporary decline in the fair value of
our fixed investment portfolio, even with regard to performing assets. These declines could cause a
increase in unrealized losses in our investment portfolio. Significant unrealized losses can
material
substantially reduce our capital position and shareholders’ equity. It is possible that our investment in
certain of these securities with unrealized losses may experience a default event and that a portion or all
of that unrealized loss may not be recoverable. In that case, the unrealized loss will be realized, at which
point we would take an impairment charge, reducing our net income.
Difficulties in the business of particular issuers or in industries in which we hold investments
could cause significant downgrades, delinquencies and defaults in our investment portfolio,
potentially resulting in lower net investment income and increased realized and unrealized
investment losses. A default by an issuer could result in a significant other-than-temporary impairment
of that investment, causing us to write the investment down and take a charge against net income. The
risk of default is higher for bonds with longer-term maturities, which we acquire in order to match our long-
term insurance obligations. We attempt to reduce this risk by purchasing only investment grade securities
and by carefully evaluating an issuer before entering into an investment. We cannot be assured that any
particular issuer, regardless of industry, will be able to make required interest and principal payments, on
a timely basis or at all. Material other-than-temporary impairments could reduce our statutory surplus,
leading to lower risk-based capital ratios, potential downgrades of our ratings by rating agencies and a
potential reduction of future dividend capacity from our insurance subsidiaries. While we intend to hold
our investments until maturity, a severe increase in defaults could cause us to suffer a significant
decrease in investment income or principal repayments, resulting in substantial realized losses from the
writedowns of
income would be negatively impacted by the
writedowns, and prospective net income would be adversely impacted by the loss of future interest
income.
impaired investments. Current net
A decline in interest rates could negatively affect income. Declines in interest rates expose
insurance companies to the risk of not earning anticipated spreads between the interest rate earned on
investments and the discount rates used to calculate the net policy liabilities. While we attempt to manage
our investments to preserve the excess investment income spread, we provide no assurance that a
significant and persistent decline in interest rates will not materially affect such spreads. Significant
decreases in interest rates could result in calls by issuers of investments, where such features are
available to issuers. These calls could result in a decline in our investment income, as reinvestment of the
proceeds would likely be at lower rates.
Liquidity Risks:
Our liquidity to fund operations is substantially dependent on funds available, primarily
dividends, from our insurance subsidiaries. As a holding company with no direct operations, our
principal asset is the capital stock of our insurance subsidiaries, which periodically declare and distribute
dividends on their capital stock. Moreover, our liquidity, including our ability to pay our operating expenses
and to make principal and interest payments on debt securities or other indebtedness owed by us, as well
as our ability to pay dividends on our common stock or any preferred stock, depends significantly upon
the surplus and earnings of our insurance subsidiaries and the ability of these subsidiaries to pay
dividends or to advance or repay funds to us. Other sources of liquidity also include a variety of short-
term and long-term instruments,
long-term debt,
intercompany financing, and reinsurance.
facility, commercial paper,
including our credit
8
The principal sources of our insurance subsidiaries’
liquidity are insurance premiums, as well as
investment
income, maturities, repayments, and other cash flow from our investment portfolio. Our
insurance subsidiaries are subject to various state statutory and regulatory restrictions applicable to
insurance companies that limit the amount of cash dividends, loans, and advances that those subsidiaries
may pay to us, including laws establishing minimum solvency and liquidity thresholds. For example, in the
states where our companies are domiciled, an insurance company generally may pay dividends only out
of its unassigned surplus as reflected in its statutory financial statements filed in that state. Additionally,
dividends paid by insurance subsidiaries are generally limited to the greater of prior year statutory net
income, excluding capital gains, on an annual noncumulative basis or 10% of prior year statutory surplus
without regulatory approval. Accordingly, impairments in invested assets or a disruption in our insurance
subsidiaries’ operations that reduces their capital or cash flow could limit or disallow payment of dividends
to us, a principal source of our cash flow.
We can give no assurance that more stringent restrictions will not be adopted from time to time by
states in which our insurance subsidiaries are domiciled, which could, under certain circumstances,
significantly reduce dividends or other amounts paid to us by our subsidiaries. Although we do not
anticipate changes, changes in these laws could constrain the ability of our subsidiaries to pay dividends
or to advance or repay funds to us in sufficient amounts and at times necessary to meet our debt
obligations and corporate expenses. Additionally, the inability of our insurance subsidiaries to obtain
approval of premium rate increases in a timely manner from state insurance regulatory authorities could
adversely impact
their profitability, and thus their ability to declare and distribute dividends to us.
Limitations on the flow of dividends from our subsidiaries could limit our ability to service and repay debt
or to pay dividends on our capital stock.
Adverse capital and credit market conditions may significantly affect our ability to meet
liquidity needs or access capital, as well as affect our cost of capital. Should credit spreads widen
in the future, the interest rate on any new debt obligation we may issue could increase, and our net
income could be reduced. If the credit and capital markets were to experience significant disruption,
uncertainty, and instability, these conditions could adversely affect our access to capital. Such market
conditions may limit our ability to replace maturing liabilities (in a timely manner or at all) and/or access
the capital necessary to grow our business.
In the unlikely event that current resources do not satisfy our needs, we may have to seek additional
financing or raise capital. The availability of additional financing or capital will depend on a variety of
factors such as market conditions, the general availability of credit or capital, the volume of trading
activities, the overall availability of credit to the insurance industry, and our credit ratings and credit
capacity. Additionally, customers, lenders, or investors could develop a negative perception of our long-
or short-term financial prospects if we incur large investment losses or if the level of our business activity
decreases due to a market downturn. Our access to funds may also be impaired if regulatory authorities
or rating agencies take negative actions against us. Our internal sources of liquidity may prove to be
insufficient, and, in such case, we may not be able to successfully obtain additional financing on favorable
terms, or at all. As such, we may be forced to delay raising capital, issue shorter term securities than we
prefer, or bear an unattractive cost of capital which could decrease our profitability and significantly
reduce our financial flexibility. Therefore, as a result, our results of operations, financial condition, and
cash flows could be materially negatively affected by disruptions in the financial markets.
Regulatory Risks:
Insurance companies,
including our insurance subsidiaries, are subject
Our businesses are heavily regulated, and changes in regulation may reduce our profitability
and growth.
to extensive
supervision and regulation in the states in which we do business. The primary purpose of this supervision
and regulation is the protection of our policyholders, not our investors. State agencies have broad
administrative power over numerous aspects of our business, including premium rates and other terms
and conditions that we can include in the insurance policies offered by our insurance subsidiaries,
marketing practices, advertising, licensing agents, policy forms, capital adequacy, solvency, reserves, and
permitted investments. Also, regulatory authorities have relatively broad discretion to grant, renew, or
initiate procedures to revoke licenses or approvals. The insurance laws, regulations and policies currently
affecting Torchmark and its insurance subsidiaries may change at any time, possibly having an adverse
effect on our business. Should these changes to our business occur, we may be unable to maintain all
9
required licenses and approvals, and our business may not fully comply with the wide variety of applicable
laws and regulations or the relevant authority’s interpretation of the laws and regulations, which may
change from time to time. If we do not have the requisite licenses and approvals or do not comply with
applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily
suspend us from carrying on some or all of our activities or impose substantial fines.
We cannot predict the timing or substance of any future regulatory initiatives. In recent years, there
has been increased scrutiny of insurance companies, including our insurance subsidiaries, by insurance
regulatory authorities, which has included more extensive examinations and more detailed review of
disclosure documents. These regulatory authorities may bring regulatory or other legal actions against us
if, in their view, our practices, or those of our agents or employees, are improper. These actions can
result in substantial fines, penalties, or prohibitions or restrictions on our business activities and could
have a material adverse effect on our business, results of operations, or financial condition. Additionally,
changes in the overall
legal or regulatory environment may, even absent any particular regulatory
authority’s interpretation of an issue changing, cause us to change our views regarding the actions that
we need to take from a legal or regulatory risk management perspective, thus necessitating changes to
our practices that may, in some cases, limit our ability to grow, impact regulatory capital requirements, or
otherwise negatively impact the profitability of our business.
the U.S.
Currently,
federal government does not directly regulate the business of
insurance.
However,
the Dodd-Frank Wall Street Record and Consumer Protection Act of 2010 establishes a
Federal Insurance Office (FIO) within the Department of the Treasury, and the Patient Protection and
Affordable Care Act (Affordable Care Act) created the Center for Consumer Information and Insurance
Oversight (CCIIO), originally established under the Department of Health and Human Services and
subsequently transferred to the Centers for Medicare and Medicaid Services (CMS). The creation of
these insurance regulatory offices may indicate that the federal government intends to play a larger role in
the direct regulation of the insurance industry. We cannot predict what impact, if any, the FIO and CCIIO,
as well as any other proposals for federal regulation of insurance could have on our business, results of
operations, or financial condition. We also cannot predict what impact actions taken by CMS, as the
regulator of our Medicare Part D business, could have on our business, results of operations, or financial
condition.
Changes in U.S. federal income tax law could increase our tax costs. Changes to the Internal
Revenue Code, administrative rulings, or court decisions affecting the insurance industry, including the
products it offers, could increase our effective tax rate and lower our net income, or negatively effect our
ability to sell some of our products.
Changes in accounting standards issued by accounting standard-setting bodies may affect
our financial statements, reduce our reported profitability, and change the timing of profit
recognition. Our financial statements are subject to the application of accounting principles generally
accepted in the United States of America (GAAP), which principles are periodically revised and/or
expanded. Accordingly, from time to time, we are required to adopt new or revised accounting standards
or guidance issued by recognized authoritative bodies. It is possible that future accounting standards that
we are required to adopt could change the current accounting treatment that we apply to our consolidated
financial statements and that such changes could have a material adverse effect on our financial
condition and results of operations. Further, standard setters have a full agenda of unissued topics under
review at any given time, any of which have the potential to negatively impact our profitability.
If we fail to comply with restrictions on patient privacy and information security, including
taking steps to ensure that our business associates who obtain access to sensitive patient
information maintain its confidentiality, our reputation and business operations could be
materially adversely affected. The collection, maintenance, use, disclosure and disposal of individually
identifiable data by our insurance subsidiaries are regulated at the international, federal and state levels.
These laws and rules are subject to change by legislation or administrative or judicial
interpretation.
Various state laws address the use and disclosure of individually identifiable health data to the extent they
are more restrictive than those contained in the privacy and security provisions in the federal Gramm-
Leach-Bliley Act of 1999 (GLBA) and in the Health Insurance Portability and Accountability Act of 1996
(HIPAA). HIPAA also requires that we impose privacy and security requirements on our business
associates (as that term is defined in the HIPAA regulations). Noncompliance with any privacy laws or
10
any security breach involving the misappropriation, loss or other unauthorized disclosure of sensitive or
confidential
information, whether by us or by one of our business associates, could have a material
adverse effect on our business, reputation and results of operations and could include material fines and
penalties, various forms of damages, consent orders regarding our privacy and security practices,
adverse actions against our licenses to do business and injunctive relief.
Litigation Risk:
Litigation could result in substantial judgments against us or our subsidiaries. We are, and
in the future may be, subject to litigation in the ordinary course of business. Some of these proceedings
have been brought on behalf of various alleged classes of complainants, and, in certain of these matters,
the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages.
Members of our management and legal teams review litigation on a quarterly and annual basis. However,
the outcome of any such litigation cannot be predicted with certainty. A number of civil jury verdicts have
been returned against insurers in the jurisdictions in which Torchmark and its insurance subsidiaries do
business involving the insurers’ sales practices, alleged agent misconduct, failure to properly supervise
agents, and other matters. These lawsuits have resulted in the award of substantial judgments against
insurers that are disproportionate to the actual damages, including material amounts of punitive damages.
In some states in which we operate, juries have substantial discretion in awarding punitive damages. This
for unpredictable material adverse judgments in any given punitive
discretion creates the potential
damages suit.
Our pending and future litigation could adversely affect us because of the costs of defending these
cases, the costs of settlement or judgments against us, or changes in our operations that could result
from litigation. Substantial legal liability in these or future legal actions could also have a material financial
effect or cause significant harm to our reputation, which, in turn, could materially harm our business and
our business prospects.
Catastrophic Event Risk:
Our business is subject to the risk of the occurrence of catastrophic events. Our insurance
policies are issued to and held by a large number of policyholders throughout the United States in
relatively low-face amounts. Accordingly, it is unlikely that a large portion of our policyholder base would
be affected by a single natural disaster. However, our insurance operations could be exposed to the risk
of catastrophic mortality or morbidity, caused by events such as a pandemic, hurricane, earthquake, or
man-made catastrophes, including acts of terrorism or war, which may produce significant claims in larger
areas, especially those that are heavily populated. Claims resulting from natural or man-made
catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year
and could materially reduce our profitability or harm our financial condition.
Information Security and Technology Risk:
A network security breach, the introduction of malware in our computing environment, a
disaster, or other unanticipated event could affect the computer systems of Torchmark or its
subsidiaries, and could damage our business and adversely affect our financial condition and
results of operations. Despite our implementation of cyber security measures to protect our hardware,
software, data, and networks from attack, damage, or unauthorized access, our computing environment
could be subject to physical and electronic break-ins and similar disruptions from unauthorized tampering
with our systems.
We retain confidential information in our computer systems. Anyone who is able to circumvent our
cyber security measures and penetrate our computer systems could access, view, misappropriate, alter
or delete information in the systems, including personally identifiable customer information and proprietary
business information. In addition, an increasing number of states require that customers be notified of
unauthorized access, use, or disclosure of their information. Any compromise of the security of our
computer systems that results in an inappropriate access, use, or disclosure of personally identifiable
customer information could damage our reputation in the marketplace, deter people from purchasing our
products, subject us to significant civil and criminal liability, and require us to incur significant technical,
legal and other expenses.
11
In the event of a disaster, such as a natural catastrophe, an industrial accident, a blackout, or
a terrorist attack or war, our computer systems may be inaccessible to our employees or
customers for a period of time. Even if our employees are able to report to work, they may be unable to
perform their duties for an extended period of time if our data or systems are disabled or destroyed and if
existing contingency plans cannot function as designed.
Item 1B. Unresolved Staff Comments
As of December 31, 2014, Torchmark had no unresolved staff comments.
Item 2. Properties
Torchmark, through its subsidiaries, owns or leases buildings that are used in the normal course of
business. Torchmark owns and occupies a 300,000 square foot facility in McKinney, Texas (a north
Dallas suburb). This facility is Torchmark’s corporate headquarters and also houses the operations of a
subsidiary, United American, as well as the operations of other subsidiaries. In addition, United American
leases 5,000 square feet of space in Omaha, Nebraska and, through a subsidiary, leases 2,500 square
feet in an office area in Syracuse, New York.
Liberty National, though headquartered in McKinney, Texas, operates its main activities out of a
24,000 square foot facility leased in Hoover, Alabama (a Birmingham suburb). An 8,000 square foot
facility is leased for storage in Pelham, Alabama, close to the Hoover facility.
Globe leases a 30,300 square foot office area in the City Place Tower building located in downtown
Oklahoma City, Oklahoma. Globe also leases 11,000 square feet at a nearby facility used for storage.
Globe Marketing Services, a subsidiary of Globe, owns a 133,000 square foot facility in Oklahoma City
which houses the Globe direct response operation.
American Income owns and is the sole occupant of an office building located in Waco, Texas. The
two-floored building contains 70,000 square feet. American Income also has leased 8,100 square feet in a
from the main office building. American Income Marketing Services, a
building across the street
subsidiary of American Income, owns a 43,000 square foot facility located in Waco, Texas, housing
American Income’s direct response operation. American Income also leases office space throughout the
United States to support its marketing operations.
Family Heritage owns 50% of a partnership that owns an approximate 66,000 square foot building in
Broadview Heights, Ohio (a suburb of Cleveland), serving as Family Heritage’s headquarters. The
partnership also leases a portion of the building to unrelated tenants.
12
Item 3. 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.
As previously reported, 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-seven 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. Amounts that could be payable to insurance beneficiaries
and to the states for the escheatment of abandoned property represent insurance liabilities and are
included in the Company’s estimate of policy benefits under the caption “Total policy liabilities” on the
Consolidated Balance Sheets. No estimate of range can be made for loss contingencies related to
possible administrative penalties or amounts that could be payable to the states for the escheatment of
abandoned property at this time.
Item 4. Mine Safety Disclosures.
Not Applicable.
13
Item 5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
(a) Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters
The principal market in which Torchmark’s common stock is traded is the New York Stock Exchange.
There were 2,996 shareholders of record on December 31, 2014, excluding shareholder accounts held in
nominee form. The market prices and cash dividends paid by calendar quarter for the past two years are
presented in the following table. Per share amounts have been retrospectively adjusted for the three-for-
two stock split effective July 1, 2014.
Quarter
1
2
3
4
Year-end closing price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $54.17
Quarter
1
2
3
4
2014
Market Price
Low
High
$53.51 $48.37
50.97
52.37
50.32
55.07
55.68
55.42
Dividends
Per Share
$.1133
.1267
.1267
.1267
2013
Market Price
Low
High
$39.87 $35.03
38.76
43.89
47.11
43.81
48.65
52.35
Dividends
Per Share
$.1000
.1133
.1133
.1133
Year-end closing price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52.10
(c) Purchases of Certain Equity Securities by the Issuer and Others for the Fourth Quarter 2014
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
October 1-31, 2014 . . . . . . . . . . .
November 1-30, 2014 . . . . . . . . .
December 1-31, 2014 . . . . . . . . .
811,046
607,000
608,448
$52.02
53.45
53.55
811,046
607,000
608,448
On August 6, 2014, Torchmark’s Board reaffirmed its continued authorization of the Company’s stock
in consultation with the Board,
repurchase program in amounts and with timing that management,
determined to be in the best interest of the Company. The program has no defined expiration date or
maximum shares to be purchased.
14
(e) Performance Graph
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Torchmark Corporation, the S&P 500 Index, and the S&P Life & Health Insurance Index
$350
$300
$250
$200
$150
$100
$50
$0
12/09
12/10
12/11
12/12
12/13
12/14
Torchmark Corporation
S&P 500
S&P Life & Health Insurance
* $100 invested on 12/31/09 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2015 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
The line graph shown above compares Torchmark’s cumulative total return on its common stock with
the cumulative total returns of the Standard and Poor’s 500 Stock Index (S&P 500) and the Standard and
Poor’s Life & Health Insurance Index (S&P Life & Health Insurance). Torchmark is one of the companies
whose stock is included within both the S&P 500 and the S&P Life & Health Insurance Index.
15
Item 6. Selected Financial Data
The following information should be read in conjunction with Torchmark’s Consolidated Financial
Statements and related notes reported elsewhere in this Form 10-K:
(Amounts in thousands except per share and percentage data)
Year ended December 31,
2014
2013
2012
2011
2010
Premium revenue:
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,966,300 $ 1,885,332 $ 1,808,524 $ 1,726,244 $ 1,663,699
987,421
Health . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
638
2,651,758
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
676,364
Net investment income . . . . . . . . . . . . . . . .
37,340
Realized investment gains (losses) . . . . . .
3,367,632
Total revenue . . . . . . . . . . . . . . . . . . . . . . .
504,095
Income from continuing operations . . . . . .
Income from discontinued operations . . . .
29,784
(35,013)
Loss on disposal, net of tax . . . . . . . . . . . .
498,866
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Per common share:
Basic earnings:
929,466
608
2,656,318
693,028
25,904
3,377,401
497,616
0
(455)
497,161
1,047,379
559
2,856,462
693,644
37,833
3,589,516
529,324
0
0
529,324
1,242,720
400
3,209,420
729,207
23,548
3,964,296
542,939
0
0
542,939
1,166,410
532
3,052,274
709,743
7,990
3,771,938
528,472
0
0
528,472
Income from continuing operations(4) .
Income (loss) from discontinued
operations(4) . . . . . . . . . . . . . . . . . . .
Net income(4)
. . . . . . . . . . . . . . . . . .
Diluted earnings:
Income from continuing operations(4) .
Income (loss) from discontinued
operations(4) . . . . . . . . . . . . . . . . . . .
Net income(4)
. . . . . . . . . . . . . . . . . .
Cash dividends declared(4) . . . . . . . . . . .
Cash dividends paid(4)
. . . . . . . . . . . . . .
Basic average shares outstanding(4) . . . . .
Diluted average shares outstanding(4) . . . .
4.15
0.00
4.15
4.09
0.00
4.09
0.51
0.49
130,722
132,640
3.84
0.00
3.84
3.79
0.00
3.79
0.45
0.44
137,647
139,564
3.65
0.00
3.65
3.60
0.00
3.60
0.40
0.38
144,921
146,848
3.06
0.00
3.06
3.02
0.00
3.02
0.31
0.30
162,417
164,723
2.75
(0.02)
2.73
2.73
(0.03)
2.70
0.27
0.27
183,014
184,685
As of December 31,
2014
2013
2012
2011
2010
Cash and invested assets(1) . . . . . . . . . . . . $15,058,996 $13,456,944 $14,155,919 $ 12,437,699 $11,563,656
Total assets(1)
15,622,973
. . . . . . . . . . . . . . . . . . . . . . .
198,875
Short-term debt . . . . . . . . . . . . . . . . . . . . . .
Long-term debt(2) . . . . . . . . . . . . . . . . . . . . .
913,354
3,667,329
Shareholders’ equity . . . . . . . . . . . . . . . . . .
20.24
. . . . . . . . . . . . . . . . .
16,588,272
224,842
914,282
3,859,631
25.27
20,214,730
238,398
992,130
4,697,466
36.19
18,191,744
229,070
990,865
3,776,342
27.66
18,776,910
319,043
989,686
4,361,786
30.56
Per diluted share(4)
Effect of fixed maturity revaluation on
diluted equity per share(3,4) . . . . . . . . .
8.28
1.81
7.07
3.96
0.37
Annualized premium in force:
Life(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic shares outstanding(4)
. . . . . . . . . . . .
Diluted shares outstanding(4) . . . . . . . . . . .
2,044,545
1,263,412
3,307,957
127,930
129,812
1,955,401
1,210,207
3,165,608
134,252
136,537
1,895,017
1,228,502
3,123,519
141,353
142,707
1,813,705
1,016,393
2,830,098
150,869
152,712
1,753,046
973,625
2,726,671
178,297
181,222
(1) At December 31, 2012, cash and invested assets included $615 million, total assets included $869 million, annualized life
premium in force included $949 thousand, and annualized health premium in force included $188 million, representing the
business acquired in the acquisition of Family Heritage in 2012.
Includes Torchmark’s 7.1% Junior Subordinated Debentures reported as “Due to affiliates” on the Consolidated Balance Sheets
at year ends 2010 through 2011 in the amount of $123.7 million.
(2)
(3) There is an accounting rule (ASC 320-10-35-1) requiring available-for-sale fixed maturities to be revalued at fair value each
period. The effect of this rule on diluted equity per share reflects the amount added or (deducted) under this rule to produce
GAAP Shareholders’ equity per share. Please see the explanation and discussion under the caption Capital Resources in
Management’s Discussion and Analysis in this report concerning the effect this rule has on Torchmark’s equity.
(4) Outstanding shares and per share amounts have been retrospectively adjusted for the three-for-two-stock split effective July 1,
2014.
16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Selected Financial Data and
Torchmark’s Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.
RESULTS OF OPERATIONS
to middle income households throughout
How Torchmark Views Its Operations: Torchmark is the holding company for a group of
insurance companies which market primarily individual life and supplemental health insurance, and to a
limited extent annuities,
the United States. We view our
operations by segments, which are the insurance product lines of life, health, Medicare Part D, and
annuities, and the investment segment that supports the product lines. Segments are aligned based on
their common characteristics, comparability of the profit margins, and management techniques used to
operate each segment. As described in Note 14—Business Segments in the Notes to Consolidated
Financial Statements, we reorganized our segment structure to separate our Medicare Part D health
insurance business from our other health insurance activities as a stand-alone segment, because
management determined that Part D meets the criteria of a distinct segment under accounting guidance.
Prior period results have been retrospectively adjusted for comparability.
Insurance Product Line Segments. As fully explained in Note 14, the insurance product line
segments involve the marketing, underwriting, and the administration of policies. Each product line is
further segmented by the various distribution units that market the insurance policies. Each distribution
unit operates in a niche market offering insurance products designed for that particular market. Whether
analyzing profitability of a segment as a whole, or the individual distribution units within the segment, the
measure of profitability used by management is the underwriting margin, which is:
Premium revenue
Less:
Policy obligations
Policy acquisition costs and commissions
Investment Segment. The investment segment involves the management of our capital resources,
including investments and the management of corporate debt and liquidity. Our measure of profitability for
the investment segment is excess investment income, which is:
Net investment income
Less:
Required interest on net policy liabilities
Financing costs
line items for each of
The tables in Note 14 reconcile Torchmark’s revenues and expenses by segment to its major income
statement
the years in the three-year period ending December 31, 2014.
Additionally, this Note provides a summary of the profitability measures that demonstrates year-to-year
comparability and which reconciles to net
income. That summary is reproduced below from the
Consolidated Financial Statements to present our overall operations in the manner that we use to
manage the business.
Acquisition: On November 1, 2012, we acquired Family Heritage, a previously privately-held
supplemental health insurance carrier.
this acquisition can be found in Note 6—
Acquisition in the Notes to Consolidated Financial Statements. The results of Family Heritage subsequent
to our acquisition are included in this discussion within our health insurance segment.
Information about
17
Analysis of Profitability by Segment
(Dollar amounts in thousands)
2014
2013
2012
Change %
Change %
2014
2013
Life insurance underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . . . $ 556,489 $ 545,059 $ 509,476 $11,430
2,812
Health insurance underwriting margin* . . . . . . . . . . . . . . . . . . . . . .
(8,034)
Medicare Part D underwriting margin* . . . . . . . . . . . . . . . . . . . . . . .
373
Annuity underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,265
Other insurance:
196,507
35,300
3,939
218,826
163,984
33,357
3,465
236,644
199,319
27,266
4,312
225,091
2 $ 35,583
1
(23)
9
3
7
32,523 20
6
474 14
(8)
(17,818)
1,943
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,354
(179,955)
(40,362)
2,208
(178,898)
(34,137)
1,898
(165,405)
(29,827)
7
146
(1,057)
1
(6,225) 18
(13,493)
310 16
8
(4,310) 14
Pre-tax total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
794,514
(260,046)
788,804
(258,137)
753,592
(246,945)
5,710
(1,909)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains (losses)—investments (after tax)** . . . . . . . . . . . . .
Acquisition expense—Family Heritage (after tax) . . . . . . . . . . . . . .
Family Heritage acquisition finalization adjustments (after tax) . . .
Legal settlement expenses (after tax)
. . . . . . . . . . . . . . . . . . . . . . .
Guaranty Fund assessment (after tax) . . . . . . . . . . . . . . . . . . . . . . .
Administrative settlements (after tax) . . . . . . . . . . . . . . . . . . . . . . . .
534,468
15,306
0
0
(1,519)
0
(5,316)
530,667
3,965
0
522
(5,931)
(751)
0
506,647
24,591
(1,914)
0
0
0
0
3,801
11,341
0
(522)
4,412
751
(5,316)
1
1
1
5
5
5
35,212
(11,192)
24,020
(20,626)
1,914
522
(5,931)
(751)
0
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 542,939 $ 528,472 $ 529,324 $14,467
3 $ (852)
0
* Retrospectively adjusted to give effect to the reorganization of segments described in Note 14 in the Notes to Consolidated
Financial Statements.
** See the discussion of Realized Gains and Losses in this report.
Torchmark’s operations on a segment-by-segment basis are discussed in depth under
the
appropriate captions following in this report.
Summary of Operations: Net income was $543 million in 2014, compared with $528 million in
2013. Net income declined slightly in 2013 from $529 million in 2012. On a diluted per share basis, 2014
net income rose 8% to $4.09 after a 5% increase in 2013. Net income per diluted share in 2013 rose to
$3.79 from $3.60 in 2012. The per-share results have exceeded the growth in dollar amounts due to our
share repurchase program. Also, each year’s per share net income was affected by realized investment
gains, which were $0.12, $0.03, and $0.17 in 2014, 2013 and 2012, respectively. More information
concerning realized investment gains and losses can be found under the caption Realized Gains and
Losses in this report where there is a more complete discussion. Also, as explained in Note 14—Business
Segments in the Notes to the Consolidated Financial Statements, we do not consider realized gains and
losses to be a component of our core insurance operations or operating segments. Additionally, we do not
consider non-operating items which are not related to the current ongoing reporting performance of our
segments as indicated in the chart above to be part of our segment operating income.
As shown in the above chart, after-tax segment results of operations rose each year over the prior
year from $507 million in 2012 to $531 million in 2013 to $534 million in 2014. The primary contributor to
the growth in both 2014 and 2013 was the underwriting margin in our life insurance segment, in which
margins rose $11 million in 2014 and $36 million in 2013. The life insurance segment is our strongest
segment and is the largest contributor to earnings in each year presented. Also contributing to growth in
income in both years was our health insurance segment, which provided $3 million of additional margin in
2014 and $33 million in 2013. The 2013 larger increase in health margin was primarily due to the
inclusion of Family Heritage’s health business for a full year since its acquisition in late 2012. Family
Heritage accounted for $32 million of the increase in 2013 margin. Margins for the Medicare Part D
segment declined 23% in 2014 to $27 million, primarily due to two costly Hepatitis C drugs which were not
required to be covered until well after our 2014 pricing was finalized, as discussed more fully later in this
report.
Excess investment income, the measure of profitability of our investment segment, increased to $225
million or 3% over the prior year amount of $219 million. This was the first time in four years the dollar
18
amount of excess investment income exceeded the prior year’s amount. In 2013, excess investment
income declined 8%. Although interest rates rebounded slightly during the first half of 2014, the low
interest rate environment continued to pressure investment yields and spreads related to required interest
on net policy liabilities throughout
income has also been
hampered by a lag in government reimbursement of Medicare Part D costs. The effects of the low-
interest-rate environment and the impact of the Part D business on investment income is discussed more
fully later in this report under the caption Investments.
the three-year period. Excess investment
The inclusion of Family Heritage’s administrative expenses for a full year for the first time added $8
million of additional administrative expense in 2013. In addition, in both 2014 and 2013, there were
increases in stock compensation expense which negatively affected the results during the year. Stock
compensation increased $7 million in 2014 and $4 million in 2013. These increases in stock
compensation expense resulted primarily from the increase in the value of Torchmark’s stock rather than
an increase in the number of grants.
Total revenues rose 5% in 2014 to $3.96 billion, after having risen 5% in 2013 to $3.77 billion. Life
premium rose 4% or $81 million in 2014 to $1.97 billion. Life premium increased $77 million in 2013 to
$1.89 billion. Net investment income rose $16 million in 2013, and rose 3% or $19 million in 2014. Health
premium increased 7% to $1.24 billion in 2014 and contributed $76 million to 2014 revenue growth, after
having gained 11% to $1.17 billion in 2013. Health premium contributed $119 million to 2013 revenue
growth.
Life insurance premium and underwriting margins have grown steadily in each of the three years
ending December 31. The increase in life premium was driven by sales growth and improvements in
persistency. While premium and underwriting margins grew, margin as a percent of premium fell slightly
in 2014 to 28%, after increasing from 28% to 29% from 2012 to 2013. These fluctuations were due
primarily to changes in mortality. Net life sales increased 12% in 2014 to $378 million after decreasing 1%
in 2013. The life insurance segment is discussed further in this report under the caption Life Insurance.
With regard to health insurance, we primarily market Medicare Supplement insurance, other limited-
benefit products including cancer, and accident and health products. As noted earlier, 2013 and 2014
health premiums were positively affected by the inclusion of Family Heritage’s health premium for the full
years. The inclusion of Family Heritage also caused our limited-benefit health premium, which is their
primary focus, to exceed our Medicare Supplement premium in 2013 for the first time in several years.
Prior to 2013, Medicare Supplement was our largest contributor to total health premium. Limited-benefit
health continued to exceed Medicare Supplement in 2014. Limited-benefit health premium was $446
million in 2014, compared with $447 million in 2013. Limited-benefit premium increased 50% over 2012
limited-benefit health premium of $298 million, a result of the inclusion of Family Heritage’s business.
Medicare Supplement premium was $423 million in 2014, increasing over the prior year’s premium for the
first time in many years, as lapses exceeded new sales in prior year periods. Medicare Supplement
premium was $417 million in 2013 and $432 million in 2012. The increase in 2014 premium resulted from
sales in 2014 to certain large groups. Health margins have remained somewhat stable as a percentage of
premium throughout the three-year period. See the discussion under Health Insurance for a more detailed
discussion of health insurance results.
We also market Medicare Part D prescription drug insurance. Our Medicare Part D premium rose 16%
in 2014 to $348 million, compared with $300 million in 2013 and $318 million in 2012. The higher
premiums in both 2014 and 2012 were due to higher levels of low-income auto-enrollees in our plans for
those years. Due to increased competition in the 2013 plan year, we experienced a decrease in 2013 Part
D premium. Medicare Part D margins were negatively impacted in 2014, however, by several factors,
including two high cost Hepatitis C drugs, the coverage of which was mandated by the Center for Medicare
and Medicaid Services (CMS) in early 2014, well after our 2014 pricing was finalized, new taxes under the
Affordable Care Act, and other higher drug costs due to rebate restructuring. As a percentage of premium,
margins fell from 12% in 2013 to 8% in 2014. For the 2015 plan year, we will have a significantly lower
number of auto-enrollees which should reduce our exposure to Hepatitis C drug claims, because
approximately 85% of these claims in 2014 were related to auto-enrollees. For more information on our
Medicare Part D business, please refer to our discussion under the caption Medicare Part D.
19
We do not currently market annuities. See the caption Annuities for discussion of the Annuity
segment.
investment
The investment segment’s pretax profitability, or excess investment income, is based on three major
components: net
income, required interest on net policy liabilities (interest applicable to
insurance products), and financing costs. In 2014, net investment income rose 3%, compared with 2% in
2013. As we view our segments, net investment income rose 3% in both periods. At the same time, our
investment portfolio grew 3% and 9% in 2014 and 2013, respectively. In recent years, net investment
income has not grown as fast as the portfolio. One reason that investment income has grown at a lower rate
than mean invested assets has grown in recent years is that new investments have been made at yield
rates lower than the yield rates earned on securities that matured or were otherwise disposed of. Also, there
is sometimes a lag between the time when proceeds from maturities and dispositions are received and
when the proceeds are reinvested, during which the funds are held in cash. Growth in total investment
income is also somewhat negatively affected by Torchmark’s share repurchase program (described later
under this caption), which has diverted cash that could have otherwise been used to acquire investments. In
2014, net investment income was negatively impacted by events affecting our Medicare Part D business.
Under the program, we are required to cover certain claim costs in the current period that are the federal
government’s responsibility, but are not reimbursed until
late in the next calendar year. This delay in
reimbursement substantially reduced our funds available for investment in 2014, with the result of reduced
investment income in 2014 and 2015.
The interest required on net policy liabilities is deducted from net investment income, and generally
grows in conjunction with the net policy liabilities that are supported by the invested assets. The lower new-
money yields resulting from the low-interest-rate environment noted above have compressed excess
investment income as required interest has continued to grow at approximately the same rate that net policy
liabilities have grown. We have implemented certain strategies to offset this effect, including increasing
premium rates on sales of new products as discussed under the caption Investments. Financing costs,
which consist of the interest required for debt service on our long and short-term debt, are also deducted
from net investment income. Financing costs in 2013 were stable at $80 million, but declined 5% in 2014.
The 2014 decline resulted from the maturity and repayment in 2013 of our $94.5 million principal amount
7 3⁄ 8% Notes.
Torchmark’s current investment policy regarding fixed maturities limits new fixed maturity acquisitions
to investment-grade securities generally with longer maturities (often exceeding twenty years) that meet
our quality and yield objectives. Approximately 97% of our invested assets at fair value consist of fixed
maturities of which 96% were investment grade at December 31, 2014. The average quality rating of the
portfolio was A-. The portfolio contains no securities backed by sub prime or Alt-A mortgages, no direct
investment in residential mortgages, no counterparty risks, no credit default swaps, or other derivative
contracts. See the analysis of excess investment income and investment activities under the caption
Investments in this report and Note 4—Investments in the Notes to Consolidated Statements of
Operations for a more detailed discussion of this segment.
In 2012 and 2013, we engaged in a debt restructuring program which resulted in a reduction in
financing costs. We issued two new debt offerings during 2012: our $300 million principal amount 3.8%
Senior Notes due 2022 and our $125 million principal amount 5.875% Junior Subordinated Debentures
due 2052, both issued in September. Proceeds from the Senior Notes were $297 million, but $150 million
were purchased by our insurance subsidiaries and were eliminated in consolidation. Proceeds from this
offering provided funding for the retirement of our 7 3⁄ 8% Senior Notes, which matured and were repaid in
August, 2013, and for the acquisition of Family Heritage in November, 2012. The $121 million net
proceeds from the Subordinated Debentures were used to fund the call of our $120 million principal
amount 7.1% Trust Originated Preferred Securities in October, 2012. More information on these
transactions can be found in Note 6—Acquisition and Note 11—Debt in the Notes to Consolidated
Financial Statements and in our discussion of Capital Resources in this report.
In each of the years 2012 through 2014, net income was affected by certain significant, unusual, and
nonrecurring nonoperating items. We do not view these items as components of core operating results
because they are not indicative of past performance or future prospects of the insurance operations. As
reported in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial Statements
20
under the caption Settlements, we were involved in certain issues in which we incurred settlement losses
and expenses. In connection with the 2012 purchase of Family Heritage, as described in Note 6—
Acquisition, we incurred $2.9 million of acquisition-related expenses ($1.9 million after tax). During 2013,
Torchmark incurred a state guaranty fund assessment in the amount of $1.2 million ($751 thousand after
tax), resulting from events in years prior to 2012. Also in 2013, we resolved a legal matter related to a
non-insurance issue in the amount of $500 thousand ($325 thousand after tax), and settled additional
litigation related to prior years in the amount of $8.6 million ($5.6 million after tax). During 2014,
Torchmark accrued for certain litigation matters in the net amount of $3.7 million ($2.4 million after tax)
that were not directly related to its insurance operations. Additionally, Torchmark received $1.3 million
($853 thousand after tax) in settlement of litigation regarding investments. Also in 2014, the Company
recorded $8.2 million in administrative settlements ($5.3 million after tax) related to benefits paid for
deaths occurring in prior years where claims were not filed. All of these items have been expensed in the
Consolidated Statements of Operations. However, as described in Note 1, we remove items such as
these that relate to prior periods or are non-operating items when evaluating the results of current
operations, and therefore exclude such matters from our segment analysis for current periods.
Torchmark has in place an ongoing share repurchase program which began in 1986. With no
specified authorization amount, we determine the amount of repurchases based on the amount of the
Company’s excess cash flow, general market conditions, and other alternative uses. The majority of these
purchases are made from excess operating cash flow. Additionally, when stock options are exercised,
proceeds from these exercises and the tax benefit are used to repurchase additional shares on the open
market to minimize dilution as a result of the option exercises. The Board of Directors has authorized 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 and its shareholders. The following chart
summarizes share purchase activity for each of the three years ended December 31, 2014.
Analysis of Share Purchases
(Amounts in thousands)
Purchases
2014
2013*
2012*
Shares
Amount
Shares
Amount
Shares
Amount
Excess cash flow and borrowings . . . . . . . . . . . . . . . . .
Option proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,155
1,394
$375,042
74,266
8,280 $360,001 11,219 $360,490
209,675
2,789
122,263
6,438
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,549
$449,308 11,069 $482,264 17,657 $570,165
*
Share purchases for the years 2013 and 2012 have been retrospectively adjusted for the three-for-two stock split effective
July 1, 2014.
Option proceeds were unusually high in 2012 due to option holders exercising several years of option
grants that expired in 2012.
Throughout the remainder of this discussion, share purchases refer only to those made from excess
cash flow and borrowings.
A discussion of each of Torchmark’s segments follows. The following discussions are presented in
the manner we view our operations, as described in Note 14—Business Segments.
21
Life Insurance. Life insurance is our
insurance segment, with 2014 life premium
largest
representing 62% of total premium. Life underwriting income before other income and administrative
expense represented 71% of the total in 2014. Additionally, investments supporting the reserves for life
products produce the majority of excess investment income attributable to the investment segment.
Life insurance premium rose 4% to $1.97 billion in 2014 after having increased 4% in 2013 to
$1.89 billion. Life insurance products are marketed through several distribution channels. Premium
income by channel for each of the last three years is as follows:
LIFE INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
American Income Exclusive Agency . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . . . . . . .
Liberty National Exclusive Agency . . . . . . . . .
Other Agencies . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
2012
Amount
$ 766,458
702,023
272,265
225,554
% of
Total
Amount
% of
Total
Amount
39% $ 715,366
663,544
36
275,980
14
230,442
11
38% $ 663,696
630,111
35
281,723
15
232,994
12
% of
Total
37%
35
15
13
$1,966,300
100% $1,885,332
100% $1,808,524
100%
We use three statistical measures as indicators of premium growth and sales over the near term:
“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
annualized premium issued, net of cancellations in the first thirty days after issue, except in the case of
Direct Response where net sales is annualized premium issued at the time the first full premium is paid
after any introductory offer period has expired. We believe that net sales is a superior indicator of the rate
of premium growth relative to annualized premium issued. First-year collected premium is defined as 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 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.
Annualized life premium in force was $2.04 billion at December 31, 2014, an increase of 5% over
$1.96 billion a year earlier. Annualized life premium in force was $1.90 billion at December 31, 2012.
The following table shows net sales information for each of the last three years by distribution method.
LIFE INSURANCE
Net Sales by Distribution Method
(Dollar amounts in thousands)
American Income Exclusive Agency . . . . . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liberty National Exclusive Agency . . . . . . . . . . . . . . .
Other Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
2012
Amount
$172,271
158,089
34,402
13,492
% of
Total
Amount
% of
Total
Amount
% of
Total
45% $152,646
144,363
42
31,050
9
11,000
4
45% $158,609
140,928
43
32,296
9
11,331
3
46%
41
10
3
$378,254
100% $339,059
100% $343,164
100%
22
The table below discloses first-year collected life premium by distribution channel.
LIFE INSURANCE
First-Year Collected Premium by Distribution Method
(Dollar amounts in thousands)
American Income Exclusive Agency . . . . . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liberty National Exclusive Agency . . . . . . . . . . . . . . .
Other Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
2012
Amount
$134,202
100,287
25,777
10,473
% of
Total
Amount
% of
Total
Amount
% of
Total
50% $127,978
93,089
37
25,580
9
9,962
4
50% $126,223
93,374
36
26,533
10
9,660
4
49%
37
10
4
$270,739
100% $256,609
100% $255,790
100%
The American Income Exclusive Agency has historically focused primarily on marketing to
members of labor unions. While the labor union market is still the backbone of American Income’s
business, the agency has diversified in recent years by focusing heavily on other affinity groups and
referrals to help to ensure sustainable growth. It is Torchmark’s highest margin business. The American
Income Agency was also the largest contributor to life premium and net sales of any Torchmark
distribution method in 2014. Life premium for this agency rose 7% to $766 million, after having risen 8%
in 2013. Net sales rose 13% in 2014 to $172 million, after having declined 4% in 2013. Net sales rose
12% in 2012. The average face amount of policies issued in 2014 was approximately $30 thousand. As is
the case with all of Torchmark’s agency distribution systems, continued increases in product sales are
largely dependent on increases in agent count. The American Income agent count was 6,434 at
December 31, 2014 compared with 5,302 a year earlier, an increase of 21%. The agent count increased
2% in 2013 and 18% in 2012. The average agent count for 2014 was 5,868. The average agent count is
based on the actual count at the end of each week during the year. Management’s primary objective is to
grow middle management in the agency to help ensure sustainable growth. This is being achieved
through an increased emphasis on agent training programs and financial incentives that appropriately
reward agents at all levels for helping develop and train personnel. We have also begun providing 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 responsibilities. We believe that
these initiatives will continue to promote
enthusiasm in the field and will drive increases in agent retention and sales activity.
The 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 Direct Response Unit’s growth 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.
While the juvenile market is an important source of sales, it also is a vehicle to reach the parents and
grandparents of the juvenile policyholders, who are more likely to respond favorably to a Direct Response
solicitation for life coverage on themselves than is the general adult population. Also, both the juvenile
policyholders and their parents are low acquisition-cost targets for sales of additional coverage over time.
The Direct Response operation accounted for 36% of our life insurance premium during 2014,
increasing 6% over 2013 premium. Life premium for this unit rose 5% in 2013 and 6% in 2012. Net sales
rose 10% to $158 million in 2014 after a 2% increase in 2013, due to growth in electronic media activity.
First-year collected premium increased 8% to $100 million in 2014 and was flat in 2013 compared to
2012. The average face amount of policies issued in 2014 was approximately $17 thousand.
23
The Liberty National Exclusive Agency markets individual and group life insurance to middle-
income customers. Life premium income for this agency was $272 million in 2014, a 1% decrease
compared with $276 million in 2013. Life premium declined 2% in 2013 from 2012. First year collected
premium increased 1% in 2014, however, after having declined 4% in 2013. The average face amount of
life policies issued in 2014 was approximately $23 thousand.
The Liberty National Agency’s net sales rose 11% to $34 million in 2014, after having declined 4% a
year earlier. The increase in net sales during 2014 marks the first increase in several years, reflecting
changes in structure of the agency that management has put in place in recent years. As is the case with
all of our agencies, sales are driven by the size of the agent force. The Liberty agency had 1,498
producing agents at December 31, 2014 compared with 1,430 a year earlier, an increase of 5%. The
producing agent count increased 1% during 2013 from 1,419. The average agent count for 2014 was
1,505. Agent counts declined during the fourth quarter of 2014 as the agency focused somewhat less on
recruiting, due to the increased emphasis on annual worksite renewals.
Our long term plans to grow this agency involve expansion from small-town markets in the southeast
to more densely populated areas with larger pools of potential agent recruits and customers. We believe
that expansion of this Agency’s presence into more heavily populated, less-penetrated areas will help
create long term agency growth. Additionally, a prospecting training program has helped to improve the
ability of agents to develop new worksite marketing business.
We also offer life insurance through Other Agencies consisting of the Military Agency, the United
American Independent Agency, and other small sales agencies. The Military Agency consists of a
nationwide independent agency whose sales force is comprised primarily of former military officers who
sell primarily to commissioned and noncommissioned military officers and their families. This business
consists of whole-life products with term insurance riders. Military premium represented 9% of
life
premium at December 31, 2014. The United American Independent Agency represented approximately
1% of Torchmark’s total life premium at that date, as their sales of Torchmark products consist primarily
of health insurance.
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
2014
2013
2012
Amount
% of
Premium
Amount
% of
Premium
Amount
% of
Premium
Premium and policy charges . . . . . . . . . . . $1,966,300
100% $1,885,332
100% $1,808,524
100%
Policy obligations . . . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . . . . .
1,293,384
(530,192)
66
(27)
1,227,857
(508,236)
65
(27)
1,172,020
(483,892)
65
(27)
Net policy obligations . . . . . . . . . . . . . . . .
763,192
Commissions, premium taxes, and non-
deferred acquisition expenses . . . . . . . .
Amortization of acquisition costs . . . . . . . .
143,174
503,445
Total expense . . . . . . . . . . . . . . . . . . . . . .
1,409,811
39
7
26
72
719,621
131,721
488,931
1,340,273
38
7
26
71
688,128
137,115
473,805
1,299,048
38
8
26
72
Insurance underwriting margin before
other income and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . . $ 556,489
28% $ 545,059
29% $ 509,476
28%
Gross margins, as indicated by insurance underwriting margin before other
income and
administrative expense, rose 2% in 2014 and 7% in 2013. The margin increased to $556 million in 2014
after rising to $545 million in 2013. The steady growth in premium contributed to margin growth in all
periods. As a percentage of premium, however, an increase in policy obligations resulted in a slightly
lower margin in 2014. Policy obligations fluctuate from period to period as a result of mortality. In both
2013 and 2014, percentage margins were positively affected by our conservation program and the
permitted increases in the deferrals of our internet-related direct response acquisition costs.
24
Health Insurance. Health insurance sold by Torchmark includes primarily Medicare Supplement
coverage to enrollees in the federal Medicare program, cancer coverage, accident coverage, and other
limited-benefit supplemental health products. As discussed in Note 14—Business Segments in the Notes
to Consolidated Financial Statements, Medicare Part D is now reported as a separate Torchmark
segment and is no longer included in the discussion of Torchmark’s other health products. See the
discussion of Medicare Part D later in this report. In this discussion of health business, all health coverage
plans other than Medicare Supplement are classified here as limited-benefit plans.
Health premium represented 27% of Torchmark’s total premium income in 2014, compared with 28%
in 2013 and 26% in 2012. Health underwriting margin accounted for 25% of the total in 2014, compared
with 25% in 2013 and 23% in 2012. Health results in 2014 and 2013 were positively affected by the late
2012 addition of Family Heritage. Family Heritage added $205 million and $191 million of health premium
in 2014 and 2013, respectively, compared with $30 million in 2012. The following table indicates health
insurance premium income by distribution channel for each of the last three years.
HEALTH INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
2014
2013
2012
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
$ 19,028
286,340
$ 24,173
274,125
$ 26,377
272,382
305,368
35% 298,298
35% 298,759
41%
Liberty National Exclusive Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
American Income Exclusive Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
Family Heritage Exclusive Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
Direct Response
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
143,722
78,295
222,017
78,244
478
78,722
204,667
0
204,667
805
57,861
58,666
Total Premium
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
446,466
422,974
152,415
88,849
241,264
78,862
573
79,435
190,923
0
190,923
313
53,585
53,898
446,686
417,132
25
9
24
7
51
49
162,607
100,928
263,535
78,957
683
79,640
30,119
0
30,119
341
57,625
57,966
298,401
431,618
28
9
22
6
52
48
36
11
4
8
41
59
Total Premium . . . . . . . . . . . . . . . . . . . . . .
$869,440
100% $863,818
100% $730,019
100%
25
We market supplemental health insurance products through a number of distribution channels. The
following table presents net sales by distribution method for the last three years.
HEALTH INSURANCE
Net Sales by Distribution Method
(Dollar amounts in thousands)
2014
2013
2012
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Medicare Supplement
$
873
82,971
$
916
40,512
$
989
41,218
83,844
46%
41,428
38% 42,207
54%
Liberty National Exclusive Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Medicare Supplement
American Income Exclusive Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Medicare Supplement
Family Heritage Exclusive Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Medicare Supplement
Direct Response
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Medicare Supplement
17,084
299
17,383
9,162
0
9,162
47,102
0
47,102
6
23,099
23,105
Total Net Sales
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Medicare Supplement
74,227
106,369
13,906
394
14,300
6,985
0
6,985
43,520
0
43,520
591
3,685
4,276
65,918
44,591
13
6
39
4
60
40
14,274
818
15,092
8,695
0
8,695
7,441
0
7,441
727
3,876
4,603
32,126
45,912
19
11
10
6
41
59
10
5
26
13
41
59
Total Net Sales . . . . . . . . . . . . . . . . . . . . . .
$180,596
100% $110,509
100% $78,038
100%
26
The following table discloses first-year collected health premium by distribution method.
HEALTH INSURANCE
First-Year Collected Premium by Distribution Method
(Dollar amounts in thousands)
2014
2013
2012
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . . . . .
$
710
49,519
$
795
38,399
$
838
33,176
50,229
42%
39,194
39%
34,014
50%
Liberty National Exclusive Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . . . . .
American Income Exclusive Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . . . . .
Family Heritage Exclusive Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . . . . .
Direct Response
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . . . . .
13,132
306
13,438
9,500
0
9,500
36,392
0
36,392
143
9,196
9,339
Total First-Year Collected Premium
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . . . . .
59,877
59,021
12,010
558
13,105
1,127
11
12,568
12
14,232
21
8
8,957
0
8,957
36,340
0
31
36,340
36
544
3,310
3,854
58,646
42,267
4
58
42
8
50
50
10,364
0
9
10,364
15
5,710
0
5,710
623
3,714
4,337
30,640
38,017
8
6
45
55
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$118,898
100% $100,913 100% $68,657
100%
Health premium, rose 1% to $869 million in 2014, after having increased 18% in 2013 to $864 million.
However, if the premium of Family Heritage were removed for comparability in 2013 and 2012, health
premium would have declined 4% in 2013. The decline in 2013 premium resulted primarily from a run-off
of a block of discontinued hospital-surgical plans. This runoff had been ongoing for a number of years. In
2014, this runoff is thought to have substantially run its course. Net sales increased 63% in 2014 to $181
million, after having increased 42% in 2013. The 2014 increase was caused by the more than double
growth in Medicare Supplement sales. These sales occurred in both the United American Independent
Agency and in the Direct Response Group. These increases were primarily the result of strong group
sales of Medicare Supplement which can vary significantly from period to period. The 2013 increase was
primarily a result of the acquisition of Family Heritage, which contributed $44 million to the growth in 2013
compared with $7 million in 2012. First-year collected premium increased 18% in 2014 and 47% in 2013,
as a result of the increased sales in both 2014 and 2013, and the addition of Family Heritage first-year
premium for a full year in 2013 for the first time.
The addition of Family Heritage’s sales and premium from limited-benefit products has resulted in
limited-benefit health premium exceeding Medicare Supplement premium income in 2013 for the first time
in several years and continuing to lead in premium in 2014. However, due to increased Medicare
Supplement group sales, Medicare Supplement net sales exceeded limited-benefit net sales in 2014.
Limited-benefit premium represented 51% of
total health premium in 2014 and 52% in 2013, but
represented 41% in 2012. However, as noted above, Medicare Supplement sales rose 139% to $106
27
million in 2014 due to the high group sales, which represented 59% of net health sales in 2014. Medicare
Supplement sales were 40% of the total
in 2013 and 59% in 2012. As mentioned previously, group
Medicare Supplement sales fluctuate significantly from period to period.
We do not expect recent health care reform activity to have a significant impact on our operations.
We don’t sell any products subject to the Affordable Care Act, and don’t believe that consumer demand
for the types of supplemental health products we sell will be diminished. While we will be subject to
certain federal taxes on a small portion of our existing health business going forward, we don’t expect the
amount of these taxes to be material.
The UA Independent Agency is Torchmark’s largest in terms of health premium income, producing
35% of health premium in 2014. This Agency is composed of independent agencies appointed with
Torchmark whose sizes range from very large, multi-state organizations down to one-person offices. All of
these agents generally sell for a number of insurance companies. Torchmark had 3,161 active producing
agents at December 31, 2014 compared with 2,414 a year earlier. This Agency is our largest producer of
Medicare Supplement insurance, with $286 million or 68% of our Medicare Supplement premium income
in 2014. Net sales for this Agency were $84 million in 2014, consisting almost entirely of Medicare
Supplement business. These net sales were more than double the net sales of $41 million in 2013. In
they had declined 2%. Total health premium income for the UA Independent Agency was
2013,
$305 million in 2014, an increase of 2% from $298 million in 2013. Premium income had declined very
slightly in 2013.
The Family Heritage Exclusive Agency was acquired by Torchmark’s acquisition of Family
Heritage on November 1, 2012 as discussed in Note 6—Acquisition in the Notes to Consolidated
Financial Statements. This agency markets primarily 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. The Family Heritage Agency is our largest agency in terms of
limited-benefit health net sales, adding $47 million in net sales in 2014, compared with $44 million in
2013, an increase of 8%. This agency’s $205 million in health premium income during 2014 represented
24% of Torchmark’s total. Premium in 2014 increased 7% over 2013 premium of $191 million. The
producing agent count was 785 agents at December 31, 2014, compared with 695 agents at
December 31, 2013. The average agent count for 2014 was 740. The agent count was 702 at December
31, 2012. Management expects to grow this agency going forward through geographic expansion and
incorporation of Torchmark’s recruiting programs.
The Liberty National Exclusive Agency represented 25% of all Torchmark health premium income
at $222 million in 2014. The Liberty Agency markets limited-benefit health supplemental products
consisting primarily of cancer insurance. Much of the Liberty’s health business is now generated through
worksite marketing which targets small businesses of 10 to 25 employees. In 2014, health premium
income in the Agency declined 8% from prior year premium of $241 million, after also declining 8% in
2013. These premium declines were due primarily to the runoff of a block of discontinued hospital-surgical
business as well as an earlier restructuring of this Agency to a variable-cost, commission-driven model.
The Liberty Agency experienced growth in net health sales in 2014 of 22% to $17 million. The agent
count at Liberty was 1,498 at 2014 year end, an increase of 5% over year end 2013 and 6% over year
end 2012.
The American Income Exclusive Agency, predominantly a life insurance distribution channel, was
our fourth largest health insurance distributor based on premium income in 2014. Its health plans are
comprised of various limited-benefit plans. Approximately 68% of the agency’s 2014 health premium was
from accident policies. Sales of the plans by this Agency are generally made in conjunction with a life
policy being sold to the same customer.
Health premium at this agency was $79 million in both 2014 and 2013. In 2013, it had declined
slightly from $80 million. However, health net sales rose 31% in 2014 to $9 million, after falling 20% in
2013 to $7 million. Because this agency focuses on life products, health net sales comprised only 5% of
the American Income Agency’s total net sales in 2014.
28
Direct Response, primarily a life operation, also offers health insurance, which is predominantly
Medicare Supplements sold directly to employer or union sponsored groups. In 2014, net health sales
were $23 million, compared with $4 million in 2013 and $5 million in 2012. The large increase in Direct
Response net sales in 2014 was due to the addition of a large Medicare Supplement group, which is not
indicative of a trend. In 2014, health net sales for this group represented approximately 13% of Direct
Response’s total life and health net sales. Direct Response health premium income was $59 million in
2014, increasing 9% over 2013 premium of $54 million. Health premium declined 7% in 2013.
As presented in the following table, Torchmark’s health insurance underwriting margin before other
income and administrative expense increased 1% to $199 million in 2014, after an increase of 20% to
$197 million in 2013. Family Heritage contributed $32 million of the $33 million 2013 increase. As a
percentage of premium income, margins were 23% in both 2014 and 2013 as compared with 22% in
2012.
HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
2014
% of
2013
% of
Amount
Premium Amount
Premium Amount
2012
% of
Premium
Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $869,440
100% $863,818
100% $730,019
100%
Policy obligations . . . . . . . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . . . . . . . . .
559,817
(64,401)
Net policy obligations . . . . . . . . . . . . . . . . . . . .
Commissions, premium taxes, and non-deferred
acquisition expenses . . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . .
495,416
79,475
95,230
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . .
670,121
64
(7)
57
9
11
77
558,982
(59,858)
499,124
75,895
92,292
667,311
65
(7)
58
9
10
77
472,988
(40,963)
432,025
52,625
81,385
566,035
65
(6)
59
8
11
78
Insurance underwriting income before other
income and administrative expense . . . . . . . . . $199,319
23% $196,507
23% $163,984
22%
29
Medicare Part D. Torchmark, through its subsidiary United American, offers coverage under the
government’s Medicare Part D plan. The Medicare Part D plan is a stand-alone prescription drug plan for
Medicare beneficiaries. Part D is regulated and partially funded by CMS for participating private insurers
like United American. Under Part D, private carriers are the primary insurers, while CMS provides
significant premium subsidies and reinsurance. Our Medicare Part D product is sold through the Direct
Response operation and to groups through the UA Independent Agency.
Medicare Part D
Selected Financial Information
(Dollar amounts in thousands)
2014
2013
2012
Amount
Amount
Amount
Premium(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $347,805 $300,008 $317,764
Net sales(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
114,489
First-year collected premium(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
153,509
186,170
94,982
78,698
66,209
(1) Total Medicare Part D premium excludes $25.5 million and $2.6 million of risk-sharing premium received in 2014 and 2013,
respectively, and $404 thousand in 2012 of risk-sharing premium paid to the Centers for Medicare and Medicaid Services
consistent with the Medicare Part D contract. This risk-sharing amount is a portion of the excess or deficiency of actual over
expected claims, and therefore we view this payment as a component of policyholder benefits in our segment analysis.
(2) Net sales for Medicare Part D represents only new first-time enrollees.
(3) First-year collected premium for Medicare Part D represents only premium collected within the first twelve months from new
first-time enrollees.
Total Medicare Part D premium was $348 million in 2014, compared with $300 million in 2013 and
$318 million in 2012. Part D net sales were $186 million in 2014, compared with $79 million in 2013 and
$114 million in 2012. The unusual increase in 2014 net sales was due to the addition in 2014 of the auto-
enrollees as noted below. We count only sales to new first-time enrollees in net sales, and the majority of
premium income is from previous enrollees. Total enrollees in the program were 269 thousand at the
beginning of the 2014 plan year, 254 thousand at the beginning of the 2013 plan year, and 215 thousand
at the beginning of the 2012 plan year.
Changes in Part D premium generally result from changes in the number of enrollees, which are
heavily influenced by new sales. In 2012, the Company issued a new lower cost Part D plan allowing us
to pick up a large number of auto-enrollees in 21 regions with resulting higher sales. In 2013, due to
intensified price competition, we qualified for new low-income auto-enrollees in only 7 regions but were
able to keep prior year auto-enrollees in 14 regions and maintain our presence in 21 regions. In 2014,
Torchmark qualified to receive new Part D auto-enrollees in 15 regions and also qualified to retain prior
year auto-enrollees in 8 regions, for a total of 23 regions. These variations in the number of new auto-
enrollees caused the changes in Part D net sales, premium, and enrollee counts, including the large
increases in 2014 and the declines in 2013. The 2013 decline was also influenced by the loss of several
employer group Part D cases at the end of 2012.
As presented in the following table, margins decreased 23% in 2014 to $27 million, even though
premium rose 16%. Premiums were increased for the year 2014 to cover higher anticipated non-deferred
acquisition expenses. As such, we expected significantly lower obligation ratios in 2014. However, due
primarily to unexpected costs related to two Hepatitis C drugs, the coverage of which was mandated by
CMS Administration early in 2014, well after our 2014 pricing was finalized, the obligation ratios for 2014
increased from 82% to 83%. Non-deferred acquisition cost ratios were significantly higher, as planned in
our pricing, due to (1) new taxes imposed by the Affordable Care Act, (2) higher costs related to a change
in the structure of drug rebates, and (3) higher costs related to the increased volume of enrollees. As a
percentage of premium, underwriting margin for 2014 fell to 8%, compared with 12% for 2013. In 2013,
margins increased 6% to $35 million, even though premium declined 6%. As a percentage of premium,
margins rose from 10% to 12%. The benefit ratio declined 2%, as a result of lower claims experience in
the group market in 2013. Group Part D claims tend to fluctuate from year to year.
30
Medicare Part D
Summary of Results
(Dollar amounts in thousands)
2014
% of
2013
% of
Amount
Premium Amount
Premium Amount
2012
% of
Premium
Premium(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $347,805
100% $300,008
100% $317,764
100%
Policy obligations . . . . . . . . . . . . . . . . . . . . . . . . .
290,341
Commissions, premium taxes, and non-deferred
acquisition expenses . . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . .
26,613
3,585
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . .
320,539
83
8
1
92
247,496
14,027
3,185
264,708
82
5
1
88
266,957
14,498
2,952
284,407
84
5
1
90
Insurance underwriting income before other
income and administrative expense . . . . . . . . . $ 27,266
8% $ 35,300
12% $ 33,357
10%
(1) Total Medicare Part D premium excludes $25.5 million and $2.6 million of risk-sharing premium received in 2014 and 2013
respectively, and $404 thousand in 2012 of risk sharing premium paid to the Centers for Medicare and Medicaid Services
consistent with the Medicare Part D contract. This risk-sharing amount is a portion of the excess or deficiency of actual over
expected claims, and therefore we view this payment as a component of policyholder benefits in our segment analysis.
For 2015, we do not expect Hepatitis C claims to have the same negative impact on margins that
they had in 2014, as our 2015 pricing reflects the cost of
In addition, we will have
significantly less auto-enrollees in 2015. Auto-enrollees accounted for approximately 85% of our 2014
Hepatitis C claims.
these drugs.
Total enrollees in the program were 249 thousand at the beginning of the 2015 plan year, compared
with 269 thousand in 2014. We expect that Part D margins will be flat to slightly lower in 2015, based on a
preliminary analysis of the risk scores and claims history of our 2015 enrollees.
We participate in the Medicare Part D program because it complements our Medicare Supplement
products, it provides us with incremental
income, we have extensive experience with the senior-age
market, and the government assurances with regard to the risk-sharing agreements for participating
insurers limit our risk. Additionally, due to our experience with service to the senior-age market and the
use of our existing Direct Response marketing system, entry to this business required little new
investment. However, as with any government-sponsored program, the possibility of regulatory changes
could change the outlook for this market.
Annuities. Our fixed annuity balances at the end of 2014, 2013, and 2012 were $1.36 billion,
$1.38 billion, and $1.35 billion, respectively. Underwriting income was $4.3 million, $3.9 million, and
$3.5 million in each of the respective years.
While the fixed annuity account balance has remained relatively stable each year over the prior year,
underwriting income has increased each year over the prior year. Policy charges have actually declined
slightly in each successive year. The majority of policy charges consist of surrender charges which are
not based on account size. A considerable portion of fixed annuity profitability is derived from the spread
of investment income exceeding contractual interest requirements, which can result in negative net policy
obligations.
In the three-year period, however, spreads tended to level as crediting rates reached
guaranteed minimums.
We do not currently market annuity products, favoring instead protection-oriented life and health
insurance products. Therefore, we do not expect that annuities will be a significant portion of our business
or marketing strategy going forward.
31
Administrative expenses. Operating expenses are included in the Other and Corporate Segments
and are classified into two categories: insurance administrative expenses and expenses of the parent
company. The following table is an analysis of operating expenses for
the three years ended
December 31, 2014.
Operating Expenses Selected Information
(Dollar amounts in thousands)
2014
% of
2013
% of
Amount
Premium Amount
Premium Amount
2012
% of
Premium
Insurance administrative expenses:
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83,625
28,095
Non-salary employee costs . . . . . . . . . . .
57,717
Other administrative expense . . . . . . . . .
10,518
Legal expense—insurance . . . . . . . . . . .
2.6% $ 82,739
33,589
0.9
52,757
1.8
9,813
0.3
2.7% $ 77,137
28,344
1.1
51,228
1.8
8,696
0.3
2.7%
1.0
1.8
0.3
Total insurance administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . .
179,955
5.6%
178,898
5.9%
165,405
5.8%
Parent company expense . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . .
Litigation settlements . . . . . . . . . . . . . . . . . . . .
State Guaranty Fund Assessment . . . . . . . . .
Acquisition expenses of Family Heritage . . . .
8,159
32,203
2,337
0
0
Total operating expenses, per
Consolidated Statements of
Operations . . . . . . . . . . . . . . . . . . . . . . $222,654
8,495
25,642
500
1,155
0
8,222
21,605
0
0
2,944
$214,690
$198,176
Insurance administrative expenses:
Increase (decrease) over prior year . . . .
0.6%
Total operating expenses:
Increase (decrease) over prior year . . . .
3.7%
8.2%
8.3%
4.0%
(1.7)%
Insurance administrative expenses rose 1% in 2014, after having increased 8% in 2013. As a
percentage of premium, they increased .1% in 2013 to 5.9%, but declined .3% in 2014 to 5.6%. The
inclusion of Family Heritage’s administrative expenses accounted for $8.1 million of the $13.5 million
increase in total administrative expense in 2013. Non-salary employee costs increased 19% in 2013 but
fell back 16% in 2014, close to 2012 levels. These fluctuations were caused in large part by adjustments
to pension expenses primarily due to changes in interest
rates in the financial markets. Stock
compensation expense has risen in each successive year as the value of Torchmark stock has increased,
resulting in higher values for grants of stock and options, as well as positive Company performance that
caused an increase in the expense related to performance share grants. As stated in Note 14—Business
Segments in the Notes to Consolidated Financial Statements, management views stock compensation
expense as a corporate expense, and therefore treats it as a Parent Company expense.
As described in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial
Statements, we described certain litigation matters that were incurred in the years 2014 and 2013 that
were not directly related to our ongoing core insurance operations. Management does not consider these
litigation matters to be part of insurance administration expense, but instead considers them to be non-
operating expenses. Also during 2013, Torchmark recorded an additional non-operating charge involving
a state guaranty fund assessment in the amount of $1.2 million, resulting from events in years prior to
2012. We incurred expenses of $2.9 million related to the acquisition of Family Heritage in late 2012 as
described in Note 6—Acquisition in the Notes to Consolidated Financial Statements. While all of these
non-operating expenses were included in “Operating expenses”
in the
Consolidated Statements of Operations in accordance with accounting guidance, they are removed by
management from consideration when evaluating segment operating results.
the respective year
for
32
Investments. 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 14—Business Segments in the Notes to the Consolidated Financial
Statements. It is defined as net investment income less both the required interest attributable to net policy
liabilities and the interest cost associated with capital funding or “financing costs.” We also view excess
investment income per diluted 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 over $6.1 billion of cash flow to repurchase Torchmark shares 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.
Excess Investment Income. The following table summarizes Torchmark’s investment income and
excess investment income.
Analysis of Excess Investment Income
(Dollar amounts in thousands except for per share data)
2014
2013
2012
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Reclassification of low income housing expense(1) . . . . . . . . . . . . . . . . . . .
Reclassification of interest amount due to deconsolidation(2)
. . . . . . . . . .
729,207 $
709,743 $
29,079
0
24,907
0
Adjusted net investment income (per segment analysis) . . . . . . . . . .
758,286
734,650
693,644
22,488
(214)
715,918
Interest on net insurance policy liabilities:
Interest on reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . .
(649,848)
192,779
(625,388)
190,025
(584,148)
185,172
Net required interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(457,069)
(435,363)
(398,976)
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(76,126)
(80,461)
(80,298)
Excess investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
225,091 $
218,826 $
236,644
Excess investment income per diluted share(3) . . . . . . . . . . . . . . . . . . . . . . $
1.70 $
1.57 $
1.61
Mean invested assets (at amortized cost) . . . . . . . . . . . . . . . . . . . . . . . . . . $13,278,028 $12,838,010 $11,750,059
Average net insurance policy liabilities(4) . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,093,560
1,248,427
Average debt and preferred securities (at amortized cost) . . . . . . . . . . . .
7,840,078
1,321,102
8,227,741
1,287,740
(1) Reclassified amortization of non-guaranteed low-income housing interests included in “Net
income” in the
Consolidated Statements of Operations but recorded in “Income taxes” in the segment analysis. See Note 1—Significant
Accounting Policies in the Notes to Consolidated Financial Statements under the caption Low-Income Housing Tax Credit
Interests for an explanation.
investment
(2) Deconsolidation of trusts liable for Trust Preferred Securities required by accounting guidance. See Note 11—Debt in the Notes
to Consolidated Financial Statements.
(3) Per share amounts for 2013 and 2012 have been retrospectively adjusted for the three-for-two stock split effective July 1, 2014.
(4) Net of deferred acquisition costs, excluding the associated unrealized gains and losses thereon.
33
Excess investment income increased $6 million or 3% in 2014 over the prior year. Excess investment
income declined $18 million or 8% in 2013. Excess investment income has been pressured over the past
three years as a result of the impact of lower interest rates on net investment income coupled with the
increase in required interest on net policy liabilities discussed later under this caption. On a per diluted share
basis, excess investment income increased 8% to $1.70 in 2014. Excess investment income declined 2% to
$1.57 per share in 2013, after having risen 3% in the prior year. The greater increase in 2014 per-share
amounts, as well as the smaller decline in 2013 relative to the changes in dollar amounts for excess
investment income are a result of share repurchases.
The largest component of excess investment income is net investment income, as adjusted for the segment
analysis, which rose 3% to $758 million in 2014. It increased 3% to $735 million in 2013 from $716 million in
2012. The inclusion of Family Heritage, acquired in late 2012, added $21 million of net investment income in 2013
compared with $3 million in 2012, accounting for the majority of the 2013 increase. However, growth in net
investment income has generally been slower than growth in mean invested assets in recent years due to the
declining interest rate environment. In 2014, fixed maturity yields averaged 5.91% on a tax-equivalent and
effective-yield basis, compared with 5.94% in 2013 and 6.35% in 2012. Even though mean invested assets have
increased each period, net investment income has grown at a slower pace as a result of the decline in average
yields. In a declining rate environment, the overall portfolio yield will decrease as new money is invested at lower
prevailing yields. The reduction in the average yields has primarily been the result of reinvesting proceeds from
bonds that matured or were called at yield rates less than the rates we earned on the bonds before they matured
or were called. While Family Heritage added incrementally to net investment income during 2014 and 2013, its
lower-yielding portfolio has also contributed to the decline in the average fixed-maturity yield.
A major factor negatively affecting net investment income, especially in 2012 and 2013, was calls of
fixed-maturity securities. During 2012, and to a lesser extent in 2013, we had an unusually large number of
these calls, including $339 million of bank-issued hybrid securities in 2012 and $129 million in 2013. Fixed
maturity securities are more likely to be called in a declining interest-rate environment, as these callable
securities can often be refinanced at lower prevailing rates. In 2014, however, call activity has been more
limited. We believe that it is unlikely that calls would have a material negative impact on investment income
in the foreseeable future if our callable investments were called and the proceeds from those calls were
reinvested at expected future new money rates. During 2014, the proceeds from all dispositions have been
reinvested at yield rates closer to the yield rates on the disposed assets.
Net investment income has also been negatively affected in 2014 by the CMS requirement for us to pay
certain Medicare Part D claims costs during the current period that are ultimately the responsibility of the
government, but are not reimbursed until the following year. Because Part D claims have been unusually
high in 2014, due to the approval of new Hepatitis C drugs discussed earlier in this report and higher overall
drug costs, we have incurred extensive upfront costs that will not be reimbursed by CMS until late 2015.
This delay in reimbursement has caused a delay in cash flows available for new investments that resulted in
a loss of approximately $5 million of pre-tax net investment income in 2014, and will cause us to lose
approximately $4 million of additional investment income in 2015. Please refer to Note 10¯Supplemental
Disclosures of Cash Flow Information in the Notes to Consolidated Financial Statements.
Presented in the following chart is the growth in net investment income compared with the growth in
mean invested assets.
Growth in net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Growth in mean invested assets (at amortized cost) . . . . . . . . . . . . . . . . . . . . .
3.2% 2.6% 1.3%
9.3
3.4
4.4
2014 2013 2012
While net investment income in recent years has been negatively impacted by the factors discussed
above, we would expect to see only modest declines in the average portfolio yield rate over the next few
years compared with the larger declines in recent years. We anticipate that less than 2% of fixed maturities
34
on average are expected to run off each year over the next five years. Overall, we are encouraged that
the prospect of additional significant calls seems to be behind us and expected maturities should have
lower yields than in the past.
Excess investment income is reduced by the required interest on net insurance policy liabilities
because we consider these amounts to be components of the profitability of our 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
(formerly SFAS 60, now incorporated into ASC 944-20-05). This guidance mandates that interest rate
assumptions be “locked in” for the life of that block of business. Each calendar year, we set the assumed
discount rate to be used to calculate the benefit reserve liability and 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 the premiums received in the future from policies of that issue year, and cannot be changed except in
the event of a premium deficiency. 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 in force business by issue year.
Because actuarial discount rates are locked in for life on essentially all of our business, benefit
reserves and deferred acquisition costs are not affected by interest rate fluctuations unless a loss
recognition event occurs. Due to the strength of our underwriting margins and the current positive spread
between the yield on our investment portfolio and the weighted-average discount rate of our in force
block, we don’t expect an extended low-interest-rate environment to cause a loss recognition event.
Information about interest on policy liabilities is shown in the following table.
Required Interest on Net Insurance Policy Liabilities
(Dollar amounts in millions)
Required
Interest
Average Net
Insurance
Policy Liabilities
Average
Discount
Rate
2014
Life and Health . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$395.9
61.2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Increase in 2014 . . . . . . . . . . . . . . . . . . . . . . . . .
457.1
4.99%
2013
Life and Health . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$372.4
63.0
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Increase in 2013 . . . . . . . . . . . . . . . . . . . . . . . . .
435.4
9.12%
2012
Life and Health . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$335.0
64.0
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in 2012 . . . . . . . . . . . . . . . . . . . . . . . . .
399.0
7.71%
$6,888.9
1,338.8
8,227.7
4.94%
$6,516.9
1,323.2
7,840.1
10.52%
$5,820.1
1,273.5
7,093.6
6.64%
5.75%
4.57
5.56
5.71%
4.76
5.55
5.76%
5.03
5.62
The combined weighted average discount rate decreased in 2013 due to the inclusion of Family
Heritage for a full year.
35
Excess investment income is also impacted by financing costs. Financing costs for the investment
segment primarily consist of interest on our various debt instruments and are deducted from excess
investment income.
The table below presents the components of financing costs and reconciles interest expense per the
Consolidated Statements of Operations.
Analysis of Financing Costs
(Amounts in thousands)
2014
2013
2012
Interest on funded debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $71,072 $75,136 $74,815
5,656
Interest on short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
5,013
41
5,299
26
Interest expense per Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . .
Reclassification of interest due to deconsolidation (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76,126
0
80,461
0
80,512
(214)
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $76,126 $80,461 $80,298
(1) See Principles of Consolidation in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial Statements
for an explanation of deconsolidation.
Financing costs decreased $4 million or 5% in 2014. They were essentially flat
in 2013. The
decrease in financing costs in 2014 was due to the maturity and repayment of our $94 million par amount
$7.375% Notes during the third quarter of 2013. The increase in financing costs in 2013 reflects the
increased interest expense from the issuance in September, 2012 of $300 million principal amount of our
3.8% Senior Notes due in 2022, $150 million of which is eliminated in consolidation. Also in September,
2012, we issued our 5.875% Junior Subordinated Debentures due 2052 for $125 million principal amount
but called our $120 million 7.1% Trust Preferred Securities one month later. In both 2014 and 2013,
interest on short-term debt declined primarily because of the reduction in the weighted-average interest
transactions are disclosed in the Financial
rate on short-term debt. More information on our debt
Condition section of this report and in Note 11—Debt in the Notes to Consolidated Financial Statements.
As previously noted, growth rates in our excess investment income decline when growth in income
from the portfolio is less than that of the interest required by policy liabilities and financing costs, such as
we have experienced in recent periods. In an extended low-interest-rate environment, the portfolio yield
will tend to decline as we invest new money at lower long-term rates. We believe, however, the decline
would be relatively slow, as, on average, only 1% to 2% of fixed maturities are expected to run off each
year over the next five years.
In response to the lower interest rates, we raised the premium rates for new business on major life
products in early 2012 and again in late 2013. The increased premium provides additional margin on
these policies to help offset higher mandatory cash values and the possible future reductions in excess
investment income. Despite these increases in premium rates, we have continued to see growth in net
sales.
Excess investment income benefits from increases in long-term rates available on new investments
and decreases in short-term borrowing rates. Of these two factors, higher investment rates have the
greater impact because the amount of cash that we invest is significantly greater than the amount that we
borrow at short-term rates. Therefore, Torchmark would benefit if rates, especially long-term rates, were
to rise.
36
investment policy calls for
Investment Acquisitions. Torchmark’s current
investing almost
exclusively in investment-grade fixed maturities generally with long maturities (maturity date more than
20 years after acquisition date) that meet our quality and yield objectives. We generally prefer to invest in
securities with longer maturities because they more closely match the long-term nature of our policy
liabilities. Further, we believe this strategy is appropriate because our strong positive cash flows are
If such longer-term securities do not meet our quality and yield
generally stable and predictable.
objectives, we consider investing in short-term securities, taking into consideration the slope of the yield
curve and other factors at the time. During calendar years 2012 through 2014, Torchmark invested almost
exclusively in fixed-maturity securities, primarily with longer-term maturities as presented in the chart
below.
The following table summarizes selected information for fixed-maturity purchases. The effective
annual yield shown in the table is the yield calculated to the potential termination date that produces the
lowest yield. This date is commonly known as the “worst call date.” Two different average life calculations
are shown, average life to the next call date and average life to the maturity date.
Fixed Maturity Acquisitions Selected Information
(Dollar amounts in millions)
For the Year
2013
2014
2012
Cost of acquisitions:
Investment-grade corporate securities . . . . . . . . . . . . . . . . . .
Taxable municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investment-grade securities . . . . . . . . . . . . . . . . . . . . . .
$696.3
0
8.7
$1,113.2 $1,465.9
1.5
16.9
0
30.6
Total fixed-maturity acquisitions . . . . . . . . . . . . . . . . . .
$705.0
$1,143.8 $1,484.3
Effective annual yield (one year compounded*) . . . . . . . . . . . . .
Average life (in years, to next call) . . . . . . . . . . . . . . . . . . . . . . . .
Average life (in years to maturity)
. . . . . . . . . . . . . . . . . . . . . . . .
Average rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.77%
22.9
23.4
BBB+
4.65%
26.0
26.5
BBB+
4.30%
25.6
26.7
BBB+
* Tax-equivalent basis, where the yield on tax-exempt securities is adjusted to produce a yield equivalent to
the pretax yield on taxable securities.
We prefer to invest primarily in bonds that are not callable (on other than a make-whole basis) prior
to maturity, but we periodically invest some funds in callable bonds when the incremental yield available
on such bonds warrants doing so. For investments in callable bonds, the actual life of the investment will
depend on whether the issuer calls the investment prior to the maturity date. Given our investments in
callable bonds, the actual average life of our investments cannot be known at the time of the investment.
However, the average life will not be less than the average life to next call and will not exceed the
average life to maturity. Data for both of these average life measures is provided in the above chart.
During the three years 2012 through 2014, we have invested almost entirely in investment-grade
corporate bonds. Acquisitions in all three years have been primarily in industrial and utility bonds. New
cash flow available for investment has been primarily provided through our insurance operations, but has
also been affected by other factors. Issuer calls, as a result of the low-interest environment experienced
during the past three years were an important factor, especially in 2012. Calls increase funds available for
investment, but as noted earlier in this discussion, they can have a negative impact on investment income
if the proceeds from the calls are reinvested in bonds that have lower yields than that of the bonds that
were called. Issuer calls were $160 million in 2014, $344 million in 2013, and $650 million in 2012. The
higher level of acquisitions in 2012 was primarily due to the additional funds available from the higher
level of 2012 calls.
37
Portfolio Analysis. Because Torchmark has recently invested almost exclusively in fixed-maturity
securities, the relative percentage of our assets invested in various types of investments varies from
industry norms. The following table presents a comparison of Torchmark’s components of invested assets
at amortized cost as of December 31, 2014 with the latest industry data.
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock (redeemable and perpetual)(2) . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and short terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Torchmark
Amount
(in millions) % Industry %(1)
$12,327
497
1
0
0
472
10
82
$13,389
92%
4
0
0
0
3
0
1
78%
0
2
9
0
4
4
3
100%
100%
(1) Latest data available from the American Council of Life Insurance as of December 31, 2013.
Includes redeemable preferred of $497 million or 100% and perpetual preferred of $0 million.
(2)
Because fixed maturities represent such a significant portion of our investment portfolio, the remainder of
the discussion of portfolio composition will focus on fixed maturities. An analysis of our fixed-maturity portfolio
by component at December 31, 2014 and December 31, 2013 is as follows:
Fixed Maturities by Component
At December 31, 2014
(Dollar amounts in millions)
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
% of Total
Fixed Maturities
Fair
Value
Amortized
Cost
Fair
Value
Corporates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,566
497
Redeemable preferred stock . . . . . . . . . . . . . . .
1,278
Municipals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
291
Government-sponsored enterprises . . . . . . . . .
100
Governments & agencies . . . . . . . . . . . . . . . . .
Residential mortgage-backed securities . . . . .
6
68
Collateralized debt obligations . . . . . . . . . . . . .
18
Other asset-backed securities . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . $12,824
$1,502
58
177
5
1
0
4
1
$1,748
$(61)
(5)
(1)
(2)
(1)
0
(9)
0
$(79)
$12,007
550
1,454
294
100
6
63
19
$14,493
82%
4
10
2
1
0
1
0
83%
4
10
2
1
0
0
0
100% 100%
38
Fixed Maturities by Component
At December 31, 2013
(Dollar amounts in millions)
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
% of Total
Fixed Maturities
Fair
Value
Amortized
Cost
Fair
Value
Corporates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,134
503
Redeemable preferred stock . . . . . . . . . . . . . . .
1,278
Municipals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
347
Government-sponsored enterprises . . . . . . . . .
122
Governments & agencies . . . . . . . . . . . . . . . . .
Residential mortgage-backed securities . . . . .
8
66
Collateralized debt obligations . . . . . . . . . . . . .
31
Other asset-backed securities . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . $12,489
$702
25
70
0
1
0
0
3
$801
$(300)
(14)
(13)
(71)
(5)
0
(8)
0
$(411)
$10,536
514
1,335
276
118
8
58
34
$12,879
81%
4
10
3
1
0
1
0
83%
4
10
2
1
0
0
0
100% 100%
At December 31, 2014, fixed maturities had a fair value of $14.5 billion, compared with $12.9 billion
at December 31, 2013. At December 31, 2014, fixed maturities were in a $1.7 billion net unrealized gain
position compared with an unrealized gain position of $390 million at December 31, 2013. Approximately
82% of our fixed maturity assets at December 31, 2014 at amortized cost were corporate bonds and 4%
were redeemable preferred stocks. This compares with 81% corporate bonds and 4% redeemable
preferred stocks at year end 2013. On a combined basis, residential mortgage-backed securities, other
asset-backed securities, and collateralized debt obligations (CDOs) were 1% of the assets at amortized
cost at December 31, 2014. The $68 million of CDOs at amortized cost made up less than 0.6% of the
assets and are backed primarily by trust preferred securities issued by banks and insurance companies.
The $6 million of residential mortgage-backed securities are rated AAA. For more information about our
fixed-maturity portfolio by component at December 31, 2014 and 2013, including an analysis of unrealized
investment losses and a schedule of maturities, see Note 4—Investments in the Notes to Consolidated
Financial Statements.
Due to the strong and stable cash flows generated by its insurance products, Torchmark has the
ability to hold securities with temporary unrealized losses until recovery. Even though these fixed maturity
investments are classified as available for sale, Torchmark generally expects and intends to hold to
maturity any securities which are temporarily impaired.
Additional information concerning the fixed-maturity portfolio is as follows.
Fixed Maturity Portfolio Selected Information
Average annual effective yield (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average life, in years, to:
Next call (2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective duration to:
Next call (2), (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity (2), (3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31,
2014
2013
5.89% 5.91%
17.8
20.5
10.9
12.0
18.3
21.5
10.4
11.7
(1) Tax-equivalent basis, where the yield on tax-exempt securities is adjusted to produce a yield equivalent
to the pretax yield on taxable securities.
(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.
39
Credit Risk Sensitivity. Credit risk relates to the level of uncertainty that a security’s issuer will
maintain its ability to honor the terms of that security until maturity. Approximately 87% of our fixed-
maturity holdings at book value are in corporate securities (including redeemable preferred and asset-
backed securities). As we continue to invest
in corporate bonds with relatively long maturities, we
continually monitor credit risk. We mitigate this ongoing risk, in part, by acquiring only investment-grade
bonds and by analyzing the financial fundamentals of each prospective issuer. We continue to monitor the
status of issuers on an ongoing basis. We also seek to reduce credit risk by spreading investments over a
large number of issuers and a wide range of industry sectors.
The following table presents the relative percentage of our fixed maturities by industry sector at
December 31, 2014.
Fixed Maturities by Sector
At December 31, 2014
(Dollar amounts in millions)
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Financial - Life/Health/PC
Insurance . . . . . . . . . . . . . . . . $ 1,819
683
633
Financial - Bank . . . . . . . . . . . . .
Financial - Other . . . . . . . . . . . .
$ 291
94
92
$ (3)
(5)
(9)
$ 2,107
772
716
Total Financial
. . . . . . . .
3,135
Utilities . . . . . . . . . . . . . . . . . . . .
Government . . . . . . . . . . . . . . . .
Energy . . . . . . . . . . . . . . . . . . . .
Basic Materials . . . . . . . . . . . . .
Other Industrials . . . . . . . . . . . .
Consumer Non-cyclical . . . . . . .
Transportation . . . . . . . . . . . . . .
Communications . . . . . . . . . . . .
. . . . . . . . . .
Consumer Cyclical
Collateralized debt
obligations . . . . . . . . . . . . . . .
Mortgage-backed securities . . .
2,183
1,669
1,512
997
910
848
559
533
404
68
6
477
379
183
173
86
112
125
80
75
54
4
0
(17)
(3)
(4)
(22)
(7)
(7)
(2)
(3)
(4)
(1)
(9)
0
3,595
2,559
1,848
1,663
1,076
1,015
971
636
604
457
63
6
% of Total
Fixed Maturities
At
Amortized
Cost
At
Fair
Value
14% 15%
5
5
24
17
13
12
8
7
7
4
4
3
1
0
5
5
25
19
13
11
7
7
7
4
4
3
0
0
Total Fixed Maturities . . . $12,824
$1,748
$(79)
$14,493
100% 100%
At December 31, 2014, approximately 24% of the fixed maturity assets at amortized cost (25% at fair
value) were in the financial sector, including 14% in life and health or property casualty insurance
companies and 5% in banks. Financial guarantors, mortgage insurers, and insurance brokers comprised
approximately 5% of the portfolio at amortized cost. After financials, the next largest sector was utilities,
which comprised 17% of the portfolio at amortized cost. The balance of the portfolio is spread among 396
issuers in a wide variety of sectors.
Our energy sector investments accounted for 12% of
fixed maturities at amortized cost as of
December 31, 2014. While this sector has seen recent volatility, we believe the risk of losses in the
foreseeable future is minimal. Over 98% of these holdings are investment grade, and the portfolio had a
net unrealized gain of $151 million at year end 2014. Less than 8% of our holdings are in the oil field
service and drilling area. While there may be some downgrades in this sector, we believe that our
investments will be able to withstand lower energy prices for an extended duration.
40
An analysis of the fixed-maturity portfolio by a composite rating at December 31, 2014 is shown in
the table below. The composite rating for each security, other than private-placement securities managed
by a third party, 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. Included in the chart below are private placement fixed-maturity holdings of $497 million at
amortized cost ($513 million at fair value) for which the ratings were assigned by the third-party manager.
Fixed Maturities by Rating
At December 31, 2014
(Dollar amounts in millions)
Amortized
Cost
%
Fair
Value
%
Investment grade:
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
688
1,333
3,914
2,429
2,833
1,066
Investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,263
Below investment grade:
BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Below B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Below investment grade . . . . . . . . . . . . . . . . . . . . . .
331
118
112
561
5% $
10
32
19
22
8
96
2
1
1
4
726
1,531
4,620
2,763
3,153
1,150
13,943
334
109
107
550
5%
10
32
19
22
8
96
2
1
1
4
$12,824
100% $14,493 100%
The portfolio has a weighted average quality rating of A- based on amortized cost. Approximately
the portfolio at amortized cost was considered investment grade. Our investment portfolio
96% of
contains no securities backed by sub-prime or Alt-A mortgages (loans for which some of the typical
documentation was not provided by the borrower). We have no direct
investments in residential
mortgages, nor do we have any counterparty risks as we are not a party to any credit default swaps or
other derivative contracts. We do not participate in securities lending. There are no off-balance sheet
investments, as all investments are reported on our Consolidated Balance Sheets. Other than $9 million
of German government bonds at amortized cost and fair value, we have no direct exposure to European
sovereign debt.
Our current
investment policy regarding fixed maturities is to acquire only investment-grade
obligations. Thus, any increases in below investment-grade issues are a result of ratings downgrades of
existing holdings.
An analysis of changes in below-investment grade fixed maturities at amortized cost is as follows.
Year Ended
December 31,
2014
(in $ millions)
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Downgrades by rating agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Upgrades by rating agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write down of other-than-temporarily impaired securities . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$566
15
(20)
(5)
0
5
$561
41
Market Risk Sensitivity. Torchmark’s financial securities are exposed to interest
rate risk,
meaning the effect of changes in financial market interest rates on the current fair value of the company’s
investment portfolio. Since 96% of the book value of our investments is attributable to fixed-maturity
investments (and virtually all of these investments are fixed-rate investments), the portfolio is highly
subject to market risk. Declines in market interest rates generally result in the fair value of the investment
portfolio exceeding the book value of the portfolio and increases in interest rates cause the fair value to
decline below the book value. Under normal market conditions, we do not expect to realize these
unrealized gains and losses because we have the ability and generally the intent
to hold these
investments to maturity. The long-term nature of our insurance policy liabilities and strong cash-flow
operating position substantially mitigate any future need to liquidate portions of the portfolio. The increase
or decrease in the fair value of insurance liabilities and debt due to increases or decreases in market
interest rates largely offsets the impact of rates on the investment portfolio. However, as is permitted by
GAAP, these liabilities are not recorded at fair value.
The following table illustrates the market risk sensitivity of our interest-rate sensitive fixed-maturity
portfolio at December 31, 2014 and 2013. This table measures the effect of a change in interest rates (as
represented by the U.S. Treasury curve) on the fair value of
the fixed-maturity portfolio. The data
measures the change in fair value arising from an immediate and sustained change in interest rates in
increments of 100 basis points.
Market Value of
Fixed Maturity Portfolio
($ millions)
Change in
Interest Rates
(in basis points)
At
December 31,
2014
At
December 31,
2013
-200
-100
0
100
200
$18,401
16,287
14,493
12,961
11,645
$16,205
14,412
12,879
11,562
10,423
42
Realized Gains and Losses. Our life and health insurance companies collect premium income
from policyholders for the eventual payment of policyholder benefits, sometimes paid many years or even
decades in the future. In addition to the payment of these benefits, we also incur acquisition costs,
administrative expenses, and taxes as a part of insurance operations. Because benefits are expected to
be paid in future periods, premium receipts in excess of current expenses are invested to provide for
these obligations. For this reason, we hold a significant investment portfolio as a part of our core
insurance operations. This portfolio consists primarily of high-quality fixed maturities containing an
adequate yield to provide for the cost of carrying these long-term insurance product obligations. As a
result, fixed maturities are generally held for long periods to support the liabilities. Expected yields on
these investments are taken into account when setting insurance premium rates and product profitability
expectations.
Investments are occasionally sold or called, resulting in a realized gain or loss. These gains and
losses generally occur only incidentally, usually as the result of sales because of deterioration in
investment quality of issuers or calls by the issuers. Investment losses are also caused by writedowns
due to impairments. We do not engage in trading investments for profit. Therefore, gains or losses which
occur in protecting the portfolio or its yield, or which result from events that are beyond our control, are
only secondary to our core insurance operations of providing insurance coverage to policyholders.
Realized gains and losses can be significant
in relation to the earnings from core insurance
operations, and as a result, can have a material positive or negative impact on net income. The significant
fluctuations caused by gains and losses can cause the period-to-period trends of net income not to be
indicative of historical core operating results nor predictive of
the future trends of core operations.
they have no bearing on core insurance operations or segment results as we view
Accordingly,
operations. For these reasons, and in line with industry practice, we remove the effects of realized gains
and losses when evaluating overall insurance operating results.
The following table summarizes our tax-effected realized gains (losses) by component for each of the
years in the three-year period ended December 31, 2014.
Analysis of Realized Gains (Losses), Net of Tax
(Dollar amounts in thousands, except for per share data)
Year Ended December 31,
2014
2013
2012
Amount
Per Share Amount Per Share* Amount
Per Share*
Fixed maturities:
Sales . . . . . . . . . . . . . . . . . . . . . . . . $10,209
4,851
Called or tendered . . . . . . . . . . . . .
0
Writedowns** . . . . . . . . . . . . . . . . .
(168)
Loss on redemption of debt . . . . . . . . .
414
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . $15,306
$0.08
0.04
0.00
0.00
0.00
$0.12
$3,015
5,525
0
0
(4,575)
$0.02
0.04
0.00
0.00
(0.03)
$24,943
5,830
(3,640)
(2,671)
129
$0.17
0.04
(0.02)
(0.02)
0.00
$3,965
$0.03
$24,591
$0.17
*
Per share amounts for 2013 and 2012 have been retrospectively adjusted for the three-for-two stock split effective July 1,
2014.
** Written down due to other-than-temporary impairment.
As described in Note 4—Investments under the caption Other-than-temporary impairments in the
Notes to Consolidated Financial Statements, we wrote certain securities down to fair value during 2012 as
a result of other-than-temporary impairment. The impaired securities met our criteria for other-than-
temporary impairment as discussed in Note 1—Significant Accounting Policies and in our Critical
Accounting Policies in this report. The writedowns resulted in pretax charges of $5.6 million in 2012 ($3.6
million after tax). During 2013, we sold investment real estate for an after-tax loss of $1.9 million, of which
$1.7 million had been written down due to other-than-temporary impairment earlier in the year. In 2012,
we redeemed our 7.1% Trust Originated Preferred Securities, recording a loss on redemption of $4.1
million ($2.7 million after tax).
43
FINANCIAL CONDITION
Liquidity. Liquidity provides Torchmark with the ability to meet on demand the cash commitments
required by its business operations and financial obligations. Our liquidity is primarily derived from three
sources: positive cash flow from operations, a portfolio of marketable securities, and 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. While the leading source of the excess cash is
investment income, due to our high underwriting margins and effective expense control, a significant
portion of the excess cash also comes from underwriting income.
Parent Company Liquidity. Cash flows from the insurance subsidiaries are used to pay interest
and principal repayments on Parent Company debt, operating expenses of the Parent, and Parent
the Parent received $479 million of cash
Company dividends to Torchmark shareholders. In 2014,
dividends from its insurance subsidiaries, compared with $488 million in 2013 and $437 million in 2012.
Including transfers from other subsidiaries and after paying debt obligations, shareholder dividends, and
other expenses (but before share repurchases), Torchmark Parent had excess operating cash flow in
2014 of approximately $377 million, compared with $364 million in 2013. Parent Company cash flow in
its operating requirements is available for other corporate purposes, such as strategic
excess of
acquisitions or share repurchases.
the Parent Company will receive
approximately $473 million in dividends from subsidiaries, and that an approximate range of $355 to
$365 million will be available as excess cash flow. Certain restrictions exist on the payment of these
dividends. For more information on the restrictions on the payment of dividends by subsidiaries, see the
restrictions section of Note 12—Shareholders’ Equity in the Notes to Consolidated Financial Statements.
Although these restrictions exist, dividend availability from subsidiaries historically has been sufficient for
the cash flow needs of the Parent Company. As additional liquidity, the Parent held $6 million of cash and
short-term investments at December 31, 2014, compared with $8 million a year earlier. The Parent also
had available a $50 million receivable from subsidiaries at 2014 year end.
is expected that
In 2015,
it
Short-Term Borrowings. An additional source of parent company liquidity is a line of credit facility
with a group of
lenders which allows unsecured borrowings and stand-by letters of credit up to
$750 million. In July 2014, Torchmark replaced a $600 million facility with this new agreement, as
discussed in Note 11—Debt
in the Notes to Consolidated Financial Statements, under the caption
Commercial Paper. The new facility, like the previous, is further designated as a back-up line of credit for
a commercial paper program. As of December 31, 2014, we had available $314 million of additional
borrowing capacity under this new facility, compared with $173 million a year earlier. There have been no
difficulties in accessing the commercial paper market during the three years ended December 31, 2014.
For detailed information about this new line of credit facility, please refer to Note 11—Debt.
In summary, Torchmark expects to have readily available funds for 2015 and 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
Company could generate additional funds through multiple sources including, but not limited to, the
issuance of additional debt, a short-term credit facility, and intercompany borrowing.
Consolidated Liquidity. Consolidated net cash inflows provided from operations were $865 million
in 2014, compared with $1.1 billion in 2013 and $943 million in 2012. In addition to cash inflows from
operations, our companies have received $160 million in investment calls and tenders and $113 million
44
of scheduled maturities or repayments during 2014. Maturities, tenders, and calls totaled $494 million in
2013 and $737 million in 2012.
Our cash and short-term investments were $82 million at year-end 2014 and $114 million at year-end
2013. Additionally, we have a portfolio of marketable fixed and equity securities that are available for sale
in the event of an unexpected need. These securities had a fair value of $14.5 billion at December 31,
2014. However, our strong cash flows from operations, investment maturities, and the availability of our
credit line make any need to sell securities for liquidity unlikely.
Off-Balance Sheet Arrangements. As a part of its above-mentioned credit facility, Torchmark had
outstanding $198 million in stand-by letters of credit at December 31, 2014. However, these letters are
issued among our subsidiaries, one of which is an offshore captive reinsurer, and have no impact on
company obligations as a whole. Any future regulatory changes that restrict the use of off-shore captive
reinsurers might require Torchmark to obtain third-party financing, which could cause an immaterial
increase in financing costs.
As of December 31, 2014, we had no unconsolidated affiliates and no guarantees of the obligations
the performance of consolidated
of
third-party entities. All of our guarantees were guarantees of
subsidiaries, as disclosed in Note 15—Commitments and Contingencies.
The following table presents information about future payments under our contractual obligations for
the selected periods as of December 31, 2014.
(Amounts in millions)
Actual
Liability
Total
Payments
Less than
One Year
One to
Three Years
Three to
Five Years
More than
Five Years
Fixed and determinable:
Debt—principal(1) . . . . . . . . . . . . . . . . . $ 1,231
Debt—interest(2) . . . . . . . . . . . . . . . . . .
6
0
Capital leases . . . . . . . . . . . . . . . . . . .
0
Operating leases . . . . . . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . .
76
Pension obligations(3)
185
. . . . . . . . . . . . .
Future insurance obligations(4) . . . . . .
11,750
$ 1,242
594
0
46
76
252
46,232
Total
. . . . . . . . . . . . . . . . . . . . . . . . . $13,248
$48,442
$ 238
71
0
9
44
18
1,326
$1,706
$ 250
116
0
14
25
41
2,604
$3,050
$ 293
94
0
8
1
47
2,574
$3,017
$
461
313
0
15
6
146
39,728
$40,669
(1) Funded debt
is itemized in Note 11—Debt
in the Notes to Consolidated Financial Statements and includes short-term
commercial paper.
Interest on debt is based on our fixed contractual obligations.
(2)
(3) Pension obligations are primarily liabilities in trust funds that are calculated in accordance with the terms of the pension plans.
They are offset by invested assets in the trusts, which are funded through periodic contributions by Torchmark in a manner
which will provide for the settlement of the obligations as they become due. Therefore, our obligations are offset by those assets
when reported on Torchmark’s Consolidated Balance Sheets. At December 31, 2014,
these pension obligations were
$477 million, but there were also assets of $323 million in the pension entities. The schedule of pension benefit payments
covers ten years and is based on the same assumptions used to measure the pension obligations, except there is no interest
assumption because the payments are undiscounted. There are also obligations for benefits other than pensions with a liability
of $23 million. Please refer to Note 10—Postretirement Benefits in the Notes to Consolidated Financial Statements for more
information on pension obligations.
(4) Future insurance obligations consist primarily of estimated future contingent benefit payments on policies in force at
December 31, 2014. These estimated payments were computed using assumptions for future mortality, morbidity and
persistency. The actual amount and timing of such payments may differ significantly from the estimated amounts shown.
Management believes that the assets supporting the liability of $11.7 billion at December 31, 2014, along with future premiums
and investment income, will be sufficient to fund all future insurance obligations.
45
Capital Resources. Torchmark’s capital structure consists of short-term debt (the commercial
paper facility described in Note 11—Debt in the Notes to Consolidated Financial Statements), long-term
funded debt, and shareholders’ equity. A complete analysis and description of long-term debt issues
outstanding is presented in Note 11.
The carrying value of the long-term funded debt was $992 million at December 31, 2014, compared
with $991 million a year earlier. As fully explained in Note 11—Debt, we issued $300 million principal
amount of 3.8% Senior Notes due in 2022 in September, 2012 for proceeds of $297 million in a public
offering. However, $150 million of the offering was acquired by Torchmark insurance subsidiaries and
was eliminated in consolidation, resulting in net proceeds after issue expenses to the consolidated group
of $147 million. The majority of the $297 million proceeds received by the Parent were used to acquire
Family Heritage as described in Note 6—Acquisition. The balance was invested and later used for the
redemption of our $94.5 million principal amount 7 3⁄ 8% Notes that matured on August 1, 2013 and for
other corporate purposes. The principal balance of the 7 3⁄ 8% Notes, along with accrued interest, was then
repaid on its maturity date in the total amount of $97.5 million.
As also discussed in Note 11, we issued $125 million principal amount of our 5.875% Junior
Subordinated Debentures due 2052 in a September, 2012 public offering. This issue resulted in net
proceeds after issue expenses of $121 million, and were used to redeem our 7.1% Trust Originated
Preferred Securities in the amount of $120 million plus accrued dividends for a total cost of $121 million.
Also noted in Note 11 was our assumption of $20 million of Trust Preferred Securities in connection
with our acquisition of Family Heritage. These securities bear interest at a variable rate, the three-month
LIBOR plus 330 basis points, which is reset each quarter. While these securities are callable by us at any
time, we have no immediate plans to do so.
Our insurance subsidiaries generally target a capital ratio of at least 325% of required regulatory
capital under Risk-Based Capital (RBC), a formula designed by insurance regulatory authorities to
monitor the adequacy of capital. The 325% target is considered sufficient for the subsidiaries because of
their strong reliable cash flows, the relatively low risk of their product mix, and because that ratio is in line
with rating agency expectations for Torchmark. At December 31, 2014, our insurance subsidiaries in the
aggregate had RBC ratios of approximately 326%. Should we experience additional impairments and/or
ratings downgrades in the future that cause the ratio to fall below 325%, management has more than
sufficient liquidity at the Parent Company to make additional contributions as necessary to maintain the
ratios at or above 325%.
As noted under the caption Summary of Operations in this report, we have an ongoing share
repurchase program. Under this program, we acquired 7 million shares at a cost of $375 million in 2014,
8 million shares at a cost of $360 million in 2013, and 11 million shares for $360 million in 2012. The
majority of purchased shares are retired each year. Please refer to the description of our share
repurchase program under the caption Summary of Operations in this report.
Torchmark has increased the quarterly dividend on its common shares over the past three years. In
the first quarter of 2012, it was increased to $.10 per share from $.08 per share. In the first quarter of
2013, it was again raised to $.1133 per share. Then, in the first quarter of 2014, dividends were raised to
$.1267 per share.
Shareholders’ equity was $4.7 billion at December 31, 2014, compared with $3.8 billion at
December 31, 2013. During the twelve months since December 31, 2013, shareholders’ equity was
reduced by the $375 million in share purchases under the repurchase program and another $74 million to
offset the dilution from stock option exercises. However, it was increased by $827 million of after-tax
unrealized gains in the fixed maturity portfolio and by the $543 million of net income.
We plan to use excess cash available at the Parent Company as efficiently as possible in the future.
limited to share repurchases, acquisitions,
Possible uses of excess cash flow include, but are not
increases in shareholder dividends, investment in fixed maturities, or repayment of short-term debt. We
will determine the best use of excess cash after ensuring that desired capital levels are maintained in our
companies.
46
We maintain a significant available-for-sale fixed-maturity portfolio to support our
insurance
policyholders’ liabilities. Current accounting guidance requires that we revalue our portfolio to fair market
value at the end of each accounting period. The period-to-period changes in fair value, net of their
associated impact on deferred acquisition costs and income tax, are reflected directly in shareholders’
equity. Changes in the fair value of the portfolio can result from changes in interest rates and liquidity in
financial markets. While invested assets are revalued, accounting rules do not permit interest-bearing
insurance policy liabilities to be valued at fair value in a consistent manner as that of assets, with changes
in value applied directly to shareholders’ equity. Due to the size of our policy liabilities in relation to our
shareholders’ equity, this inconsistency in measurement usually has a material impact on the reported
value of shareholders’ equity. If these liabilities were revalued in the same manner as the assets, the
effect on equity would be largely offset. Fluctuations in interest rates cause undue volatility in the period-
to-period presentation of our shareholders’ equity, capital structure, and financial ratios which would be
essentially removed if interest-bearing liabilities were valued in the same manner as assets. From time to
time, the market value of our fixed maturity portfolio may be depressed as a result of bond market
illiquidity which could result in a significant decrease in 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 losses due to fluctuations in market value of fixed maturities caused by interest rate changes and
temporarily illiquid markets. Accordingly, our management, credit rating agencies, lenders, many industry
analysts, and certain other financial statement users prefer to remove the effect of this accounting rule
when analyzing our balance sheet, capital structure, and financial ratios.
The following tables present selected data related to our capital resources. Additionally, the tables
present the effect of this accounting guidance on relevant line items, so that investors and other financial
statement users may determine its impact on Torchmark’s capital structure.
Selected Financial Data
At December 31, 2014
At December 31, 2013
At December 31, 2012
Effect of
Accounting
Rule
Requiring
Revaluation (1)
GAAP
Effect of
Accounting
Rule
Requiring
Revaluation (1)
GAAP
Effect of
Accounting
Rule
Requiring
Revaluation (1)
GAAP
Fixed maturities (millions) . . . . . . . . . . $ 14,493
Deferred acquisition costs
(millions) (2) . . . . . . . . . . . . . . . . . . . .
Total assets (millions) . . . . . . . . . . . . .
Short-term debt (millions) . . . . . . . . . .
Long-term debt (millions)
. . . . . . . . . .
Shareholders’ equity (millions) . . . . . .
3,472
20,215
238
992
4,697
$1,669
$ 12,879
$ 390
$ 13,541
$1,578
(16)
1,653
0
0
1,074
3,338
18,192
229
991
3,776
(10)
380
0
0
247
3,198
18,777
319
990
4,362
(25)
1,553
0
0
1,009
Book value per diluted share (3)
. . . . .
Debt to capitalization (4) . . . . . . . . . . . .
36.19
20.8%
8.28
(4.6)%
27.66
24.4%
1.81
(1.3)%
30.56
23.1%
7.07
(5.0)%
Diluted shares outstanding
(thousands) (3) . . . . . . . . . . . . . . . . . . 129,812
Actual shares outstanding
(thousands) (3) . . . . . . . . . . . . . . . . . . 127,930
136,537
134,252
142,707
141,353
(1) Amount added to (deducted from) comprehensive income to produce the stated GAAP item
(2)
(3) Outstanding shares and per share amounts have been retrospectively adjusted for the three-for-two stock split effective July 1,
Includes the value of insurance purchased
2014.
(4) Torchmark’s debt covenants require that the effect of the accounting rule requiring revaluation be removed to determine this
ratio. This ratio is computed by dividing total debt by the sum of debt and shareholders’ equity.
FASB guidance provides for an option which, if elected, would permit us to value our interest-bearing
policy liabilities and debt at
fair value in our Consolidated Balance Sheets. However, unlike the
accounting rule which permits us to account for changes in our available-for-sale bond portfolio through
other comprehensive income, the guidance requires such changes to be recorded in earnings. Because
47
both the size and duration of the investment portfolio do not match those attributes of our policyholder
liabilities and debt,
the impact on earnings could be very significant and volatile, causing reported
earnings not to be reflective of core results. Therefore, we have not elected this option.
Torchmark’s ratio of earnings before interest and taxes to interest requirements (times interest
earned) was 11.2 times in 2014, compared with 10.5 times in 2013 and 2012. This times-interest-earned
ratio is computed by dividing interest expense into the sum of pre-tax income from continuing operations
and interest expense. A discussion of our interest expense is included in the discussion of financing costs
under the caption Investments in this report.
Financial Strength Ratings. The financial strength of our major insurance subsidiaries is rated by
Standard & Poor’s and A. M. Best. The following chart presents these ratings for our five largest
insurance subsidiaries at December 31, 2014.
Liberty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Globe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United American . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
American Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Family Heritage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA-
AA-
A+
AA-
N/A
A+ (Superior)
A+ (Superior)
A+ (Superior)
A+ (Superior)
A (Excellent)
Standard
& Poor’s
A.M.
Best
A.M. Best states that it assigns an A+ (Superior) rating to those companies which, in its opinion, have
demonstrated superior overall performance when compared to the norms of the life/health insurance
industry. A+ (Superior) companies have a superior ability to meet their ongoing insurance obligations.
Companies rated A (Excellent) are considered to have excellent ability to meet those obligations.
The AA financial strength rating category is assigned by Standard & Poor’s Corporation (S&P) to
those insurers which have very strong financial security characteristics, differing only slightly from those
rated higher. An insurer rated A has strong financial security characteristics, but is somewhat more likely
to be affected by adverse business conditions than are insurers with higher ratings. The plus sign (+) or
minus sign (-) shows the relative standing within the major rating category.
In August 2014, S&P updated its outlook on Torchmark’s capital position to a negative outlook. The
revised outlook was due to a change in S&P’s view of certain internal components of Torchmark’s existing
capital position rather than a change in the capital position itself. Management believes Torchmark’s
regulatory capital position is currently as strong as it has been for many years and we expect our
consolidated RBC ratio to remain at least 325% going forward. While we are currently evaluating multiple
options to address S&P’s comments, we do not anticipate any change in our share repurchase program
as a result of S&P’s action.
OTHER ITEMS
Litigation. Torchmark and its subsidiaries are subject to being named as parties to pending or
threatened litigation, much of which involves punitive damage claims based upon allegations of agent
misconduct at the insurance subsidiaries. Such punitive damage claims may have the potential for
significant adverse results since Torchmark and its subsidiaries operate in jurisdictions where large
punitive damage awards bearing little or no relation to actual damages continue to be awarded. This
bespeaks caution since it is impossible to predict the likelihood or extent of punitive damages that may be
awarded if liability is found in any given case. Based upon information presently available, and in light of
legal and other factual defenses available to Torchmark and its subsidiaries, contingent liabilities arising
from threatened and pending litigation are not presently considered by us to be material. For more
information concerning litigation, please refer to Note 15—Commitments and Contingencies in the Notes
to the Consolidated Financial Statements.
48
CRITICAL ACCOUNTING POLICIES
Future Policy Benefits. Because of the long-term nature of insurance contracts, our insurance
companies are liable for policy benefit payments that will be made in the future. The liability for future
policy benefits is determined by standard actuarial procedures common to the life insurance industry. The
accounting policies for determining this liability are disclosed in Note 1—Significant Accounting Policies in
the Notes to Consolidated Financial Statements.
Approximately 84% of our liabilities for future policy benefits at December 31, 2014 were traditional
insurance liabilities where the liability is determined as the present value of future benefits less the
present value of the portion of the gross premium required to pay for such benefits. The assumptions
used in estimating the future benefits for this portion of business are set at the time of contract issue.
These assumptions are “locked in” and are not revised for the lifetime of the contracts, except where
there is a premium deficiency, as defined in Note 1—Significant Accounting Policies in the Notes to
Consolidated Financial Statements under the caption Future Policy Benefits. Otherwise, variability in the
accrual of policy reserve liabilities after policy issuance is caused only by variability of the inventory of in
force policies. Torchmark did not have a premium deficiency event for its traditional business during the
three years ended December 31, 2014.
The remaining portion of liabilities for future policy benefits pertains to business accounted for as
deposit business, where the recorded liability is the fund balance attributable to the benefit of
policyholders as determined by the policy contract at the financial statement date. Accordingly, there are
no assumptions used to determine the future policy benefit liability for deposit business.
Deferred Acquisition Costs. Certain costs of acquiring new business are deferred and recorded as
an asset. Deferred acquisition costs eligible for deferral consist primarily of sales commissions and other
underwriting costs related to the successful issuance of a new insurance contract as indicated in Note 1—
Significant Accounting Policies under the caption Deferred Acquisition Costs in the Notes to Consolidated
Financial Statements. Additionally,
insurance business or insurance
the cost of acquiring blocks of
business through the purchase of other companies, known as the value of insurance purchased, is
included in deferred acquisition costs. Our policies for accounting for deferred acquisition costs and the
associated amortization are reported under the same caption in Note 1.
Approximately 99% of our recorded amounts for deferred acquisition costs at December 31, 2014
were related to traditional products and are being amortized over the premium-paying period in proportion
to the present value of actual historic and estimated future gross premiums. The projection assumptions
for this business are set at the time of contract issue. These assumptions are “locked-in” at that time and,
except where there is a loss recognition issue, are not revised for the lifetime of the contracts. Absent a
premium deficiency, variability in amortization after policy issuance is caused only by variability in
premium volume. We have not recorded a deferred acquisition cost loss recognition event for assets
related to this business for any period in the three years ended December 31, 2014.
The remaining 1% of deferred acquisition costs pertain to deposit business for which deferred
acquisition costs are amortized over the estimated lives of the contracts in proportion to actual and
estimated future gross profits. These contracts are not subject to lock-in. The assumptions must be
updated when actual experience or other evidence suggests that earlier estimates should be revised.
Revisions related to our deposit business assets have not had a material impact on the amortization of
deferred acquisition costs during the three years ended December 31, 2014.
Policy Claims and Other Benefits Payable. This liability consists of known benefits currently payable
and an estimate of claims that have been incurred but not yet reported to us. The estimate of unreported
claims is based on prior experience and is made after careful evaluation of all information available to us.
However, the factors upon which these estimates are based can be subject to change from historical
patterns. Factors involved include the litigation environment, regulatory mandates, and the introduction of
policy types for which claim patterns are not well established, and medical trend rates and medical cost
inflation as they affect our health claims. Changes in these estimates, if any, are reflected in the earnings
of the period in which the adjustment is made. We believe that the estimates used to produce the liability
for claims and other benefits, including the estimate of unsubmitted claims, are the most appropriate
49
under the circumstances. However, there is no certainty that the resulting stated liability will be our
ultimate obligation. At this time, we do not expect any change in this estimate to have a material impact
on earnings or financial position consistent with our historical experience.
Valuation of Fixed Maturities. We hold a substantial investment in high-quality fixed maturities to
provide for the funding of our future policy contractual obligations over long periods of time. While these
securities are generally expected to be held to maturity, they are classified as available for sale and are
sold from time to time, primarily to manage risk. We report this portfolio at fair value. Fair value is the
price that we would expect to receive upon sale of the asset in an orderly transaction. The fair value of
the fixed-maturity portfolio is primarily affected by changes in interest rates in financial markets, having a
greater impact on longer-term maturities. Because of
the size of our fixed-maturity portfolio, small
changes in rates can have a significant effect on the portfolio and the reported financial position of the
Company. This impact
increments under the caption Market Risk
Sensitivity in this report. However, as discussed under the caption Financial Condition in this report, we
believe these unrealized fluctuations in value have no meaningful impact on our actual financial condition
and, as such, we remove them from consideration when viewing our financial position and financial ratios.
is disclosed in 100 basis point
At times, the values of our fixed maturities can also be affected by illiquidity in the financial markets.
Illiquidity would contribute to a spread widening, and accordingly unrealized losses, on many securities
that we would expect to be fully recoverable. Even though our fixed maturity portfolio is available for sale,
we have the ability and intent to hold the securities until maturity as a result of our strong and stable cash
flows generated from our
insurance products. Considerable information concerning the policies,
procedures, classification levels, and other relevant data concerning the valuation of our fixed-maturity
investments is presented in Note 1—Significant Accounting Policies and in Note 4—Investments under
the captions Fair Value Measurements in both notes.
Impairment of Investments. We continually monitor our investment portfolio for investments that
have become impaired in value, where fair value has declined below carrying value. While the values of
the investments in our portfolio constantly fluctuate due to market conditions, an other-than-temporary
impairment charge is recorded only when a security has experienced a decline in fair market value which
is deemed to be other than temporary. The policies and procedures that we use to evaluate and account
for impairments of investments are disclosed in Note 1—Significant Accounting Policies in the Notes to
Consolidated Financial Statements and the discussions under the captions Investments and Realized
Gains and Losses in this report. While every effort is made to make the best estimate of status and value
with the information available regarding an other-than-temporary impairment, it is difficult to predict the
future prospects of a distressed or impaired security.
Defined benefit pension plans. We maintain funded defined benefit plans covering most full-time
employees. We also have unfunded nonqualified defined benefit plans covering certain key and other
employees. Our obligations under these plans are determined actuarially based on specified actuarial
assumptions. In accordance with GAAP, an expense is recorded each year as these pension obligations
grow due to the increase in the service period of employees and the interest cost associated with the
passage of time. These obligations are offset, at least in part, by the growth in value of the assets in the
funded plans. At December 31, 2014, our gross liability under these funded plans was $403 million, but
was offset by assets of $323 million.
The actuarial assumptions used in determining our obligations for pensions include employee
mortality and turnover, retirement age, the expected return on plan assets, projected salary increases,
and the discount rate at which future obligations could be settled. These assumptions have an important
effect on the pension obligation. A decrease in the discount rate or rate of return on plan assets will cause
an increase in the pension obligation. A decrease in projected salary increases will cause a decrease in
this obligation. Small changes in assumptions may cause significant differences in reported results for
these plans. For example, a sensitivity analysis is presented below for the impact of change in the
50
discount rate and the long-term rate of return on assets assumed on our defined benefit pension plans
expense for the year 2014 and projected benefit obligation as of December 31, 2014.
Assumption
% Change
Impact on
Expense
Impact on Projected
Benefit Obligation
(Dollars in Thousands)
Discount Rate (1):
Increase . . . . . . . . . . . . . . . . . . .
Decrease . . . . . . . . . . . . . . . . . .
0.25
(0.25)
$(2,610)
2,754
$(19,809)
21,059
Expected Return (2):
Increase . . . . . . . . . . . . . . . . . . .
Decrease . . . . . . . . . . . . . . . . . .
0.25
(0.25)
(758)
758
(1) The discount rate was 5.12% for 2014 expense and 4.23% for the projected benefit obligation at December 31, 2014
(2) The expected return rate assumed was 6.97%
The Company determines mortality assumptions through the use of published mortality tables that
reflect broad-based studies of mortality and published longevity improvement scales. During 2014, the
Company revised the mortality assumptions based on an evaluation of a new mortality table and longevity
scale released by the Society of Actuaries. The change in these assumptions added approximately $26
million to the projected benefit obligation as of December 31, 2014.
The criteria used to determine the primary assumptions are discussed in Note 9—Postretirement
Benefits in the Notes to Consolidated Financial Statements. While we have used our best efforts to
determine the most reliable assumptions, given the information available from company experience,
economic data, independent consultants and other sources, we cannot be certain that actual results will
be the same as expected. The assumptions are reviewed annually and revised, if necessary, based on
more current information available to us. Note 9 also contains information about pension plan assets,
investment policies, and other related data.
51
CAUTIONARY STATEMENTS
We caution readers regarding certain forward-looking statements contained in the foregoing
discussion and elsewhere in this document, and in any other statements made by us or on our behalf
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 us or our
business, whether express or implied, is meant as and should be considered a forward-looking statement.
Such statements represent our opinions concerning future operations, strategies, financial results or other
developments.
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 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) Changes in lapse rates and/or sales of our insurance policies as well as levels of mortality,
morbidity and utilization of healthcare services that differ from our assumptions;
2) Federal and state legislative and regulatory developments, 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 (HMOs) 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 that we own, or that may impair issuers’ ability to pay
interest due us 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 our estimates and
judgments which may differ from the actual amounts ultimately realized.
Readers are also directed to consider other risks and uncertainties described in our other documents on
file with the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information required by this item is found under the heading Market Risk Sensitivity in Item 7
beginning on page 42 of this report.
52
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2014 and 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period ended
Page
54
55
December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
Consolidated Statements of Comprehensive Income for each of the three years in the period
ended December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended
December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57
58
59
60
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Torchmark Corporation
McKinney, Texas
We have audited the accompanying consolidated balance sheets of Torchmark Corporation and
subsidiaries (Torchmark) as of December 31, 2014 and 2013, and the related consolidated statements of
operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2014. Our audits also included the financial statement schedules listed in
the Index at Item 15. These financial statements and financial statement schedules are the responsibility
of Torchmark’s management. Our responsibility is to express an opinion on the financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
their operations and their cash flows for each of
In our opinion, such consolidated financial statements present fairly, in all material respects, the
financial position of Torchmark Corporation and subsidiaries as of December 31, 2014 and 2013, and the
results of
the three years in the period ended
December 31, 2014, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
We have also audited,
the Public Company Accounting
Oversight Board (United States), Torchmark’s internal control over financial reporting as of December 31,
2014, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27,
2015 expressed an unqualified opinion on Torchmark’s internal control over financial reporting.
in accordance with the standards of
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
February 27, 2015
54
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share data)
December 31,
2014
2013
Assets:
Investments:
Fixed maturities—available for sale, at fair value (amortized cost:
2014—$12,823,612; 2013—$12,488,875) . . . . . . . . . . . . . . . . . . . . . . . . . $14,493,060 $12,879,133
1,884
448,887
13,207
76,890
Equity securities, at fair value (cost: 2014—$776; 2013—$875) . . . . . . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,477
472,109
10,449
15,882
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,992,977 13,420,001
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66,019
204,879
543,988
3,471,781
441,591
493,495
36,943
200,038
331,103
3,337,649
441,591
424,419
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,214,730 $18,191,744
Liabilities:
Future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,750,495 $11,256,155
Unearned and advance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74,174
223,380
Policy claims and other benefits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94,286
Other policyholders’ funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72,275
212,137
95,446
Total policy liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,130,353 11,647,995
Current and deferred income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt
Long-term debt (estimated fair value: 2014—$1,148,749;
1,797,265
359,118
238,398
1,285,574
261,898
229,070
2013—$1,131,391)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
992,130
990,865
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,517,264 14,415,402
Shareholders’ equity:
Preferred stock, par value $1 per share—Authorized 5,000,000 shares;
outstanding: 0 in 2014 and in 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
Common stock, par value $1 per share—Authorized 320,000,000 shares;
outstanding: (2014—134,218,183 issued, less 6,287,907 held in treasury
and 2013—151,218,183 issued, less 16,965,802 held in treasury)* . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134,218
457,613
997,452
3,376,846
(268,663)
151,218
462,058
210,981
3,495,533
(543,448)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,697,466
3,776,342
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . $20,214,730 $18,191,744
* Amounts have been retrospectively adjusted for the stock split described in Note 1.
See accompanying Notes to Consolidated Financial Statements.
55
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
Year Ended December 31,
2014
2013
2012
Revenue:
Life premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,966,300 $1,885,332 $1,808,524
1,047,379
Health premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
559
Other premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,856,462
Total premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,166,410
532
3,052,274
1,242,720
400
3,209,420
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
729,207
23,548
0
2,121
3,964,296
709,743
10,668
(2,678)
1,931
3,771,938
693,644
43,433
(5,600)
1,577
3,589,516
Benefits and expenses:
Life policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . .
1,301,562
875,633
42,005
2,219,200
1,227,857
817,687
43,302
2,088,846
1,172,020
739,541
44,121
1,955,682
Amortization of deferred acquisition costs . . . . . . . . . . . . . . . . . . .
Commissions, premium taxes, and non-deferred acquisition
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total benefits and expenses . . . . . . . . . . . . . . . . . . . . . . . . .
418,772
403,389
385,167
249,076
222,654
76,126
3,185,828
221,426
214,690
80,461
3,008,812
203,986
198,176
80,512
2,823,523
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
778,468
763,126
765,993
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(236,669)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 542,939 $ 528,472 $ 529,324
(234,654)
(235,529)
Basic net income per share* . . . . . . . . . . . . . . . . . . . . . . . . . $
4.15 $
3.84 $
Diluted net income per share* . . . . . . . . . . . . . . . . . . . . . . . $
4.09 $
3.79 $
3.65
3.60
* Per share amounts have been retrospectively adjusted for the stock split described in Note 1.
See accompanying Notes to Consolidated Financial Statements.
56
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 542,939 $
2014
Year Ended December 31,
2013
528,472 $ 529,324
2012
Other comprehensive income (loss):
Unrealized investment gains (losses):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,312,841
(1,166,332)
657,954
Reclassification adjustment for (gains) losses on
securities included in net income . . . . . . . . . . . . . . . . . .
Reclassification adjustment for amortization of (discount)
premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange adjustment on securities recorded at
(23,771)
(13,138)
(41,745)
(8,621)
(6,569)
462
fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains (losses) on securities . . . . . . . . . . . . . . . . . . .
(1,567)
1,278,882
(1,173)
(1,187,212)
(4,334)
612,337
Unrealized gains (losses) on other investments:
Unrealized holding gains (losses) arising during
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for (gains) losses included in
net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains (losses) on other investments . . . . . . . . . . . .
Total unrealized investment gains (losses) . . . . . . . . . . . .
4,180
28
2,517
0
4,180
1,283,062
3,532
3,560
(1,183,652)
0
2,517
614,854
Less applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains (losses) on investments, net of tax . . . . . . . . . .
(448,985)
834,077
415,481
(768,171)
(215,194)
399,660
Unrealized gains (losses) attributable to deferred acquisition
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains (losses) attributable to deferred acquisition
(6,200)
2,170
14,906
(5,217)
7,234
(2,532)
costs, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,030)
9,689
4,702
Foreign exchange translation adjustments, other than
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10,770)
3,290
(2,962)
1,220
3,487
(1,118)
Foreign exchange translation adjustments, other than
securities, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,480)
(1,742)
2,369
Pension adjustments:
Amortization of pension costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experience gain (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension adjustments, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,285
0
(65,817)
(55,532)
19,436
(36,096)
18,366
0
52,296
70,662
(24,732)
45,930
14,799
(3,452)
(59,613)
(48,266)
16,894
(31,372)
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . .
786,471
(714,294)
375,359
Comprehensive income (loss)
. . . . . . . . . . . . . . . . . . . . . . $1,329,410 $ (185,822) $ 904,683
See accompanying Notes to Consolidated Financial Statements.
57
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(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
Year Ended December 31, 2012
Balance at January 1, 2012 . . . . . . . . . . .
$0
$168,468 $425,331
$ 549,916
$3,208,555 $(492,639) $3,859,631
Comprehensive income (loss) . . . . . . . . .
Common dividends declared ($.40 a
share)* . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of treasury stock . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . .
Retirement of treasury stock* . . . . . . . . . .
375,359
529,324
(57,592)
(570,165)
3,192
(51,322) 232,344
(278,533) 314,847
904,683
(57,592)
(570,165)
21,605
203,624
0
18,413
22,602
(26,564)
(9,750)
Balance at December 31, 2012 . . . . . .
0
158,718
439,782
925,275
3,350,432 (512,421)
4,361,786
Year Ended December 31, 2013
Comprehensive income (loss) . . . . . . . . .
Common dividends declared ($.45 a
share)* . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of treasury stock . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . .
Retirement of treasury stock* . . . . . . . . . .
(714,294)
528,472
(61,991)
563
(482,264)
1,615
(25,195) 122,871
(296,748) 326,751
(185,822)
(61,991)
(482,264)
25,642
118,991
0
23,464
21,315
(22,503)
(7,500)
Balance at December 31, 2013 . . . . . .
0
151,218
462,058
210,981
3,495,533 (543,448)
3,776,342
Year Ended December 31, 2014
Comprehensive income (loss) . . . . . . . . .
Common dividends declared ($.51 a
share) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of treasury stock . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . .
786,471
542,939
1,329,410
(65,998)
(449,308)
526
78,934
(573,349) 644,633
362
(22,641)
(65,998)
(449,308)
32,203
74,817
0
31,315
18,524
(54,284)
(17,000)
Balance at December 31, 2014 . . . . . .
$0
$134,218 $457,613
$ 997,452
$3,376,846 $(268,663) $4,697,466
* Dollar and per share amounts have been retrospectively adjusted to give effect to the stock split described in Note 1.
See accompanying Notes to Consolidated Financial Statements.
58
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
2013
2012
2014
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 542,939 $
Adjustments to reconcile net income to cash provided from operations:
528,472 $
529,324
Increase in future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in other policy benefits . . . . . . . . . . . . . . . . . . . . . . . . .
Deferral of policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . .
Change in current and deferred income taxes . . . . . . . . . . . . . . . . . . . . . . .
Realized (gains) losses on sale of investments and properties . . . . . . . . .
Change in other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
585,632
(11,982)
(567,271)
418,772
98,711
(23,548)
(163,522)
(15,023)
578,217
(6,006)
(524,263)
403,389
76,121
(7,990)
50,900
20,440
497,306
(8,115)
(480,818)
385,167
122,538
(37,833)
(89,677)
24,947
Cash provided from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
864,708
1,119,280
942,839
Cash used for investment activities:
Investments sold or matured:
Fixed maturities available for sale—sold . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed maturities available for sale—matured, called, and repaid . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109,024
273,223
700
795
133,463
493,885
14,000
1,333
345,601
736,900
0
9,458
Total investments sold or matured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
383,742
642,681
1,091,959
Acquisition of investments:
Fixed maturities—available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of Family Heritage, net of cash acquired . . . . . . . . . . . . . . . . . . . .
Net increase in policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (increase) decrease in short-term investments . . . . . . . . . . . . . . . . . . . . .
Net change in payable or receivable for securities . . . . . . . . . . . . . . . . . . . . .
Additions to properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in low-income housing interests . . . . . . . . . . . . . . . . . . . . . . . . . .
(704,993)
0
(704,993)
0
(23,222)
61,008
0
(19,367)
8,752
(56,083)
(1,143,840)
(591)
(1,431,690)
(1,786)
(1,144,431)
0
(24,837)
17,970
(43,987)
(11,168)
570
(51,176)
(1,433,476)
(186,424)
(23,130)
(73,616)
3,647
(4,667)
56
(72,388)
Cash used for investment activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(350,163)
(614,378)
(698,039)
Cash provided from (used for) financing activities:
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of 3.8% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of 5.875% Junior Subordinated Debentures . . . . . . . . . . . . . . . . . .
Issue expenses of debt offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of 7.375% Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of 7.1% Junior Subordinated Debentures . . . . . . . . . . . . . . . . . .
Net borrowing (repayment) of commercial paper . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from stock option exercises . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net receipts (payments) from deposit-type product . . . . . . . . . . . . . . . . . . . . .
56,294
(65,006)
0
0
0
0
0
9,328
18,524
(449,308)
(69,792)
97,816
(60,911)
0
0
0
(94,050)
0
3,983
21,315
(482,264)
(21,808)
181,022
(55,527)
150,000
125,000
(7,101)
0
(123,711)
245
22,602
(570,165)
8,523
Cash provided from (used for) financing activities . . . . . . . . . . . . . . . . . . . . . . . .
(499,960)
(535,919)
(269,112)
Effect of foreign exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . .
14,491
6,250
1,909
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year
29,076
36,943
(24,767)
61,710
(22,403)
84,113
Cash at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,019 $
36,943 $
61,710
See accompanying Notes to Consolidated Financial Statements.
59
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies
Business: Torchmark Corporation (Torchmark or alternatively,
through its
subsidiaries provides a variety of life and health insurance products and annuities to a broad base of
customers.
the Company)
Basis of Presentation: The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of America (GAAP), under
guidance issued by the Financial Accounting Standards Board (FASB). The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation: The consolidated financial statements include the results of Torchmark
and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation. When Torchmark acquires a subsidiary or a block of business, the assets acquired and the
liabilities assumed are measured at fair value at the acquisition date. Any excess of acquisition cost over
the fair value of net assets is recorded as goodwill. Expenses incurred to effect the acquisition are
charged to earnings as of the acquisition date. Upon acquisition, the accounts and results of operations
are consolidated as of and subsequent to the acquisition date.
Torchmark accounts for its variable interest entities (VIE’s) under accounting guidance which clarifies
the definition of a variable interest and the instructions for consolidating VIE’s. Only primary beneficiaries
are required or allowed to consolidate VIE’s. Therefore, a company may have voting control of a VIE, but
if it is not the primary beneficiary of the VIE, it is not permitted to consolidate the VIE. The trust that was
liable for Torchmark’s 7.1% Trust Preferred Securities that were redeemed in October, 2012 met the
definition of a VIE. However, Torchmark was not the primary beneficiary of this entity because its interest
was not variable. Therefore, Torchmark was not permitted to consolidate its interest, even though it
owned 100% of the voting equity of the trust and guaranteed its performance. For this reason, Torchmark
reported its 7.1% Junior Subordinated Debentures due to the trust as “Due to affiliates” each period at its
carrying value. However, Torchmark viewed the Trust Preferred Securities as it does any other debt
offering and consolidated the trust in its segment analysis because GAAP requires that the segment
analysis be reported as management views its operations and financial condition. More information about
the redemption of these securities is disclosed in Note 11—Debt.
Additionally, as further described under the caption Low-Income Housing Tax Credit Interests below
in this note, Torchmark holds passive interests in limited partnerships which provide investment returns
through the provision of tax benefits (principally from the transfer of Federal or state tax credits related to
federal low-income housing). These interests are also considered to be VIEs. They are not consolidated
because the Company has no power to control the activities that most significantly affect the economic
performance of these entities and therefore the Company is not the primary beneficiary of any of these
interests. Torchmark’s involvement is limited to its limited partnership interest in the entities. Torchmark
has not provided any other financial support to the entities beyond its commitments to fund its limited
partnership interests, and there are no arrangements or agreements with any of the interests to provide
other financial support. The maximum loss exposure relative to these interests is limited to their carrying
value.
When a component of Torchmark’s business is sold or expected to be sold during the ensuing year,
Torchmark reports the assets and liabilities of the component as assets and liabilities of subsidiaries held
for sale. Assets or liabilities of subsidiaries held for sale are segregated and are recorded in the
Consolidated Balance Sheets at the lower of the carrying amount or estimated fair value less cost to sell.
If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Torchmark
reports the results of operations of a business as discontinued operations when the component is sold or
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
expected to be sold, the operations and cash flows of the business have been or will be eliminated from
the ongoing operations as a result of the disposal transaction, and Torchmark will not have any significant
continuing involvement in the operations of the business after the disposal transaction. The results of
discontinued operations are reported in discontinued operations in the Consolidated Statements of
Operations for current and prior periods commencing in the period in which the business is either
disposed of or is accounted for as a disposal group, including any gain or loss recognized on the sale or
adjustment of the carrying amount to fair value less cost to sell.
Investments: Torchmark classifies all of its fixed-maturity investments, which include bonds and
redeemable preferred stocks, as available for sale. Investments classified as available for sale are carried
at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated
other comprehensive income.
Investments in equity securities, which include common and
nonredeemable preferred stocks, are reported at fair value with unrealized gains and losses, net of
deferred taxes, reflected directly in accumulated other comprehensive income. Policy loans are carried at
unpaid principal balances. Mortgage loans, included in “Other long-term investments,” are carried at
amortized cost. Investments in real estate, included in “Other long-term investments,” are reported at cost
less allowances for depreciation. Depreciation is calculated on the straight-line method. Short-term
investments include investments in interest-bearing time deposits with original maturities of twelve months
or less.
Gains and losses realized on the disposition of
investments are determined on a specific
identification basis. Income attributable to investments is included in Torchmark’s net investment income.
Net
income and realized investment gains and losses are not allocated to insurance
policyholders’ liabilities.
investment
Fair Value Measurements, Investments in Securities: Torchmark measures the fair value of its fixed
maturities and equity securities based on a hierarchy consisting of three levels which indicate the quality
of the fair value measurements as described below:
•
•
•
Level 1 – fair values are based on quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access as of the measurement date.
Level 2 – fair values are based on inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted
prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets
or liabilities in markets that are not active, inputs other than quoted prices that are observable for
the asset or liability, or inputs that can otherwise be corroborated by observable market data.
Level 3 – fair values are based on inputs that are considered unobservable where there is little, if
any, market activity for the asset or liability as of the measurement date. In this circumstance, the
Company has to rely on values derived by independent brokers or
internally-developed
assumptions. Unobservable inputs are developed based on the best information available to the
Company which may include the Company’s own data or bid and ask prices in the dealer market.
therefore determines the fair values of
The great majority of the Company’s fixed maturities are not actively traded and direct quotes are not
generally available. Management
these securities after
consideration of data provided by third-party pricing services and independent broker/dealers. Over 99%
of the fair value reported at December 31, 2014 was determined using data provided by third-party pricing
services. Prices provided by third-party pricing services are not binding offers but are estimated exit
values. They are based on observable market data inputs which can vary by security type. Such inputs
include benchmark yields, available trades, broker/dealer quotes, issuer spreads, benchmark securities,
bids, offers, and other market data. Management reviews and analyzes all prices obtained to insure the
reasonableness of the values, taking all available information into account. In addition, management
corroborates the prices obtained from third-party sources against other independent sources. When
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
corroborated prices produce small variations, the close correlation indicates observable inputs, and the
mean value is used. When corroborated prices present greater variations, additional analysis is required
to determine which value is the most appropriate. When only one price is available, management
evaluates observable inputs and performs additional analysis to confirm that the price is appropriate. All
fair value measurements based on prices determined with observable market data are reported as
Level 1 or Level 2 measurements.
When third-party vendor prices are not available, the Company attempts to obtain at least three
quotes from broker/dealers for each security. When at least three quotes are obtained, and the standard
deviation of such quotes is less than 3%, (suggesting that the independent quotes were likely derived
using similar observable inputs), the Company uses the mean quote and classifies the measurement as
Level 2. At December 31, 2014 and 2013, there were no assets valued as Level 2 in this manner with
broker quotes.
When the standard deviation is 3% or greater, or the Company cannot obtain three quotes, then
additional information and management judgment are required to establish the fair value. Further review
is performed on the available quotes to determine if they can be corroborated within reasonable tolerance
to any other observable evidence. If one of the quotes or the mean of the available quotes can be
corroborated with other observable evidence, then the value is reported as Level 2. Otherwise, the value
is classified as Level 3. The Company uses information and valuation techniques deemed appropriate for
determining the point within the range of reasonable fair value estimates that is most representative of fair
value under current market conditions. As of December 31, 2014 and 2013, fair value measurements
classified as Level 3 represented 4.0% and 2.8%, respectively, of
total fixed maturities and equity
securities. Transfers between levels are recognized as of the end of the period of transfer.
Beginning in 2012, Torchmark began investing in a portfolio of private placement bonds which are
not actively traded. This portfolio is managed by a third party and was $497 million at amortized cost on
December 31, 2014, compared with $313 million a year earlier. The portfolio manager provides valuations
for the bonds based on a pricing matrix utilizing observable inputs, such as the benchmark treasury rate
and published sector indices, and unobservable inputs such as an internally-developed credit rating. If the
unobservable inputs can be closely corroborated with publicly available information, the fair values are
classified as Level 2. If they cannot be corroborated, the fair values are classified as Level 3. As of
December 31, 2014 and 2013, all private placements were classified as Level 3.
The fair values for each class of security and by valuation hierarchy level are indicated in Note 4—
Investments under the caption Fair value measurements.
Fair Value Measurements, Other Financial
Instruments: Fair values for cash, short-term
investments, short-term debt, receivables and payables approximate carrying value. Policy loans are an
integral part of Torchmark’s subsidiaries’ life insurance policies in force and cannot be valued separately.
The fair values of Torchmark’s long-term debt issues are based on the same methodology as investments
in fixed maturities. Because observable inputs were available for these debt securities at December 31,
2014, they were classified as Level 2 in the valuation hierarchy. The fair value for each debt instrument as
of December 31, 2014 is disclosed in Note 11—Debt. As described in Note 9—Postretirement Benefits,
Torchmark maintains an unqualified supplemental retirement plan. Because this plan is unfunded, the
assets which support the liability for this plan are considered general assets of the Company. These
assets consist of the cash value of corporate-owned life insurance policies and exchange traded funds
(ETF’s). The fair value of the insurance cash values approximates carrying value. Fair values for the
ETF’s are derived from direct quotes and are considered Level 1 in the valuation hierarchy.
Impairment of Investments: Torchmark’s portfolio of fixed maturities fluctuates in value due to
changes in interest rates in the financial markets as well as other factors. Fluctuations caused by market
interest rate changes have little bearing on whether or not the investment will be ultimately recoverable.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
Therefore, Torchmark considers these declines in value resulting from changes in market interest rates to
be temporary. In certain circumstances, however, Torchmark determines that the decline in the value of a
security is other-than-temporary and writes the book value of the security down to its fair value, realizing
an investment loss. The evaluation of Torchmark’s securities for other-than-temporary impairments is a
process that is undertaken at least quarterly and is overseen by a team of Company investment and
accounting professionals. Each security which is impaired because the fair value is less than the cost or
amortized cost is identified and evaluated. The determination that an impairment is other-than-temporary
is highly subjective and involves the careful consideration of many factors. Among the factors considered
are:
•
•
•
The length of time and extent to which the security has been impaired
The reason(s) for the impairment
The financial condition of the issuer and the near-term prospects for recovery in fair value of the
security
The Company’s ability and intent to hold the security until anticipated recovery
•
• Expected future cash flows
In many cases, management believes it
The relative weight given to each of these factors can change over time as facts and circumstances
change.
to
prospective factors than to retrospective factors. Prospective factors that are given more weight include
prospects for recovery, the Company’s ability and intent to hold the security until anticipated recovery,
and expected future cash flows.
is appropriate to give relatively more weight
Among the facts and information considered in the process are:
• Default on a required payment
•
•
Issuer bankruptcy filings
Financial statements of the issuer
• Changes in credit ratings of the issuer
•
The value of underlying collateral
• News and information included in press releases issued by the issuer
• News and information reported in the media concerning the issuer
• News and information published by or otherwise provided by credit analysts
• Recent cash flows
While all available information is taken into account, it is difficult to predict the ultimately recoverable
amount of a distressed or impaired security. If a security is determined to be other-than-temporarily
impaired, the cost basis of the security is written down to fair value and is treated as a realized loss in the
period the determination is made. The written-down security will be amortized and revenue recognized in
accordance with estimated future cash flows.
Current accounting guidance is such that if an entity intends to sell or if it is more likely than not that it
will be required to sell an impaired security prior to recovery of its cost basis, the security is to be
impairment must be charged to
considered other-than-temporarily impaired and the full amount of
earnings. Otherwise, losses on fixed maturities which are other-than-temporarily impaired are separated
into two categories, the portion of loss which is considered credit loss and the portion of loss which is due
to other factors. The credit loss portion is charged to earnings while the loss due to other factors is
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
charged to other comprehensive income. The credit loss portion of an impairment is determined as the
difference between the security’s amortized cost and the present value of expected future cash flows
discounted at the security’s original effective yield rate. The temporary portion is the difference between
this present value of expected future cash flows and fair value (as discounted by a market yield). The
expected cash flows are determined using judgment and the best information available to the Company.
Inputs used to derive expected cash flows include expected default rates, current levels of subordination,
and loan-to-collateral value ratios. Management believes that the present value of future cash flows at the
original effective yield is a better measure of valuation, because fair value determined by a discounted
market yield is often based on limited observable market data, and the market for these securities is
generally neither active nor orderly.
Cash: Cash consists of balances on hand and on deposit
in banks and financial
institutions.
Overdrafts arising from the overnight investment of funds offset cash balances on hand and on deposit.
long-
Recognition of Premium Revenue and Related Expenses: Premium income for traditional
duration life and health insurance products is recognized when due from the policyholder. Premiums for
short-duration health contracts are recognized as revenue over the contract period in proportion to the
insurance protection provided. Profits for limited-payment life insurance contracts are recognized over the
contract period. Premiums for universal life-type and annuity contracts are added to the policy account
value, and revenues for such products are recognized as charges to the policy account value for
mortality, administration, and surrenders (retrospective deposit method). Life premium includes policy
charges of $21 million, $22 million, and $23 million for the years ended December 31, 2014, 2013, and
2012, respectively. Other premium consists of annuity policy charges in each year. Profits are also
earned to the extent that investment income exceeds policy liability interest requirements. The related
benefits and expenses are matched with revenues by means of the provision of future policy benefits and
the amortization of deferred acquisition costs in a manner which recognizes profits as they are earned
over the same period.
Future Policy Benefits: The liability for future policy benefits for universal
life-type products is
represented by policy account value. The liability for future policy benefits for all other life and health
products, approximately 84% of total future policy benefits, is determined on the net level premium
method. This method provides for the present value of expected future benefit payments less the present
value of expected future net premiums, based on estimated investment yields, mortality, morbidity,
persistency and other assumptions which were considered appropriate at the time the policies were
issued. For limited-payment contracts, a deferred profit liability is also recorded which causes profits to
emerge over the life of the contract in proportion to policies in force. Assumptions used for traditional life
and health insurance products are based primarily on Company experience. Assumptions for interest
rates range from 2.5% to 7.0% for Torchmark’s insurance companies with an overall weighted average
assumed rate of 5.7%. Mortality tables used for individual life insurance include various statutory tables
and modifications of a variety of generally accepted actuarial tables. Morbidity assumptions for individual
health are based on Company experience and industry data. Withdrawal and termination assumptions are
based on Torchmark’s experience. Once established, assumptions for these products are generally not
changed. An additional provision is made on most products to allow for possible adverse deviation from
the assumptions. These estimates are periodically reviewed and compared with actual experience. If it is
determined that existing contract liabilities, together with the present value of future gross premiums, will
not be sufficient to cover the present value of future benefits and to recover unamortized deferred
acquisition costs, then a premium deficiency exists. Such a deficiency would be recognized immediately
by a charge to earnings and either a reduction of unamortized deferred acquisition costs or an increase in
the liability for future policy benefits. From that point forward, the liability for future policy benefits would
be based on the revised assumptions.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
Deferred Acquisition Costs: Certain costs of acquiring new insurance business are deferred and
recorded as an asset. These costs are essential for the acquisition of new insurance business and are
directly related to the successful issuance of an insurance contract including sales commissions, policy
issue costs, and underwriting costs. Additionally, deferred acquisition costs include the value of insurance
purchased, which are the costs of acquiring blocks of insurance from other companies or through the
acquisition of other companies. These costs represent the difference between the fair value of the
contractual insurance assets acquired and liabilities assumed compared against the assets and liabilities
for insurance contracts that the Company issues or holds measured in accordance with GAAP. Deferred
acquisition costs and the value of insurance purchased are amortized in a systematic manner which
life-type policies are
matches these costs with the associated revenues. Policies other than universal
amortized with interest over the estimated premium-paying period of the policies in a manner which
charges each year’s operations in proportion to the receipt of premium income. Universal life-type policies
are amortized with interest in proportion to estimated gross profits. The assumptions used to amortize
acquisition costs with regard to interest, mortality, morbidity, and persistency are consistent with those
used to estimate the liability for future policy benefits. For interest-sensitive and deposit-balance type
products, these assumptions are reviewed on a regular basis and are revised if actual experience differs
significantly from original expectations. For all other products, amortization assumptions are generally not
revised once established. Deferred acquisition costs are subject
to periodic recoverability and loss
recognition testing to determine if there is a premium deficiency. These tests evaluate whether the
present value of future contract-related cash flows will support the capitalized deferred acquisition cost
asset. These cash flows consist primarily of premium income, less benefits and expenses taking inflation
into account. The present value of these cash flows, less the benefit reserve, is then compared with the
unamortized deferred acquisition cost balance. In the event the estimated present value of net cash flows
is less, the deficiency would be recognized by a charge to earnings and either a reduction of unamortized
acquisition costs or an increase in the liability for future benefits, as described under the caption Future
Policy Benefits.
Advertising Costs: Costs related to advertising are generally charged to expense as incurred.
response advertising costs are capitalized when there is a reliable and
However, certain direct
demonstrated relationship between total costs and future benefits that is a direct result of incurring these
costs. Torchmark’s Direct Response advertising costs consist primarily of the production and distribution
costs of direct mail advertising materials, and when capitalized are included as a component of deferred
acquisition costs. They are amortized in the same manner as other deferred acquisition costs. Direct
response advertising costs charged to earnings and included in other operating expense were $8 million,
$6 million, and $16 million in 2014, 2013, and 2012, respectively. Capitalized advertising costs included
within deferred acquisition costs were $1.15 billion at December 31, 2014 and $1.09 billion at December
31, 2013.
Policy Claims and Other Benefits Payable: Torchmark establishes a liability for known policy
benefits payable and an estimate of claims that have been incurred but not yet reported to the Company.
The estimate of unreported claims is based on prior experience. Torchmark makes an estimate after
careful evaluation of all information available to the Company. However, there is no certainty the stated
liability for claims and other benefits, including the estimate of unsubmitted claims, will be Torchmark’s
ultimate obligation.
Income Taxes:
Income taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement book values and tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. More information concerning income taxes is provided in Note 8—Income Taxes.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
Property and Equipment: Property and equipment, included in “Other assets,” is reported at cost
less allowances for depreciation. Depreciation is recorded primarily on the straight line method over the
estimated useful lives of these assets which range from three to ten years for equipment and five to forty
years for buildings and improvements. Ordinary maintenance and repairs are charged to income as
incurred. Impairments, if any, are recorded when, based on events and circumstances, it becomes
evident that the fair value of the asset is less than its carrying amount. Original cost of property and
equipment was $139 million at December 31, 2014 and $136 million at December 31, 2013. Accumulated
depreciation was $85 million at year end 2014 and $85 million at the end of 2013. Depreciation expense
was $7.4 million in 2014, $6.4 million in 2013, and $7.1 million in 2012. During 2013, Liberty National Life
Insurance Company (Liberty National), a Torchmark subsidiary, sold real estate for a loss of $265
thousand after a previous write-down for other-than-temporary impairment of $2.7 million earlier in the
year. The sale of this property eliminated substantially all asbestos-related liability for Torchmark.
Low-Income Housing Tax Credit Interests: As of December 31, 2014, Torchmark had $318 million
invested in limited partnerships that provide low-income housing tax credits and other related Federal
income tax and state premium tax benefits to Torchmark. The carrying value of Torchmark’s investment
in these entities was $290 million at December 31, 2013. As of December 31, 2014, Torchmark was
obligated under future commitments of $76 million, which is included in the above carrying value.
Interests for which the return has been guaranteed by unrelated third-parties are accounted for using the
effective-yield method. The remaining interests are accounted for using the amortized-cost method.
The Federal income benefits accrued during each of the years presented, net of the amortization
associated with guaranteed interests, were recorded in “Income taxes.” Amortization associated with non-
guaranteed interests and interests providing for state premium tax benefits was reflected as a component
of “Net investment income.” All state premium tax benefits, net of the related amortization, were recorded
in “Net investment income.” At December 31, 2014, $313 million associated with the Federal interests
was included in “Other assets” with the remaining $5 million state-related interests included in “Other
invested assets.” At December 31, 2013, the comparable amounts were $283 million and $7 million,
respectively. Any unpaid commitments to invest are recorded in “Other liabilities.” In the segment
analysis, the amortization associated with the non-guaranteed interests is reflected as a component of
“Income tax expenses,” and not “Net investment income,” consistent with the treatment of the guaranteed
interests. Management views this presentation as a more accurate matching of costs with the associated
revenues with respect to the low-income housing interests.
As described later in this note, under the caption Unadopted Accounting Policies, Torchmark will
adopt new accounting guidance concerning its interests in low-income housing beginning in 2015. The
new guidance will result in accounting for these items in a manner more consistent with the Company’s
segment analysis.
is subject to annual
Goodwill: The excess cost of business acquired over the fair value of net assets acquired is
reported as goodwill. Goodwill
impairment testing based on certain procedures
outlined by GAAP. These procedures include a qualitative assessment as to whether it is more likely than
not that goodwill
is impaired, and they also require consideration of a change in relevant events or
circumstances that could possibly affect the valuation of a goodwill reporting unit. If it is determined that
an impairment is likely, the procedures then involve measuring the carrying value of each reporting unit of
Torchmark’s segments,
the
corresponding unit. If the carrying value of a unit including goodwill exceeds its estimated fair value, then
the goodwill in that unit could potentially be impaired. In that event, further testing is required under the
accounting guidance to determine the amount of impairment, if any. If there is an impairment in the
goodwill of any reporting unit, it is written down and charged to earnings in the period of test.
the estimated fair value of
including the goodwill of
that unit, against
Torchmark has tested its goodwill annually in each of the years 2012 through 2014. These tests,
performed in the second quarter each year,
involved assigning carrying value by allocating the
Company’s net assets to each of the reporting units of Torchmark’s segments, including the portion of
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
In 2012,
the qualitative assessment was employed as permitted by
goodwill assigned to the unit.
accounting guidance. Based on the analyses as outlined in the guidance, it was determined that an
impairment of goodwill was not likely. In both 2014 and 2013, the fair values of the various reporting units
were developed. The fair value of each reporting unit was determined using discounted expected cash
flows associated with that unit. Judgment and assumptions are used in developing the projected cash
flows for the reporting units, and such estimates are subject to change. The Company also exercises
judgment in the determination of the discount rate, which management believes to be appropriate for the
risk associated with the cash flow expectations. The fair value of each reporting unit is then measured
against that reporting unit’s corresponding carrying value. Because the estimated fair value substantially
exceeded the carrying value, including goodwill, of each reporting unit in each period, Torchmark’s
goodwill was not impaired in any of those periods.
Treasury Stock: Torchmark accounts for purchases of treasury stock on the cost method. Issuance
of treasury stock is accounted for using the weighted-average cost method.
Postretirement Benefits: Torchmark accounts for
its postretirement defined benefit plans by
recognizing the funded status of those plans on its Consolidated Balance Sheets in accordance with
accounting guidance. Periodic gains and losses attributable to changes in plan assets and liabilities that
are not recognized as components of net periodic benefit costs are recognized as components of other
comprehensive income, net of tax. More information concerning the accounting and disclosures for
postretirement benefits is found in Note 9—Postretirement Benefits.
Stock Compensation: Torchmark accounts for stock-based compensation by recognizing an
expense in the financial statements based on the “fair value method.” The fair value method requires that
a fair value be assigned to a stock option or other stock grant on its grant date and that this value be
amortized over the grantees’ service period.
The fair value method requires the use of an option valuation model to value employee stock options.
Torchmark has elected to use the Black-Scholes valuation model for option expensing. A summary of
assumptions for options granted in each of the three years 2012 through 2014 is as follows:
Volatility factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
2012
30.9% 38.5% 39.4%
.89% 1.1% 1.0%
5.65
5.62
5.55
1.9% 1.1% 1.3%
The expected term is generally derived from Company experience. However, expected terms are
determined based on the simplified method as permitted by Staff Accounting Bulletins 107 and 110 when
company experience is insufficient. The Torchmark Corporation 2011 Incentive Plan replaced all previous
plans and allows for option grants with a ten-year contractual term which vest over five years in addition
to seven-year grants which vest over three years as permitted by the previous plans. The Company has
sufficient experience with seven-year grants that vest in three years, but insufficient historical experience
with five-year vesting. Therefore, Torchmark has used the simplified method to determine the expected
term for the ten-year grants with five-year vesting and will do so until adequate experience is developed.
Volatility and risk-free interest rates are assumed over a period of time consistent with the expected term
of the option. Volatility is measured on a historical basis. Monthly data points are utilized to derive
volatility for periods greater than three years. Expected dividend yield is based on current dividend yield
held constant over the expected term. Once the fair value of an option has been determined, it is
amortized on a straight-line basis over the employee’s service period for that grant (from the grant date to
the date the grant is fully vested). Expenses for restricted stock and restricted stock units are based on
the grant-date fair value allocated on a straight-line basis over the service period. Performance share
expense is recognized based on management’s estimate of
the probability of meeting the metrics
identified in the performance share award agreement, assigned to each service period as these estimates
develop.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
Torchmark management views all stock-based compensation expense as a corporate or Parent
Company expense and, therefore, presents it as such in its segment analysis (See Note 14—Business
Segments). It is included in “Other operating expense” in the Consolidated Statements of Operations.
Stock Split: Torchmark declared a three-for-two stock split paid in the form of a 50% stock dividend
on all of the Company’s outstanding common stock, having a record date of June 2, 2014. On July 1,
2014, the payment date, holders of Torchmark common stock received one additional share of stock for
every two shares held. Upon completion of the transaction, Torchmark had 139,218,183 shares issued at
a par value of $1 per share and 131,031,843 shares outstanding after giving effect to the purchase of $26
thousand in fractional shares on July 1, 2014. Shareholders’ equity component amounts as of
December 31, 2013 were retrospectively adjusted to reflect this stock dividend. All share and per share
amounts have been adjusted to reflect this stock split for all periods presented in these consolidated
financial statements.
Earnings Per Share: Torchmark presents basic and diluted earnings per share (EPS) on the face of
the Consolidated Statements of Operations. Basic EPS is computed by dividing income available to
common shareholders by the weighted average common shares outstanding for the period. Diluted EPS
is calculated by adding to shares outstanding the additional net effect of potentially dilutive securities or
contracts, such as stock options, which could be exercised or converted into common shares. For more
information on earnings per share, see Note 12—Shareholders’ Equity.
Unadopted Accounting Policies
Low-income housing tax credits: The FASB has issued new accounting guidance, Investments-
Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects
(ASU 2014-01). This accounting guidance replaces the effective yield method of accounting with respect
to investments in qualified affordable housing projects and, if certain conditions are present, provides for a
new method of accounting. The new method of accounting allows an investor to amortize the cost of its
investment based on the proportion of the tax credits/benefits received during the year to the total
expected tax credits/benefits to be received over the life of the investment and will be recognized in the
Consolidated Statements of Operations as a component of “Income tax expense.” Additional disclosures
are required concerning investments in qualified affordable housing.
The new guidance is effective for Torchmark beginning January 1, 2015, with early adoption
permitted. The guidance continues to permit the effective-yield method for investments held as of the date
of adoption. Adoption is required on a retrospective basis. Torchmark does not expect that adoption will
have a material impact on the consolidated financial statements.
Revenue recognition: The FASB issued Accounting Standard Update No. 2014-09 Revenue from
Contracts with Customers (ASU 2014-09), to clarify the principles for recognizing revenue, to provide
more consistency and comparability in revenue recognition practices, and to simplify recognition
requirements along with other improvements. ASU 2014-09 will be effective for Torchmark beginning in
calendar year 2017. The Company is currently evaluating this new guidance. Torchmark’s revenues
consist of insurance premium and revenues related to financial instruments. These forms of revenue are
not within the scope of ASC 2014-09 because they are addressed by other guidance. Therefore,
Torchmark does not expect that the implementation of this guidance will result in any significant change in
the manner the Company recognizes its revenue.
Share-based performance awards: New accounting guidance has also been issued pertaining to
share awards with performance targets. This standard, entitled Accounting for Share-Based Payments
When the Terms of an Award Provide That a Performance Target Could be Achieved After the Requisite
Service Period (ASU 2014-12), is effective for Torchmark beginning in calendar year 2016, with early
the
adoption permitted. The new guidance provides that
the Company must
take into account
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
performance target in the recognition of compensation expense once the achievement of the performance
target is probable. Torchmark has a limited number of such awards, but currently accounts for these
items consistent with the new guidance. Therefore, no material impact is expected from adoption.
Going concern: The FASB has issued Presentation of Financial Statements – Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(ASU 2014-15). This new 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 disclosures if there is substantial doubt
about its ability to continue as a going concern. ASU 2014-15 is effective for Torchmark for the year
ended December 31, 2016 and for interim periods thereafter. Early adoption is permitted.
Note 2—Statutory Accounting
Life insurance subsidiaries of Torchmark are required to file statutory financial statements with state
insurance regulatory authorities. Accounting principles used to prepare these statutory financial
statements differ from GAAP. Consolidated net income and shareholders’ equity (capital and surplus) on
a statutory basis for the insurance subsidiaries were as follows:
Net Income
Year Ended December 31,
2012
2013
2014
Shareholders’ Equity
At December 31,
2013
2014
Life insurance subsidiaries . . . . . . . . . . . . . .
$446,439
$572,509
$484,327
$1,262,624 $1,328,803
The excess, if any, of shareholder’s equity of the insurance subsidiaries on a GAAP basis over that
determined on a statutory basis is not available for distribution by the insurance subsidiaries to Torchmark
without regulatory approval. Insurance subsidiaries’ statutory capital and surplus necessary to satisfy
regulatory requirements in the aggregate was $439 million at December 31, 2014. More information on
the restrictions on the payment of dividends can be found in Note 12—Shareholders’ Equity.
Torchmark’s statutory financial statements are presented on the basis of accounting practices
prescribed by the insurance department of the state of domicile of each insurance subsidiary. All states
have adopted the National Association of
(NAIC) statutory accounting
practices (NAIC SAP) as the basis for statutory accounting. However, certain states have retained the
prescribed practices of their respective insurance code or administrative code which can differ from NAIC
SAP. There are no significant differences between NAIC SAP and the accounting practices prescribed by
the states of domicile for Torchmark’s life insurance companies that affect statutory surplus.
Insurance Commissioners’
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Supplemental Information About Changes to Accumulated Other Comprehensive Income
An analysis in the change in balance by component of Accumulated Other Comprehensive Income is
as follows for the twelve months ended December 31, 2014 and 2013.
Components of Accumulated Other Comprehensive Income
For the twelve months ended December 31, 2013:
Available
for Sale
Assets
Deferred
Acquisition
Costs
Foreign
Exchange
Pension
Adjustments
Total
Balance at January 1, 2013 . . . . . . . . . . . $1,024,367
Other comprehensive income (loss)
before reclassifications, net of tax . . . .
Reclassifications, net of tax . . . . . . . . . . .
(758,857)
(9,314)
Other comprehensive income (loss) . . . .
(768,171)
$(16,417) $26,608
$(109,283) $ 925,275
9,689
0
9,689
(1,742)
0
(1,742)
33,992
11,938
(716,918)
2,624
45,930
(714,294)
Balance at December 31, 2013 . . . . . . . .
256,196
(6,728)
24,866
(63,353)
210,981
For the twelve months ended December 31, 2014:
Other comprehensive income (loss)
before reclassifications, net of tax . . . .
Reclassifications, net of tax . . . . . . . . . . .
855,132
(21,055)
(4,030)
0
(7,480)
0
(42,781)
6,685
800,841
(14,370)
Other comprehensive income (loss) . . . .
834,077
(4,030)
(7,480)
(36,096)
786,471
Balance at December 31, 2014 . . . . . . . . $1,090,273
$(10,758) $17,386
$ (99,449) $ 997,452
Reclassifications out of Accumulated Other Comprehensive Income are presented below for the
twelve months ended December 31, 2014 and 2013.
Reclassification Adjustments
Twelve months
ended
December 31,
Component Line Item
2014
2013
Affected line items in the
Statement of Operations
Unrealized gains (losses) on available for sale
assets:
Realized (gains) losses . . . . . . . . . . . . . . . . . .
Amortization of (discount) premium . . . . . . . .
Total before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,621)
(32,392)
11,337
(21,055)
(16,175)
6,861
(9,314)
Income Taxes
$(23,771) $ (9,606) Realized investment gains (losses)
(6,569) Net investment income
Pension adjustments:
Amortization of prior service cost . . . . . . . . . .
Amortization of actuarial (gain) loss . . . . . . . .
Total before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total reclassifications (after tax) . . . . . . . . . . . . . . .
2,113
8,172
10,285
(3,600)
6,685
2,276 Other operating expenses
16,090 Other operating expenses
18,366
(6,428)
11,938
$(14,370) $ 2,624
Income Taxes
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments
Portfolio Composition:
A summary of fixed maturities available for sale and equity securities by cost or amortized cost and
estimated fair value at December 31, 2014 and 2013 is as follows:
2014:
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Amount per
the Balance
Sheet
% of Total
Fixed
Maturities*
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed,
and government-sponsored
enterprises . . . . . . . . . . . . . . . . . . . . $
States, municipalities, and political
subdivisions . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . .
Collateralized debt obligations . . . . . .
Other asset-backed securities . . . . . .
Redeemable preferred stocks . . . . . . . .
367,463 $
5,561
$ (3,183) $
369,841 $
369,841
3%
1,278,429
25,824
10,565,620
67,876
21,424
496,976
177,052
1,350
1,501,212
4,165
1,104
57,626
(718)
(1)
(60,880)
(8,809)
0
(5,031)
1,454,763
27,173
12,005,952
63,232
22,528
549,571
1,454,763
27,173
12,005,952
63,232
22,528
549,571
10
0
83
0
0
4
Total fixed maturities . . . . . . . . . . . . . .
12,823,612
1,748,070
(78,622)
14,493,060
14,493,060
100%
Equity securities . . . . . . . . . . . . . . . . . . . . .
776
701
0
1,477
1,477
Total fixed maturities and equity
securities . . . . . . . . . . . . . . . . . . . . . $12,824,388 $1,748,771
$(78,622) $14,494,537 $14,494,537
2013:
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Amount per
the Balance
Sheet
% of Total
Fixed
Maturities*
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed,
and government-sponsored
enterprises . . . . . . . . . . . . . . . . . . . . $
States, municipalities, and political
subdivisions . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . .
Collateralized debt obligations . . . . . .
Other asset-backed securities . . . . . .
Redeemable preferred stocks . . . . . . . .
428,106 $
362
$ (75,295) $
353,173 $
353,173
3%
1,278,434
43,811
10,133,868
66,173
35,568
502,915
69,817
411
702,867
0
2,699
25,064
(12,947)
(67)
(300,389)
(7,968)
(98)
(14,198)
1,335,304
44,155
10,536,346
58,205
38,169
513,781
1,335,304
44,155
10,536,346
58,205
38,169
513,781
10
0
82
1
0
4
Total fixed maturities . . . . . . . . . . . . . .
12,488,875
801,220
(410,962)
12,879,133
12,879,133
100%
Equity securities . . . . . . . . . . . . . . . . . . . . .
875
1,009
0
1,884
1,884
Total fixed maturities and equity
securities . . . . . . . . . . . . . . . . . . . . . $12,489,750 $802,229
$(410,962) $12,881,017 $12,881,017
*
At fair value
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
A schedule of fixed maturities by contractual maturity at December 31, 2014 is shown below on an
amortized cost basis and on a fair value basis. Actual maturities could differ from contractual maturities
due to call or prepayment provisions.
Fixed maturities available for sale:
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from one to five years . . . . . . . . . . . . . . . . . . . . . . .
Due from five to ten years . . . . . . . . . . . . . . . . . . . . . . . .
Due from ten to twenty years . . . . . . . . . . . . . . . . . . . . .
Due after twenty years . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed and asset-backed securities . . . . . . .
Amortized
Cost
Fair
Value
$
195,358
477,616
963,368
3,621,769
7,473,762
91,739
$12,823,612
$
198,639
535,088
1,062,424
4,168,982
8,439,509
88,418
$14,493,060
Analysis of investment operations:
Year Ended December 31,
2013
2014
2012
Net investment income is summarized as follows:
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 732,925 $
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less investment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 729,207 $
8
35,015
1,508
75
769,531
(40,324)
709,756
323
33,471
1,281
138
744,969
(35,226)
709,743
$691,229
1,178
30,717
2,320
311
725,755
(32,111)
$693,644
An analysis of realized gains (losses) from investments is as follows:
Realized investment gains (losses):
Fixed maturities:
Sales and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicable tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains (losses) from investments, net of tax . . . . . . . . . . . . . . . . . $
23,170 $
0
601
(258)
35
23,548
(8,242)
15,306 $
13,138
0
0
0
(5,148)
7,990
(4,025)
3,965
$ 47,345
(5,600)
0
(4,109)
197
37,833
(13,242)
$ 24,591
An analysis of the net change in unrealized investment gains (losses) is as
follows:
$ (1,489)
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
613,826
Fixed maturities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
612,337
Net change in unrealized gains (losses) on securities . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,517
Net change in unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,283,062 $(1,183,652) $614,854
317
(1,187,529)
(1,187,212)
3,560
1,279,190
1,278,882
4,180
(308) $
Additional information about securities sold is as follows:
Fixed maturities:
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$109,024
17,583
(1,879)
$133,463
5,948
(1,310)
$345,601
40,851
(2,477)
At December 31,
2013
2014
2012
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Fair value measurements: The following tables represent the fair value of assets measured on a
recurring basis at December 31, 2014 and 2013:
Description
Fixed maturities available for sale: . . . . . . . . . . . . . . . . . . . .
Bonds:
U.S. Government direct, guaranteed, and
Fair Value Measurements at December 31, 2014 Using:
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total Fair
Value
government-sponsored enterprises . . . . . . . . .
$
0
$
369,841
$
0
$
369,841
States, municipalities, and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized debt obligations . . . . . . . . . . . . . . .
Other asset-backed securities . . . . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . . . . . . . .
1,504
0
86,571
0
661
22,945
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
111,681
664
1,453,259
27,173
11,406,667
0
21,867
526,626
13,805,433
0
0
0
512,714
63,232
0
0
575,946
833
1,454,763
27,173
12,005,952
63,232
22,528
549,571
14,493,060
1,477
Total fixed maturities and equity securities . . . . .
$112,325
$13,805,433
$576,779
$14,494,537
Percentage of total . . . . . . . . . . . . . . . . . . . . . . . . .
0.8%
95.2%
4.0%
100.0%
Description
Fixed maturities available for sale: . . . . . . . . . . . . . . . . . . . .
Bonds:
U.S. Government direct, guaranteed, and
Fair Value Measurements at December 31, 2013 Using:
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total Fair
Value
government-sponsored enterprises . . . . . . . . .
$
0
$
353,173
$
0
$
353,173
States, municipalities, and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized debt obligations . . . . . . . . . . . . . . .
Other asset-backed securities . . . . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
47,058
0
0
22,220
69,278
1,108
1,335,304
44,155
10,188,988
0
38,169
491,561
12,451,350
0
0
0
300,300
58,205
0
0
358,505
776
1,335,304
44,155
10,536,346
58,205
38,169
513,781
12,879,133
1,884
Total fixed maturities and equity securities . . . . .
$ 70,386
$12,451,350
$359,281
$12,881,017
Percentage of total . . . . . . . . . . . . . . . . . . . . . . . . .
0.5%
96.7%
2.8%
100.0%
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
The following table represents changes in assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3).
Analysis of Changes in Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Asset-
backed
securities
$ 7,122
Collateralized
debt
Obligations
$ 30,320
Corporates*
$ 11,250
Equities
$710
Total
$ 49,402
0
1,482
Balance at January 1, 2012 . . . . . . . . . . . . . . .
Total gains or losses:
Included in realized gains/losses . . .
Included in other comprehensive
income . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . .
Other ** . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers into Level 3 . . . . . . . . . . . . . . . .
Balance at December 31, 2012 . . . . . . . . . . . .
Total gains or losses:
Included in realized gains/losses . . .
Included in other
comprehensive income . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . .
Other ** . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers out of Level 3 . . . . . . . . . . . . . .
Balance at December 31, 2013 . . . . . . . . . . . .
Total gains or losses:
Included in realized gains/losses . . .
Included in other
comprehensive income . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . .
Other ** . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers out of Level 3 . . . . . . . . . . . . . .
Balance at December 31, 2014 . . . . . . . . . . . .
0
1,078
0
0
(219)
0
0
7,981
0
426
0
0
(57)
0
(8,350)
0
0
0
0
0
0
0
0
0
$
3,600
183,676
(13,429)
699
0
43,794
231,072
0
(17,243)
129,755
0
5
(834)
(42,455)
300,300
0
29
0
0
0
0
0
739
0
37
0
0
0
0
0
776
1,482
16,774
183,676
(13,429)
3,128
1,536
43,794
286,363
0
(6,697)
129,755
0
2,786
(2,121)
(50,805)
359,281
12,067
0
0
2,648
1,536
0
46,571
0
10,083
0
0
2,838
(1,287)
0
58,205
15,924
1
0
15,925
3,323
0
(16,049)
5,519
(3,690)
0
$ 63,232
27,864
186,366
(1)
13
(1,829)
0
$512,714
57
0
0
0
0
0
$833
31,244
186,366
(16,050)
5,532
(5,519)
0
$576,779
*
**
Includes redeemable preferred stocks
Includes capitalized interest and foreign exchange adjustments.
Acquisitions of Level 3 investments in 2014 and 2013 are comprised of private-placement fixed
maturities managed by an unaffiliated third-party.
Quantitative Information about Level 3
Fair Value Measurements
As of December 31, 2014
Valuation
Techniques
Collateralized debt obligations . . . . . . . . $ 63,232 Discounted
cash flows
512,714 Discounted
cash flows
833 Third-party
Other investments . . . . . . . . . . . . . . . . . .
Private placement fixed maturities . . . . .
Fair Value
Unobservable
Input
Discount
rate
Credit
rating
Range
Weighted
Average
9-12.5%
11.9%
BB+ to A+
BBB
pricing without
adjustment
N/A
N/A
N/A
$576,779
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
The collateral underlying collateralized debt obligations for which fair values are reported as Level 3
consists primarily of trust preferred securities issued by banks and insurance companies. None of the
collateral is subprime or Alt-A mortgages (loans for which the typical documentation was not provided by
the borrower). Collateralized debt obligations are valued at the present value of expected future cash
flows using an unobservable discount rate. Expected cash flows are determined by scheduling the
projected repayment of the collateral assuming no future defaults, deferrals, or recoveries. The discount
rate is risk-adjusted to take these items into account. A significant increase (decrease) in the discount
rate will produce a significant decrease (increase) in fair value. Additionally, a significant
increase
(decrease) in the cash flow expectations would result in a significant increase (decrease) in fair value.
The private placements are also valued based on discounted cash flows, resulting from the
contractual cash flows discounted by a yield determined as a treasury benchmark adjusted for a credit
spread. The credit spread is developed from observable indices for similar public fixed maturities and
unobservable indices for private fixed maturities for corresponding credit ratings. However, the credit
ratings for the private placements are considered unobservable inputs, as they are assigned by the third
party investment manager based on a quantitative and qualitative assessment of the credit underwritten.
A higher (lower) credit rating would result in a higher (lower) valuation. For more information regarding
valuation procedures, please refer to Note 1 — Significant Accounting Policies under the caption Fair
Value Measurements, Investments in Securities.
The following table presents transfers in and out of each of the valuation levels of fair values.
Level 1 . . . . . . . .
Level 2 . . . . . . . .
Level 3 . . . . . . . .
In
$36,468
0
0
2014
Out
Net
In
2013
Out
Net
In
2012
Out
Net
$
0
(36,468)
0
$ 36,468
(36,468)
0
$19,416
50,805
0
$
0
(19,416)
(50,805)
$ 19,416
31,389
(50,805)
$48,536
0
43,794
$
0
(92,330)
0
$ 48,536
(92,330)
43,794
Transfers into Level 2 from Level 3 result from the availability of observable market data when a
security is valued at the end of a period. Transfers into Level 3 occur when there is a lack of observable
market information. Transfers into Level 1 from Level 2 occur when direct quotes are available; transfers
from Level 1 into Level 2 result when only observable market data and no direct quotes are available.
Other-than-temporary impairments: Torchmark has determined that certain of its holdings in fixed
maturity investments were other-than-temporarily impaired during the three years ended December 31,
2014. The following table presents the writedowns recorded due to these impairments in accordance with
accounting guidance and whether the writedown was charged to earnings or other comprehensive income.
Writedowns for Other-Than-Temporary Impairments
2014
2013
Net
Income
Other
Comprehensive
Income
Net
Income
Other
Comprehensive
Income
Corporate bonds (pre-tax) . . . . . . . . .
After tax . . . . . . . . . . . . . . . . . . . . . . . .
$0
$0
$0
$0
$0
$0
$0
$0
2012
Other
Comprehensive
Income
$0
$0
Net
Income
$5,600
$3,640
As of year end 2014, previously written down securities remaining in the portfolio were carried at a
fair value of $52 million. Otherwise, as of December 31, 2014, Torchmark has no information available to
cause it to believe that any of its investments are other-than-temporarily impaired. Torchmark has the
ability and intent to hold these investments to recovery, and does not intend to sell nor expects to be
required to sell its other impaired securities.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Unrealized gains/loss analysis:
In 2013, increases in interest rates in financial markets caused the
net unrealized gain balances to decline to $390 million at December 31, 2013 from $1.6 billion a year
earlier. During 2014, interest rates declined resulting in an increase in net unrealized gains at December 31,
2014 to $1.7 billion. At December 31, 2014, investments in securities in the financial sector were in a $460
million net unrealized gain position. These investments in the financial sector represented 24% of the
portfolio at amortized cost and 25% at fair value. This is compared with a net unrealized gain position of
$180 million at the end of the prior year. Investments and securities in the other sectors had net unrealized
gains of $1.2 billion at year end 2014 and $210 million at year end 2013. The following tables disclose gross
unrealized investment losses by class of investment at December 31, 2014 and December 31, 2013 for the
respective periods of time in a loss position. Torchmark considers these investments to be only temporarily
impaired.
ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES
At December 31, 2014
Description of Securities
Fixed maturities available for sale:
U.S. Government direct, guaranteed, and
Less than
Twelve Months
Twelve Months
or Longer
Total
Fair
Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
government-sponsored enterprises . . . . . . . . . . . . $
States, municipalities and political subdivisions . . . .
Foreign governments . . . . . . . . . . . . . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized debt obligations . . . . . . . . . . . . . . . . . .
Other asset-backed securities . . . . . . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . . . . . .
4,478
5,632
0
434,757
0
0
1,008
$
(7) $ 149,238
20,756
800
810,945
11,190
0
58,983
(206)
0
(17,491)
0
0
(1)
$ (3,176)
(512)
(1)
(43,389)
(8,809)
0
(5,030)
$ 153,716
26,388
800
1,245,702
11,190
0
59,991
$ (3,183)
(718)
(1)
(60,880)
(8,809)
0
(5,031)
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . $445,875
$(17,705) $1,051,912
$(60,917)
$1,497,787
$(78,622)
ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES
At December 31, 2013
Description of Securities
Fixed maturities available for sale:
U.S. Government direct, guaranteed, and
Less than
Twelve Months
Twelve Months
or Longer
Total
Fair Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair Value
Unrealized
Loss
government-sponsored enterprises . . . . . . . . . . . . $ 242,144 $ (42,885) $ 87,977 $ (32,410) $ 330,121 $ (75,295)
(12,947)
(67)
(300,389)
(7,968)
(98)
(14,198)
States, municipalities and political subdivisions . . . .
Foreign governments . . . . . . . . . . . . . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized debt obligations . . . . . . . . . . . . . . . . . .
Other asset-backed securities . . . . . . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . . . . . .
167,660
11,966
2,692,494
0
6,974
106,229
169,279
11,966
3,292,844
58,080
10,847
188,516
(12,807)
(67)
(196,139)
0
(26)
(3,694)
(140)
0
(104,250)
(7,968)
(72)
(10,504)
1,619
0
600,350
58,080
3,873
82,287
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . $3,227,467 $(255,618) $834,186 $(155,344) $4,061,653 $(410,962)
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Additional information about investments in an unrealized loss position is as follows:
Number of issues (Cusip numbers) held:
As of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80
462
173
130
Less than
Twelve
Months
Twelve
Months
or Longer
Total
253
592
Torchmark’s entire fixed-maturity and equity portfolio consisted of 1,604 issues at December 31,
2014 and 1,619 issues at December 31, 2013. The weighted-average quality rating of all unrealized loss
positions as of December 31, 2014 was BBB+, compared with BBB+ a year earlier. The weighted-
average quality ratings are based on amortized cost.
Other investment information:
Other long-term investments consist of the following:
Investment real estate, at depreciated cost . . . . . . . . . . . . . . . . .
Low-income housing interests . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
203
5,370
4,876
$
203
7,589
5,415
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,449
$13,207
December 31,
2014
2013
Accumulated depreciation on investment real estate was $1.7 million at both December 31, 2014 and
December 31, 2013. Torchmark did not have any invested assets that were non-income producing during
the twelve months ended December 31, 2014.
Note 5—Deferred Acquisition Costs
An analysis of deferred acquisition costs is as follows:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,337,649
$3,198,431
$2,916,732
2014
2013
2012
Additions:
Deferred during period:
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Value of insurance purchased during year
Foreign exchange adjustment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment attributable to unrealized investment losses(1) . . . . . . . . .
Total additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
361,358
205,913
567,271
0
0
0
567,271
331,060
193,203
524,263
8,489
0
14,906
547,658
312,581
168,237
480,818
175,257
3,557
7,234
666,866
Deductions:
Amortized during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange adjustment
. . . . . . . . .
Adjustment attributable to unrealized investment gains(1)
Total deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(418,772)
(8,167)
(6,200)
(433,139)
(403,389)
(5,051)
0
(408,440)
(385,167)
0
0
(385,167)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,471,781
$3,337,649
$3,198,431
(1) Represents amounts pertaining to investments relating to universal life-type products.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 6—Acquisition
On November 1, 2012, Torchmark acquired all of the outstanding common stock of Family Heritage
Life Insurance Company of America (Family Heritage), a privately-held supplemental health insurance
provider. Family Heritage was founded in 1989 and is headquartered in Cleveland, Ohio. It is a specialty
insurer focused primarily on selling protection-oriented individual supplemental health insurance products
through a captive agency force. The purchase price was approximately $234 million, including post-
closing adjustments and the assumption of $20 million par value of debt in the form of trust preferred
securities issued by Family Heritage’s previous parent company ($20 million fair value at the purchase
date). The balance of the purchase price of approximately $214 million was funded primarily with cash
provided from borrowings as described in Note 11—Debt. There was approximately $27 million of cash
acquired in the transaction. Acquisition expenses in connection with the transaction charged to
Torchmark’s earnings in 2012 were $2.9 million ($1.9 million after tax). These costs were included as
“Other operating expense” in the Consolidated Statement of Operations for 2012. In 2013, a one-time
adjustment for the finalization of accounting for the insurance assets and liabilities for the Family Heritage
acquisition was completed. The result of this adjustment was a $1.5 million increase in pretax income
($522 thousand after tax), due to the net effect of an increase in the policyholder benefit reserve of $8.5
million and a greater increase in the deferred acquisition asset of $10.0 million.
During the two-month period commencing on the purchase date of November 1, 2012 and ending
December 31, 2012, Family Heritage had revenues of $33 million and net income of $3.1 million included
in Torchmark’s 2012 Consolidated Statement of Operations.
The table below presents supplemental unaudited pro forma information for 2012 as if the Family
Heritage acquisition were completed on January 1, 2011, based on estimates and assumptions
considered appropriate:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per diluted share . . . . . . . . . . . . . . . . . . . . . .
Year Ended
December 31,
2012
$197,174
13,220
0.09
The supplemental unaudited pro forma information above is presented for informational purposes only
and is not necessarily indicative of the results of operations that actually would have been achieved had the
acquisition been consummated at that time, nor is it intended to be a projection of future results.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 7—Liability for Unpaid Health Claims
Activity in the liability for unpaid health claims is summarized as follows:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of Family Heritage . . . . . . . . . . . . . . . . . . . . . . . . . .
Incurred related to:
Current year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid related to:
Current year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2012
2013
2014
$101,719
0
$104,870
0
$103,517
11,700
792,740
(23,106)
720,490
(11,594)
704,934
(17,531)
769,634
708,896
687,403
725,386
59,714
636,150
75,897
627,495
70,255
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
785,100
712,047
697,750
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 86,253
$101,719
$104,870
At the end of each period, the liability for unpaid health claims includes an estimate of claims incurred
but not yet reported to the Company. Such estimates are updated regularly based upon the Company’s
most recent claims data with recognition of emerging experience trends. Because of the nature of the
Company’s health business, the payment lags are relatively short and most claims are fully paid within a
year from the time incurred. Fluctuations in claims experience can lead to either over- or under-estimation
of the liability for any given year. The difference between the estimate made at the end of the prior period
and the actual experience during the period is reflected above under the caption “Incurred related to: Prior
years.”
Claims paid in each of the years 2012 through 2014 were settled for amounts less than anticipated
when estimated at the previous year end. The most significant component of these favorable variances
was in Torchmark’s Medicare Part D business and, to a lesser extent, Torchmark’s UA Independent and
Liberty National agencies. The Company’s estimates at each point have reflected the emerging data and
trends. In the Medicare Part D channel, the Company is required to estimate claim discounts that will be
received from drug manufacturers. In each of the years 2012 through 2014, the discounts from the drug
manufacturers received in the current year but related to prior year claims were higher than anticipated
when the claim liability was determined.
The liability for unpaid health claims is included with “Policy claims and other benefits payable” on the
Consolidated Balance Sheets.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 8—Income Taxes
The components of income taxes were as follows:
Year Ended December 31,
2012
2013
2014
Income tax expense from continuing operations . . . . . . . . . . . . . . . . . . . $235,529 $ 234,654 $236,669
Shareholders’ equity:
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax basis compensation expense (from the exercise of stock options
and vesting of restricted stock awards) in excess of amounts
recognized for financial reporting purposes . . . . . . . . . . . . . . . . . . .
424,089
(386,752)
201,950
(18,524)
(21,314)
(22,602)
$641,094 $(173,412) $416,017
Income tax expense from continuing operations consists of:
Year Ended December 31,
2012
2013
2014
Current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $147,486 $176,427 $161,332
75,337
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88,043
58,227
$235,529 $234,654 $236,669
In each of the years 2012 through 2014, deferred income tax expense was incurred because of
certain differences between net income before income taxes as reported on the Consolidated Statements
of Operations and taxable income as reported on Torchmark’s income tax returns. As explained in Note
1—Significant Accounting Policies, these differences caused the financial statement book values of some
assets and liabilities to be different from their respective tax bases.
The effective income tax rate differed from the expected 35% rate as shown below:
2014
Year Ended December 31,
%
2013
%
2012
%
Expected income taxes . . . . . . . . . . . . . . . . . . . . . . . $272,464 35.0% $267,094 35.0% $268,098 35.0%
Increase (reduction) in income taxes resulting
from:
Tax-exempt investment income . . . . . . . . . . . . . . $ (3,233)
(36,442)
Low income housing investments . . . . . . . . . . . .
2,740
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(.4)
(4.7)
.4
(3,107)
(32,417)
3,084
(.4)
(4.2)
.4
(3,506)
(28,877)
954
(.4)
(3.8)
.1
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . $235,529 30.3% $234,654 30.8% $236,669 30.9%
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 8—Income Taxes (continued)
The tax effects of temporary differences that gave rise to significant portions of the deferred tax
assets and deferred tax liabilities are presented below:
Deferred tax assets:
Fixed maturity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Carryover of tax losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
December 31,
2014
2013
12,925 $
3,036
15,961
16,868
11,415
28,283
Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee and agent compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future policy benefits, unearned and advance premiums, and policy claims . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
522,219
74,088
879,851
331,408
4,732
92,772
68,911
829,032
315,291
1,126
Total gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,812,298
1,307,132
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,796,337 $1,278,849
Torchmark and its subsidiaries, excluding Family Heritage, file a life-nonlife consolidated Federal
income tax return on a separate company basis.
income tax return. Family Heritage files its Federal
Torchmark’s consolidated Federal
income tax returns are routinely audited by the Internal Revenue
Service (IRS). The IRS completed its examination of Torchmark’s 2008-2011 consolidated income tax
returns during 2014 resulting in no impact on the company’s effective tax rate. The statutes of limitations
for the assessment of additional tax are closed for all tax years prior to 2011 with respect to Torchmark’s
consolidated and Family Heritage’s Federal
income tax returns. Management believes that adequate
provision has been made in the consolidated financial statements for any potential assessments that may
result from current or future tax examinations and other tax-related matters for all open years.
Torchmark has net operating loss carryforwards of approximately $8.7 million at December 31, 2014
which will begin to expire in 2032 if not otherwise used to offset future taxable income. A valuation
allowance is to be provided when it is more likely than not that deferred tax assets will not be realized by
the Company. No valuation allowance has been recorded relating to Torchmark’s deferred tax assets
since, in management’s judgment, Torchmark will more likely than not have sufficient taxable income in
future periods to fully realize its existing deferred tax assets.
Torchmark’s tax liability is adjusted to include a provision for uncertain tax positions taken or
expected to be taken in a tax return. However, during the years 2012 through 2014, Torchmark did not
have any uncertain tax positions which resulted in unrecognized tax benefits.
Torchmark’s continuing practice is to recognize interest and/or penalties related to income tax
matters in income tax expense. The Company recognized interest income of $465 thousand, $0, and $56
thousand, net of Federal
income tax benefits, in its Consolidated Statements of Operations for 2014,
2013, and 2012, respectively. The Company had no accrued interest or penalties at December 31, 2014
or 2013.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits
Pension Plans: Torchmark has noncontributory retirement benefit plans and contributory savings
plans which cover substantially all employees. There are also two nonqualified, noncontributory
supplemental benefit pension plans which cover a limited number of employees. The total cost of these
retirement plans charged to operations was as follows:
Year Ended
December 31,
Defined Contribution
Plans
Defined Benefit
Pension Plans
2014 . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . .
$3,078
3,373
3,668
$23,463
33,122
26,007
Torchmark accrues expense for the defined contribution plans based on a percentage of
the
employees’ contributions. The plans are funded by the employee contributions and a Torchmark
contribution equal
to the amount of accrued expense. Plan contributions are both mandatory and
discretionary, depending on the terms of the plan.
Cost for the defined benefit pension plans has been calculated on the projected unit credit actuarial
cost method. All plan measurements for the defined benefit plans are as of December 31 of
the
respective year. The defined benefit pension plans covering the majority of employees are funded.
Contributions are made to funded pension plans subject
to minimums required by regulation and
maximums allowed for tax purposes. Defined benefit plan contributions were $14.6 million in 2014,
$10.3 million in 2013, and $8.2 million in 2012. Torchmark estimates as of December 31, 2014 that it will
contribute an amount not to exceed $20 million to these plans in 2015. The actual amount of contribution
may be different from this estimate.
Torchmark has a Supplemental Executive Retirement Plan (SERP), which provides to a limited
number of executives an additional supplemental defined pension benefit. The supplemental benefit is
based on the participant’s qualified plan benefit without consideration to the regulatory limits on
compensation and benefit payments applicable to qualified plans, except that eligible compensation is
capped at $1 million. The SERP is unfunded. However, a Rabbi Trust has been established to support the
liability for this plan. This trust consists of life insurance policies on the lives of plan participants with an
unaffiliated insurance carrier as well as an investment account. The premiums paid for the insurance
coverage were $2.2 million in 2014, $2.9 million in 2013, and $1.7 million in 2012. The cash value of
these policies at December 31, 2014 was $24 million and was $22 million a year earlier. Investments in
the investment account consist of exchange traded funds. Deposits of $6 million in 2013 and $5 million in
in this trust. There were no deposits in 2014. As of
2012 were added to the investment account
investments was
the insurance policies and the trust
the combined value of
December 31, 2014,
$74 million, compared with $66 million a year earlier. Because this plan is unqualified, the investments
and the policyholder value of the insurance policies in the Rabbi Trust are not included as defined benefit
plan assets but as assets of the Company. They are included with “Other Assets” in the Consolidated
Balance Sheets. The liability for this SERP at December 31, 2014 was $71 million and was $58 million a
year earlier.
The Company has another small supplemental benefit pension plan which is limited to a very select
group of employees and was closed as of December 31, 1994. It provides the full benefits that an
employee would have otherwise received from a defined benefit plan in the absence of the limitation on
benefits payable under a qualified plan. This plan is unfunded. Liability for this closed plan was $3 million
at December 31, 2014 and December 31, 2013. Pension cost for both supplemental defined benefit plans
is determined in the same manner as for the qualified defined benefit plans.
Plan assets in the funded plans consist primarily of investments in marketable fixed maturities and
equity securities and are valued at fair value. Torchmark measures the fair value of its financial assets,
including the assets in its benefit plans, in accordance with accounting guidance which establishes a
hierarchy for asset values and provides a methodology for the measurement of value. Please refer to
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
Note 1—Significant Accounting Policies under the caption Fair Value Measurements, Investments in
Securities for a complete discussion of valuation procedures. The following table presents the assets of
Torchmark’s defined benefit pension plans for the years ended December 31, 2014 and 2013.
Pension Assets by Component at December 31, 2014
Fair Value Determined by:
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total
Amount
% to
Total
Equity securities:
Financial . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Consumer, Cyclical
Technology . . . . . . . . . . . . . . . . . . . . . . .
Consumer, Non-Cyclical . . . . . . . . . . . .
Energy . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . .
Other bonds . . . . . . . . . . . . . . . . . . . . . . . .
Guaranteed annuity contract* . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 45,790
26,542
16,965
11,665
10,192
9,322
7,092
127,568
9,038
4,156
$166,825
284
15,027
$ 45,790
26,542
16,965
11,665
10,192
9,322
7,092
127,568
166,825
284
15,027
9,038
4,156
14%
8
5
4
3
3
2
39
52
0
5
3
1
Grand Total
. . . . . . . . . . . . . . . . . . . . . . . .
$140,762
$182,136
$
0
$322,898
100%
*
Annuity contract issued by a Torchmark subsidiary
Pension Assets by Component at December 31, 2013
Fair Value Determined by:
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total
Amount
% to
Total
Equity securities:
Financial . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer, Cyclical
. . . . . . . . . . . . . . . .
Energy . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer, Non-Cyclical . . . . . . . . . . . .
Technology . . . . . . . . . . . . . . . . . . . . . . .
Depository Institutions . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . .
Other bonds . . . . . . . . . . . . . . . . . . . . . . . .
Guaranteed annuity contract* . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 35,807
17,915
13,816
13,187
13,055
10,523
10,153
114,456
0
13,318
1,667
$
831
831
147,445
267
13,769
$ 35,807
17,915
13,816
13,187
13,055
10,523
10,984
115,287
147,445
267
13,769
13,318
1,667
12%
6
5
4
4
3
4
38
51
0
5
5
1
Grand Total
. . . . . . . . . . . . . . . . . . . . . . . .
$129,441
$162,312
$ 0
$291,753
100%
*
Annuity contract issued by a Torchmark subsidiary
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
Torchmark’s investment objectives for its plan assets include preservation of capital, preservation of
purchasing power, and long-term growth. Torchmark seeks to preserve capital through investments made
in high quality securities with adequate diversification by issuer and industry sector to minimize risk. The
portfolio is monitored continuously for changes in quality and diversification mix. The preservation of
purchasing power is intended to be accomplished through asset growth, exclusive of contributions and
withdrawals, in excess of the rate of inflation. Torchmark intends to maintain investments that when
combined with future plan contributions will produce adequate long-term growth to provide for all plan
obligations. The Company’s expectation for the portfolio is to achieve a compound total rate of return of
3% in excess of the inflation rate, to be reviewed on a three-year basis. It is also Torchmark’s objective
that the portfolio’s investment return will meet or exceed the return of a balanced market index.
The majority of the securities in the portfolio are highly marketable so that there will be adequate
liquidity to meet projected payments. There are no specific policies calling for asset durations to match
those of benefit obligations.
Allowed investments are limited to equities, fixed maturities, and short-term investments (invested
cash). There is also a guaranteed annuity contract issued by American Income Life Insurance Company
to fund the obligations of the American Income Pension Plan. The assets are to be invested in a mix of
equity and fixed income investments that best serve the objectives of the pension plan. Factors to be
considered in determining the asset mix include funded status, annual pension expense, annual pension
liability. Equities include common and preferred stocks, securities
contributions, and balance sheet
convertible into equities, mutual
in equities, and other equity-related investments.
funds that
Equities must be listed on major exchanges and adequate market liquidity is required. Fixed maturities
consist of marketable debt securities rated investment grade at purchase by a major rating agency. Short-
term investments include fixed maturities with maturities less than one year and invested cash. Short-
term investments in commercial paper must be rated at least A-2 by Standard & Poor’s with the issuer
rated investment grade. Invested cash is limited to banks rated A or higher. Investments outside of the
aforementioned list are not permitted, except by prior approval of the Plan’s Trustees. At December 31,
2014, there were no restricted investments contained in the portfolio. Plan contributions have been
invested primarily in equity securities during the three years ended December 31, 2014.
invest
The investment portfolio is to be well diversified to avoid undue exposure to a single sector, industry,
business, or security. The equity and fixed-maturity portfolios are not permitted to invest in any single
issuer that would exceed 10% of total plan assets at the time of purchase. Torchmark does not employ
any other special risk management techniques, such as derivatives, in managing the pension investment
portfolio.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
The following table discloses the assumptions used to determine Torchmark’s pension liabilities and
costs for the appropriate periods. The discount and compensation increase rates are used to determine
current year projected benefit obligations and subsequent year pension expense. The long-term rate of
return is used to determine current year expense. Differences between assumptions and actual
experience are included in actuarial gain or loss.
Weighted Average Pension Plan Assumptions
For Benefit Obligations at December 31:
2014
2013
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.23% 5.12%
4.35
4.35
For Periodic Benefit Cost for the Year:
2014
2013
2012
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected Long-Term Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.12% 4.18% 5.09%
6.96
6.97
4.40
4.35
7.20
4.04
The discount rate is determined based on the expected duration of plan liabilities. A yield is then
derived based on the current market yield of a hypothetical portfolio of higher-quality corporate bonds
which match the liability duration. The rate of compensation increase is projected based on Company
experience, modified as appropriate for future expectations. The expected long-term rate of return on plan
assets is management’s best estimate of the average rate of earnings expected to be received on the
assets invested in the plan over the benefit period. In determining this assumption, consideration is given
to the historical rate of return earned on the assets, the projected returns over future periods, and the
spread between the long-term rate of return on plan assets and the discount rate used to compute benefit
obligations.
Net periodic pension cost for the defined benefit plans by expense component was as follows:
Year Ended December 31,
2012
2013
2014
Service cost—benefits earned during the period . . . . . . . . . . .
Interest cost on projected benefit obligation . . . . . . . . . . . . . . .
Expected return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognition of actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 12,925
19,270
(19,031)
10,283
16
$ 14,984
17,043
(17,429)
18,143
381
$ 11,215
16,796
(17,114)
14,799
311
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 23,463
$ 33,122
$ 26,007
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
An analysis of the impact on other comprehensive income (loss) concerning pensions and other
postretirement benefits is as follows:
Balance at January 1 . . . . . . . . . . . .
Amortization of:
Prior service cost . . . . . . . . . . . . .
Net actuarial (gain) loss* . . . . . . .
Total amortization* . . . . . . . . . . . . . .
Plan amendments . . . . . . . . . . . . . .
Experience gain(loss) . . . . . . . . . . .
2014
$ (97,467)
2013
$(168,129)
2012
$(119,863)
2,113
8,172
10,285
0
(65,817)
2,276
16,090
18,366
0
52,296
2,146
12,653
14,799
(3,452)
(59,613)
Balance at December 31 . . . . . . . .
$(152,999)
$ (97,467)
$(168,129)
*
Includes amortization of postretirement benefits other than pensions of $2 thousand in 2014, $224 thousand in 2013, and $0 in
2012.
The following table presents a reconciliation from the beginning to the end of the year of the
projected benefit obligation and plan assets for pensions. This table also presents the amounts previously
recognized as a component of accumulated other comprehensive income.
Pension Benefits
For the year ended
December 31,
2014
2013
Changes in benefit obligation:
Obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 383,859
12,925
Service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,270
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost
78,487
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(17,115)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
477,426
Obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$414,921
14,984
17,043
(45,258)
(17,831)
383,859
Changes in plan assets:
Fair value at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
291,753
33,641
14,619
(17,115)
322,898
277,641
21,613
10,330
(17,831)
291,753
Funded status at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(154,528) $ (92,106)
Amounts recognized in accumulated other comprehensive income
consist of:
Net loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 146,571
3,362
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amounts recognized at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 149,933
$ 90,878
5,476
$ 96,354
The portion of other comprehensive income that is expected to be reflected in pension expense in
2015 is as follows:
Amortization of prior service cost
. . . . . . . . . . . . . . . . . . . .
Amortization of net actuarial loss . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
326
14,135
$14,461
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
The accumulated benefit obligation (ABO) for Torchmark’s funded defined benefit pension plans was
$374 million and $295 million at December 31, 2014 and 2013, respectively. In the unfunded plans, the
ABO was $63 million and $52 million at December 31, 2014 and 2013, respectively.
Torchmark has estimated its expected pension benefits to be paid over the next ten years as of
December 31, 2014. These estimates use the same assumptions that measure the benefit obligation at
December 31, 2014, taking estimated future employee service into account. Those estimated benefits are
as follows:
For the year(s)
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020-2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 17,103
18,335
20,055
21,274
22,557
135,663
Postretirement Benefit Plans Other Than Pensions: Torchmark provides a small postretirement life
insurance benefit for most retired employees, and also provides additional postretirement life insurance
benefits for certain key employees. The majority of the life insurance benefits are accrued over the
working lives of active employees. Otherwise, Torchmark does not provide postretirement benefits other
than pensions and the life insurance benefits described above.
Torchmark’s post-retirement defined benefit plans other than pensions are not funded. Liabilities for
these plans are measured as of December 31 for the appropriate year.
The components of net periodic postretirement benefit cost for plans other than pensions are as
follows:
Year Ended December 31,
2013
2012
2014
Service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost on benefit obligation . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . .
Net amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognition of net actuarial (gain) loss . . . . . . . . . . . . . . .
$
0
646
0
2
(256)
$ 354
1,030
0
224
0
$ 392
1,020
0
0
0
Net periodic postretirement benefit cost
. . . . . . . . . . . . . .
$ 392
$1,608
$1,412
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
The following table presents a reconciliation of the benefit obligation and plan assets from the
beginning to the end of the year. As these plans are unfunded, funded status is equivalent to the accrued
benefit liability.
Benefits Other Than Pensions
For the year ended December 31,
2014
2013
Changes in benefit obligation:
Obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in plan assets:
Fair value at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,860
0
646
1,700
(311)
22,895
0
0
311
(311)
0
$ 22,367
354
1,030
(2,475)
(416)
20,860
0
0
416
(416)
0
Funded status at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(22,895)
$(20,860)
Amounts recognized in accumulated other comprehensive
income:
Net loss* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amounts recognized at year end . . . . . . . . . . . . . . . . .
$ 3,066
$ 3,066
$ 1,113
$ 1,113
*
The net loss for benefit plans other than pensions reduces other comprehensive income.
The table below presents the assumptions used to determine the liabilities and costs of Torchmark’s
post-retirement benefit plans other than pensions.
Weighted Average Assumptions for Post-Retirement
Benefit Plans Other Than Pensions
For Benefit Obligations at December 31:
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.23% 5.12%
2014
2013
For Periodic Benefit Cost for the Year:
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.12% 4.18% 5.09%
2014
2013
2012
Estimated Future Payments for Post-Retirement
Benefit Plans Other Than Pensions
For the year(s)
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020-2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
994
1,117
1,301
1,503
1,655
10,659
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 10—Supplemental Disclosures of Cash Flow Information
The following table summarizes Torchmark’s noncash transactions, which are not reflected on the
Consolidated Statements of Cash Flows:
Year Ended December 31,
2012
2013
2014
Stock-based compensation not involving cash . . . . . . . . . . . . . . . . $32,203 $25,642 $21,605
29,759
Commitments for low-income housing interests . . . . . . . . . . . . . . .
1,537
Capitalized investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,000
Debt assumed to acquire Family Heritage . . . . . . . . . . . . . . . . . . . .
75,706
0
0
42,525
806
0
The following table summarizes certain amounts paid during the period:
Year Ended December 31,
2012
2013
2014
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77,066 $ 81,322 $77,686
89,061
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112,935
139,091
In 2014, Torchmark’s receivables increased $164 million, reducing cash flows from operations. Of
this amount, $154 million was due primarily to collections to be received in 2015 under the federal
governments’ Medicare Part D risk-sharing and pass-through agreements, as well as contracted rebates
from Part D drug providers.
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 11—Debt
The following table presents information about the terms and outstanding balances of Torchmark’s
debt.
Description
Selected Information about Debt Issues
Annual
Interest
Rate
Issue
Date
Periodic
Interest
Payments
Due
Outstanding
Principal
(Par Value)
Outstanding
Principal
(Book Value)
Outstanding
Principal
(Fair Value)
Outstanding
Principal
(Book Value)
As of December 31,
2014
2013
Notes, due 5/15/23(1)(2)
Senior Notes, due 6/15/16(1)(3)
Senior Notes, due 6/15/19(1)(3)
Senior Notes, due 9/15/22(1)(3)
Junior Subordinated
. . . . . . . . . . . 7.875% 5/93 5/15 & 11/15 $ 165,612 $ 163,758 $ 210,112 $ 163,609
248,753
290,268
147,392
. . . . . 6.375% 6/06 6/15 & 12/15
. . . . . 9.250% 6/09 6/15 & 12/15
. . . . . 3.800% 9/12 3/15 & 9/15
249,236
290,618
147,648
250,000
292,647
150,000
268,395
370,569
154,673
Debentures due 12/15/52(4)(8)
. . . . 5.875% 9/12 quarterly
125,000
120,870
125,000
120,843
Junior Subordinated
Debentures due 3/15/36(4)(5)
. . . . . 3.541%(9) (6)
quarterly
20,000
20,000
20,000
20,000
Total funded debt . . . . . . . . . . . . . .
. . . . . . . . . . . . .
Commercial Paper(7)
1,003,259
238,450
992,130
238,398
1,148,749
238,398
990,865
229,070
Total debt
. . . . . . . . . . . . . . . . . .
$1,241,709 $1,230,528 $1,387,147 $1,219,935
(1) All securities other than the Junior Subordinated Debentures have equal priority with one another.
(2) Not callable.
(3) Callable subject to “make-whole” premium.
(4) Quarterly payments on the 15th of March, June, Sept., and Dec.
(5) Callable anytime.
(6) Assumed upon November 1, 2012 acquisition of Family Heritage.
(7) Classified as short-term debt.
(8) Callable as of December 15, 2017.
(9)
Interest paid at 3 month LIBOR plus 330 basis points, resets each quarter.
The amount of debt that becomes due during each of the next five years is: 2015—$238 million;
2016—$250 million; 2017—$0; 2018—$0; 2019—$293 million; and thereafter—$461 million.
Funded debt: On September 24, 2012, Torchmark issued $300 million principal amount of 3.80%
Senior Notes due 2022. Interest on the Senior Notes are payable semi-annually. As part of the offering,
two of Torchmark’s insurance subsidiaries acquired a combined amount of $150 million par value of the
Senior Notes. Proceeds from the issuance of this debt, net of underwriters’ discount and expenses, were
$147 million with total proceeds to the Parent Company of approximately $297 million. The Senior Notes
are redeemable by Torchmark in whole or in part at any time subject to a “make-whole” premium,
whereby the Company would be required to pay the greater of the full principal amount of the notes or
otherwise the present value of the remaining payment schedule of the notes discounted at a rate of
interest equivalent to the rate of a United States Treasury security of comparable term plus a spread of 30
basis points. Torchmark used a portion of the net proceeds from the new Senior Note offering to fund the
acquisition of Family Heritage as described in Note 6 - Acquisition. The Parent Company used the
remaining proceeds to repay its $94 million principal amount 7 3⁄ 8% Notes that matured on August 1,
2013.
Additionally, on September 24, 2012, Torchmark completed the public offering of its 5.875% Junior
Subordinated Debentures due 2052 for an aggregate principal amount of $125 million. Proceeds from this
offering were $121 million, net of underwriters’ discount and issue expenses. These debentures pay
interest quarterly. The securities are redeemable on December 15, 2052, and are first callable in whole or
in part by Torchmark on or after December 15, 2017. Expenses of $4.2 million related to the offering have
been netted against long-term debt and will be amortized over the forty-year redemption period. Net
proceeds were used to fund the redemption of Torchmark’s 7.1% Trust Preferred Securities discussed
below.
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 11—Debt (continued)
On October 24, 2012, Torchmark’s 7.1% Trust Originated Preferred Securities were redeemed in the
amount of $120 million plus accrued dividends at a total cost of $121 million. These securities were
originally issued in 2006 as preferred securities of Torchmark’s Capital Trust III, a deconsolidated variable
interest entity. Upon redemption of
III as well as the 7.1% Junior
Subordinated Debentures due to that Trust in the amount of $124 million were liquidated. An after-tax loss
of $2.7 million was recorded on this redemption in the fourth quarter of 2012 within “Realized investment
gains (losses),” representing the write-off of the unamortized issue expenses.
these securities, Capital Trust
Capital Trust III, which held the Trust Preferred Securities, was a variable interest entity in which
Torchmark was not the primary beneficiary. Therefore, Torchmark was prohibited by accounting rules
from consolidating Capital Trust III even though it had 100% ownership, complete voting control, and had
guaranteed the performance of the trust. Accordingly, prior to redemption, Torchmark carried its 7.1%
Junior Subordinated Debentures due to Capital Trust III as a liability under the caption “Due to Affiliates”
on its Consolidated Balance Sheets. Expenses related to the original offering reduced long-term debt and
were amortized over the forty-year redemption period.
In connection with the purchase of Family Heritage, Torchmark assumed $20 million par amount of
Trust Preferred Securities that were liabilities of Family Heritage’s former parent. These securities, which
are due March 15, 2036, had a fair value of $20 million on the November 1, 2012 purchase date and were
carried at an amortized cost of $20 million at December 31, 2012. They bear interest at a variable rate
paid quarterly, determined as the three-month LIBOR plus 330 basis points which is reset each quarter.
They are callable by Torchmark at any time.
Commercial Paper: As of July 16, 2014, Torchmark entered into a new credit facility with a group of
lenders allowing for unsecured borrowings and stand-by letters of credit up to $750 million, replacing a
previous facility that had a maximum limitation of $600 million. Up to $250 million in letters of credit can
be issued against the new facility. The facility is further designated as a back-up credit line for a
commercial paper program under which the Company may either borrow from the credit line or issue
commercial paper at any time, with total commercial paper outstanding not
to exceed the facility
maximum, less any letters of credit issued. Interest is charged at variable rates. The facility has no
ratings-based acceleration triggers which would require early repayment. The new facility terminates July
to certain covenants regarding
16, 2019.
capitalization, as was the case with the previous credit facility. As of December 31, 2014, and throughout
the three-year period ended December 31, 2014, Torchmark was in full compliance with the appropriate
covenants. Borrowings on the credit
facilities are reported as short-term debt on the Consolidated
Balance Sheets. A table presenting selected information concerning Torchmark’s short-term borrowings is
presented below.
In accordance with the agreement, Torchmark is subject
Short-Term Borrowings
At December 31,
2014
2013
Balance at end of period (at par value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $238,450 $229,140
Annualized interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Letters of credit outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $198,000 $198,000
172,860
Remaining amount available under credit line . . . . . . . . . . . . . . . . . . . . . . .
313,550
.32%
.30%
Average balance outstanding during period . . . . . . . . . . . . . .
Daily-weighted average interest rate (annualized) . . . . . . . . .
Maximum daily amount outstanding during period . . . . . . . . .
$296,246
$274,435
$250,401
.26%
.33%
.48%
$343,000
$340,140
$385,000
For the Year Ended December 31,
2014
2013
2012
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12—Shareholders’ Equity
Share Data: A summary of preferred and common share activity is presented in the following chart.
All share data in this Note has been retrospectively restated to give effect to the three-for-two stock split
described in Note 1.
Preferred Stock
Common Stock
Issued
Treasury
Stock
Issued
Treasury
Stock
2012:
Balance at January 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grants of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock due to exercise of stock options . . . .
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . .
2013:
Grants of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeitures and surrenders of restricted stock . . . . . . . . . . . . . . .
Issuance of common stock due to exercise of stock options . . . .
Issuance of common stock due to settlement of restricted stock
units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . .
2014:
Grants of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeitures of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock due to exercise of stock options . . . .
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
0
0
0
0
0
0
168,468,183 (17,598,985)
104,580
8,036,235
(17,656,559)
9,750,000
158,718,183 (17,364,729)
(9,750,000)
76,415
(37,359)
3,917,757
11,190
(11,069,076)
7,500,000
151,218,183 (16,965,802)
(7,500,000)
19,041
(2,700)
2,210,349
(8,548,795)
(17,000,000) 17,000,000
(6,287,907)
134,218,183
Acquisition of Common Shares: Torchmark shares are acquired from time to time through open
market purchases under the Torchmark stock repurchase program when it is believed to be the best use
of Torchmark’s excess cash flows. Share repurchases under this program were 7.2 million shares at a
cost of $375 million in 2014, 8.3 million shares at a cost of $360 million in 2013, and 11.2 million shares at
a cost of $360 million in 2012. When stock options are exercised, proceeds from the exercises are
generally used to repurchase approximately the number of shares available with those funds in order to
reduce dilution. Shares repurchased for dilution purposes were 1.4 million shares at a cost of $74 million
in 2014, 2.8 million shares at a cost of $122 million in 2013, and 6.4 million shares at a cost of
$210 million in 2012.
Retirement of Treasury Stock: Torchmark retired 17.0 million shares of treasury stock in 2014,
7.5 million in 2013, and 9.8 million in 2012.
Restrictions: Restrictions exist on the flow of funds to Torchmark from its insurance subsidiaries.
Statutory regulations require life insurance subsidiaries to maintain certain minimum amounts of capital
and surplus. Dividends from insurance subsidiaries of Torchmark are limited to the greater of prior year
statutory net income excluding realized capital gains on an annual noncumulative basis, or 10% of prior
year surplus, in the absence of special regulatory approval. Additionally, insurance company distributions
are generally not permitted in excess of statutory surplus. Subsidiaries are also subject
to certain
minimum capital requirements. Subsidiaries of Torchmark paid cash dividends to the parent company in
the amount of $479 million in 2014, $488 million in 2013, and $437 million in 2012. As of December 31,
2014, dividends and transfers from insurance subsidiaries to parent available to be paid in 2015 were
limited to the amount of $438 million without regulatory approval, such that $825 million was considered
restricted net assets of the subsidiaries. The Company believes that total dividends and transfers of $473
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12—Shareholders’ Equity (continued)
in 2015. Please refer to Schedule II. Condensed Financial
million will be available to the parent
Information of Registrant for more information about Torchmark’s transactions with its subsidiaries. While
there are no legal restrictions on the payment of dividends to shareholders from Torchmark’s retained
earnings, retained earnings as of December 31, 2014 were restricted by lenders’ covenants which require
the Company to maintain and not distribute $2.6 billion from its total consolidated retained earnings of
$3.4 billion.
Earnings Per Share: A reconciliation of basic and diluted weighted-average shares outstanding
used in the computation of basic and diluted earnings per share is as follows:
Basic weighted average shares outstanding . . . . . . . . . . . .
Weighted average dilutive options outstanding . . . . . . . . . .
130,721,738
1,918,506
137,646,885
1,916,900
144,921,299
1,926,283
Diluted weighted average shares outstanding . . . . . . . . . . .
132,640,244
139,563,785
146,847,582
2014
2013
2012
There were no anti-dilutive shares as of December 31, 2012, 2013, or 2014. Income available to
to income available to common
common shareholders for basic earnings per share is equivalent
shareholders for diluted earnings per share.
Note 13—Stock-Based Compensation
Torchmark’s stock-based compensation consists of stock options, restricted stock, restricted stock
units, and performance shares. Certain employees, directors, and consultants have been granted fixed
equity options to buy shares of Torchmark stock at the market value of the stock on the date of grant,
under the provisions of the Torchmark stock option plans. The options are exercisable during the period
commencing from the date they vest until expiring according to the terms of the grant. Options generally
expire the earlier of employee termination or option contract term, which ranges from seven to ten years.
Options generally vest in accordance with the following schedule:
Grants under the Torchmark Corporation 2011 Incentive Plan:
Directors – vest in six months.
Employees:
Seven year grants – vest one half in two years, and one half in three years.
Ten year grants – vest one fourth in two years, and one fourth in each of the next three years.
Grants under all previous compensation plans:
Directors – vest in six months.
Employees – vest one half in two years, and one half in three years.
All employee options vest immediately upon retirement on or after the attainment of age 65, upon death,
or disability. Torchmark generally issues shares for the exercise of stock options from treasury stock. The
Company generally uses the proceeds from option exercises to buy shares of Torchmark common stock
in the open market to reduce the dilution from option exercises.
As disclosed in Note 1—Significant Accounting Policies, Torchmark recorded a three-for-two stock
split, effective as of July 1, 2014. As a result, share and per share data in this Note have been
retrospectively adjusted to give effect to this split. During 2014, shareholders approved an amendment to
the 2011 Incentive Plan allowing for an additional 6.3 million shares available for grant.
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Stock-Based Compensation (continued)
An analysis of shares available for grant is as follows:
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 Plan Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options expired and forfeited during year . . . . . . . . . . . . . . . . . . .
Restricted stock expired and forfeited during year (counted as
3.1 options)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options granted during year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock, restricted stock units, and performance shares
granted under the Torchmark Corporation 2011 Incentive
Plan (counted as 3.1 options per grant)* . . . . . . . . . . . . . . . . . .
Available for Grant
2013
2014
2012
4,368,753
6,300,000
3,488
6,804,452
0
128,109
9,149,013
0
8,775
31,620
(1,523,982)
9,625
(1,626,863)
0
(1,609,087)
(721,286)
(946,570)
(744,249)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,458,593
4,368,753
6,804,452
* Plan allows for grant of restricted stock such that each stock grant reduces 3.1 options available for grant
A summary of stock compensation activity for each of the three years ended December 31, 2014 is
presented below:
2014
2013
2012
Stock-based compensation expense recognized* . . . . . . . . . . . . . . . . . . . . . $32,203 $25,642 $ 21,605
7,562
Tax benefit recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.47
Weighted-average grant-date fair value of options granted . . . . . . . . . . . . .
80,781
Intrinsic value of options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
181,022
Cash received from options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,307
Actual tax benefit received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,271
14.77
61,229
56,294
23,232
8,975
12.37
72,793
97,815
27,972
* No stock-based compensation expense was capitalized in any period.
An analysis of option activity for each of the three years ended December 31, 2014 is as follows:
2014
2013
2012
Options
Weighted Average
Exercise Price
Options
Weighted Average
Exercise Price
Options
Weighted Average
Exercise Price
Outstanding-beginning of
year . . . . . . . . . . . . . . . . . 8,579,202
$27.84
10,998,206
$25.43
17,430,590
$23.61
Granted:
7-year term . . . . . . . . . . . 1,226,270
297,712
10-year term . . . . . . . . .
Exercised . . . . . . . . . . . . . .(2,210,348)
Expired and forfeited . . . . .
(3,488)
Adjustment due to 7/1/14
stock split . . . . . . . . . . . .
(27)
50.70
50.69
25.47
40.05
n/a
1,361,700
265,162
(3,917,757)
(128,109)
0
Outstanding-end of year
. . 7,889,321
$32.91
8,579,202
37.62
37.40
24.97
32.33
0.00
$27.84
1,269,450
339,638
(8,031,572)
(9,900)
0
10,998,206
30.73
30.33
22.55
29.75
0.00
$25.43
Exercisable at end of
year . . . . . . . . . . . . . . . . . 3,809,415
$24.58
4,395,552
$22.95
6,392,726
$23.58
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Stock-Based Compensation (continued)
A summary of restricted stock and restricted stock units granted during each of the years in the three
year period ended December 31, 2014 is presented in the table below. Restricted stock holders are
entitled to dividends on the stock and holders of restricted stock units are entitled to dividend equivalents.
Executive grants vest over five years and director grants vest over six months.
Executives restricted stock:
2014
2013
2012
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90,000
Price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50.69 $ 40.09 $ 30.75
Aggregate value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
608 $ 2,353 $ 2,767
Percent vested as of 12/31/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,000
58,695
0%
0%
40%
Directors restricted stock:
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,580
Price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51.62 $ 35.45 $ 29.16
425
Aggregate value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
100%
Percent vested as of 12/31/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
533 $
100%
363 $
100%
15,045
7,041
Directors restricted stock units (including dividend equivalents):
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,496
Price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51.69 $ 35.99 $ 29.35
455
Aggregate value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
100%
Percent vested as of 12/31/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
612 $
100%
637 $
100%
12,322
16,998
Certain senior executives of the Company have been granted performance shares. On February 24
and March 4, 2014, grants were made of 179 thousand performance shares with grant prices ranging
from $50.69 to $52.40 per share for an aggregate grant price of $9.2 million. On February 27, 2013, a
grant was made of 148 thousand performance shares at a price of $37.40 per share for an aggregate
grant price of $5.5 million. On February 21 and 22, 2012 grants were made of 120 thousand performance
shares with grant prices ranging from $32.48 to $32.73 per share for an aggregate grant price of $3.9
million. Performance grants have a three year contract life, and they do not vest prior to the termination of
the contract period. While the target distribution is 179 thousand, 148 thousand, and 120 thousand shares
for the 2014, 2013, and 2012 grants, respectively, the determination of the actual settlement in shares will
be based on the achievement of certain performance objectives of Torchmark over the respective three-
year contract periods. The actual shares could be distributed in a range from 0 to 359 thousand shares
for the 2014 grants and 0 to 295 thousand shares for the 2013 grants. A final determination for the 2012
grants has been made as of December 31, 2014 to be 211 thousand shares, as those shares became
fully vested at January 27, 2015. The performance shareholders are not entitled to dividend equivalents,
and are not entitled to dividend payments until vested and settled.
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Stock-Based Compensation (continued)
An analysis of unvested restricted stock is as follows:
Executive
Restricted
Stock
Executive
Performance
Shares
Directors
Restricted
Stock
Directors
Restricted
Stock
Units
Total
2012:
Balance at January 1, 2012 . . . . . . . . . . . .
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restriction lapses . . . . . . . . . . . . . . . . . . . .
Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . .
490,500
90,000
(112,950)
0
Balance at December 31, 2012 . . . . . . .
467,550
2013:
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional performance shares* . . . . . . . . .
Restriction lapses . . . . . . . . . . . . . . . . . . . .
Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . .
58,695
0
(150,750)
(31,050)
Balance at December 31, 2013 . . . . . . .
344,445
0
120,000
0
0
120,000
147,750
94,800
0
0
362,550
2014:
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional performance shares* . . . . . . . . .
Restriction lapses . . . . . . . . . . . . . . . . . . . .
Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . .
12,000
0
(90,315)
(2,700)
179,250
22,060
0
(7,500)
Balance at December 31, 2014 . . . . . . .
263,430
556,360
0
14,580
(14,580)
0
0
15,045
0
(15,045)
0
0
7,041
0
(7,041)
0
0
0
15,496
(15,496)
0
490,500
240,076
(143,026)
0
0
587,550
16,998
0
(16,998)
0
238,488
94,800
(182,793)
(31,050)
0
706,995
12,322
0
(12,322)
0
210,613
22,060
(109,678)
(10,200)
0
819,790
* Estimated additional share grants expected due to achievement of performance criteria.
Restricted stock units outstanding at each of the year ends 2014, 2013, and 2012 were 98,039,
85,717, and 79,907, respectively. Restricted stock units are only available to directors, and are not
converted to shares until the director’s retirement, death, or disability. There were no unvested director
restricted shares outstanding at the end of any of the years 2012 through 2014. Director restricted stock
and restricted stock units are generally granted on the first working day of the year and vest in six
months. Dividend equivalents are earned on restricted stock units only. They are granted in the form of
additional restricted stock units and vest immediately upon grant.
An analysis of the weighted-average grant-date fair values of unvested restricted stock is as follows
for the year 2014:
Executive
Restricted Stock
Executive
Performance
Shares
Directors
Restricted
Stock
Directors
Restricted
Stock Units
Grant-date fair value per share at January 1, 2014 . . . . . .
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated additional performance shares . . . . . . . . . . . . . .
Restriction lapses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grant-date fair value per share at December 31, 2014 . . .
$ 29.49
50.69
(25.37)
31.13
31.85
$34.58
51.41
41.93
50.69
40.07
$ 51.62
$ 51.62
(51.62)
(51.62)
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Stock-Based Compensation (continued)
Additional information about Torchmark’s stock-based compensation as of December 31, 2014 and
2013 is as follows:
Outstanding options:
2014
2013
Weighted-average remaining contractual term (in years) . . . . . . . . . . . . . . . . . . . . .
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.34
$167,713
4.11
$208,152
Exercisable options:
Weighted-average remaining contractual term (in years) . . . . . . . . . . . . . . . . . . . . .
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.72
$112,724
2.49
$128,150
Unrecognized compensation* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average period of expected recognition (in years)* . . . . . . . . . . . . . . . . . . .
$ 38,809
0.91
$ 37,397
0.96
* Includes restricted stock
Additional information concerning Torchmark’s unvested options is as follows at December 31:
2014
2013
Number of shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average exercise price (per share) . . . . . . . . . . . . . . . . . . . . . $
Weighted-average remaining contractual term (in years) . . . . . . . . . . .
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,079,906
40.69 $
5.85
54,989 $
4,183,650
32.98
5.81
80,002
Torchmark expects that substantially all unvested options will vest.
The following table summarizes information about stock options outstanding at December 31, 2014.
Range of
Exercise Prices
Number
Outstanding
$18.56 - $20.58
24.22 - 29.59
30.33 - 32.48
37.40 - 43.06
50.69 - 51.62
$18.56 - $51.62
1,719,209
1,698,264
1,335,555
1,614,112
1,522,181
7,889,321
Options Outstanding
Options Exercisable
Weighted-
Average
Remaining
Contractual
Life (Years)
Weighted-
Average
Exercise
Price
1.87
3.37
4.69
5.48
6.69
4.34
$18.17
29.31
30.54
37.58
50.70
$32.91
Number
Exercisable
1,719,209
1,552,247
506,440
26,250
5,269
3,809,415
Weighted-
Average
Exercise
Price
$18.17
29.30
30.61
43.06
51.62
$24.58
No equity awards were cash settled during the three years ended December 31, 2014.
Note 14—Business Segments
Torchmark’s reportable segments are based on the insurance product
lines it markets and
administers: life insurance, health insurance, Medicare Part D, 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. There is also an investment segment which manages the investment portfolio, debt, and cash
flow for the insurance segments and the corporate function. Torchmark’s chief operating decision maker
evaluates the overall performance of the operations of the Company in accordance with these segments.
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
Effective January 1, 2014, Torchmark reorganized its segment structure to separate its Medicare Part D
health insurance business from its other health insurance activities as a stand-alone segment. Management has
concluded that Medicare Part D meets the criteria of a distinct segment. Previously, Part D was included in the
health segment. Prior periods’ segment results have been retrospectively adjusted for comparability. Premium
income for Medicare Part D health insurance is included with the premium for other health products in the
Consolidated Statements of Operations.
Life insurance products include traditional and interest-sensitive whole life insurance as well as term life
insurance. Health products are generally guaranteed-renewable and include Medicare Supplement, cancer,
accident,
long-term care, and limited-benefit hospital and surgical coverages. Medicare Part D includes
prescription drug coverage for Medicare beneficiaries. Annuities include fixed-benefit contracts.
Torchmark markets its insurance products through a number of distribution channels, each of which sells the
products of one or more of Torchmark’s insurance segments. The tables below present segment premium
revenue by each of Torchmark’s marketing groups.
Torchmark Corporation
Premium Income By Distribution Channel
For the Year 2014
Life
Health
Medicare Part D
% of
Total Amount
Annuity
Distribution Channel
United American Independent . . . . . . . . . . . . . $
Liberty National Exclusive . . . . . . . . . . . . . . . .
American Income Exclusive . . . . . . . . . . . . . .
Family Heritage Exclusive . . . . . . . . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
16,582
272,265
766,458
1,595
702,023
207,377
% of
Total Amount
1 $305,368
222,017
78,722
204,667
58,666
14
39
0
36
10
% of
Total Amount
35 $ 55,397
25
6,431
9
24
7
285,977
$400
16
2
82
$1,966,300 100 $869,440 100 $347,805
100
$400
For the Year 2013
Life
Health
Medicare Part D
% of
Total Amount
Annuity
Distribution Channel
United American Independent . . . . . . . . . . . . . $
Liberty National Exclusive . . . . . . . . . . . . . . . .
American Income Exclusive . . . . . . . . . . . . . .
Family Heritage Exclusive . . . . . . . . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
19,742
275,980
715,366
1,006
663,544
209,694
% of
Total Amount
1 $298,298
241,264
79,435
190,923
53,898
15
38
0
35
11
% of
Total Amount
35 $ 41,455
28
7,361
9
22
6
251,192
$532
14
2
84
$1,885,332 100 $863,818 100 $300,008
100
$532
For the Year 2012
Life
Health
Medicare Part D
% of
Total Amount
Annuity
Distribution Channel
United American Independent . . . . . . . . . . . . . $
Liberty National Exclusive . . . . . . . . . . . . . . . .
American Income Exclusive . . . . . . . . . . . . . .
Family Heritage Exclusive . . . . . . . . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
21,127
281,723
663,696
130
630,111
211,737
% of
Total Amount
1 $298,759
263,535
79,640
30,119
57,966
15
37
0
35
12
% of
Total Amount
41 $ 64,021
36
8,533
11
4
8
245,210
$559
20
3
77
Total
% of
Total Amount
100 $ 377,747
500,713
845,180
206,262
1,046,666
207,377
% of
Total
12
16
27
6
33
6
100 $3,183,945 100
Total
% of
Total Amount
100 $ 360,027
524,605
794,801
191,929
968,634
209,694
% of
Total
12
17
26
6
32
7
100 $3,049,690 100
Total
% of
Total Amount
100 $ 384,466
553,791
743,336
30,249
933,287
211,737
% of
Total
13
19
26
1
33
8
100 $2,856,866 100
$1,808,524 100 $730,019 100 $317,764
100
$559
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
Because of the nature of the life insurance industry, Torchmark has no individual or group which would be
considered a major customer. Substantially all of Torchmark’s business is conducted in the United States.
The measure of profitability established by the chief operating decision maker for insurance segments is
underwriting margin before other income and administrative expenses,
in accordance with the manner the
segments are managed. It essentially represents gross profit margin on insurance products before insurance
administrative expenses and consists of premium,
less net policy obligations, acquisition expenses, and
commissions. Interest credited to net policy liabilities (reserves less deferred acquisition costs) is reflected as a
component of the Investment segment in order to match this cost to the investment earnings from the assets
supporting the net policy liabilities.
The measure of profitability for the Investment segment is excess investment income, which represents the
income earned on the investment portfolio in excess of net policy requirements and financing costs associated
with Torchmark’s debt. Other than the above-mentioned interest allocations and an intersegment commission,
there are no other intersegment revenues or expenses. Expenses directly attributable to corporate operations are
included in the “Corporate” category. Stock-based compensation expense is considered a corporate expense by
Torchmark management and is included in this category. All other unallocated revenues and expenses on a
pretax basis, including insurance administrative expense, are included in the “Other” segment category.
Torchmark holds a sizeable investment portfolio to support its insurance liabilities, the yield from which is
used to offset policy benefit, acquisition, administrative and tax expenses. This yield or investment income is
taken into account when establishing premium rates and profitability expectations of its insurance products. In
holding such a portfolio, investments are sold, called, or written down from time to time, resulting in a realized
gain or loss. These gains or losses generally occur as a result of disposition due to issuer calls, a downgrade in
credit quality, compliance with Company investment policies, or other reasons often beyond management’s
control. Unlike investment income, realized gains and losses are incidental to insurance operations, and only
overall yields are considered when setting premium rates or insurance product profitability expectations. While
these gains and losses are not relevant to segment profitability or core operating results, they can have a material
positive or negative result on net income. For these reasons, management removes realized investment gains
and losses when it views its segment operations.
During 2014, Torchmark accrued for certain litigation matters in the net amount of $3.7 million ($2.4 million
after tax) that were not directly related to its insurance operations. Additionally, Torchmark received $1.3 million
($853 thousand after tax) in settlement of litigation regarding investments. Also in 2014, the Company recorded
$8.2 million in administrative settlements ($5.3 million after tax) related to benefits paid for deaths occurring in
prior years where claims had not been filed. These administrative settlements were included in “Policyholder
benefits” in the Consolidated Statements of Operations in 2014. During 2013, Torchmark incurred four non-
operating charges: (1) a state guaranty fund assessment in the amount of $1.2 million ($751 thousand after tax),
resulting from events in years prior to 2012, (2) a legal settlement related to a non-insurance matter in the amount
of $500 thousand ($325 thousand after tax), (3) the settlement of a litigation matter related to prior years in the
amount of $8.6 million ($5.6 million after tax) and (4) a one-time adjustment related to the finalization of
accounting for the acquisition of the insurance assets and liabilities of Family Heritage. The Family Heritage
acquisition closed on November 1, 2012. This adjustment increased after-tax earnings in the amount of $522
thousand. Management removes items that are related to prior periods when evaluating the operating results of
current periods. Management also removes non-operating items unrelated to its core insurance activities when
evaluating those results. Therefore, these items are excluded in its presentation of segment results, because
accounting guidance requires that operating segment results be presented as management views its business.
With the exception of the administrative settlements in the paragraph above, all of these items are included in
“Other operating expense” in the Consolidated Statements of Operations for the appropriate year.
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
The following tables set forth a reconciliation of Torchmark’s revenues and operations by segment to its
information
line items. See Note 1—Significant Accounting Policies for additional
major income statement
concerning reconciling items of segment profits to pretax income.
Life
Health
Medicare
Part D
Annuity Investment
Other
Corporate Adjustments Consolidated
For the year 2014
Revenue:
Premium . . . . . . . . . . . . . . . . . . . . . . $1,966,300 $869,440 $347,805 $
Net investment income . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . .
400
$ 758,286
Total revenue . . . . . . . . . . . . . . . 1,966,300 869,440 347,805
400
758,286
$
2,354
2,354
Expenses:
Policy benefits . . . . . . . . . . . . . . . . . . 1,293,384 559,817 290,341
Required interest on:
42,005
Policy reserves . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . .
Amortization of acquisition costs . . .
Commissions, premium taxes, and
non-deferred acquisition costs . . .
Insurance administrative expense(2)
.
Parent expense . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . .
Interest expense . . . . . . . . . . . . . . . .
(530,192)
168,100
335,345
(64,401)
22,499
72,731
0 (55,255) 649,848
1,453 (192,779)
7,838
727
2,858
143,174
79,475
26,613
47
179,955
$ 8,159
32,203
76,126
$25,475(1)
(29,079)(4)
(233)(3)
$3,209,420
729,207
2,121
(3,837)
3,940,748
33,653(1,6)
2,219,200
0
0
418,772
249,076
182,377
8,074
32,203
76,126
(233)(3)
2,422(5)
(85)(5)
Total expenses . . . . . . . . . . . . . 1,409,811 670,121 320,539
(3,912) 533,195
179,955
40,362
35,757
3,185,828
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . .
Nonoperating items . . . . . . . . . . . . . .
Amortization of low-income
housing . . . . . . . . . . . . . . . . . . . . .
Measure of segment profitability
556,489 199,319
27,266
4,312
225,091 (177,601)
(40,362)
(39,594)
10,515(5,6)
754,920
10,515
29,079(4)
29,079
(pretax) . . . . . . . . . . . . . . . . . . . . $ 556,489 $199,319 $ 27,266 $ 4,312 $ 225,091 $(177,601) $(40,362)
$
0
794,514
Deduct applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(260,046)
Segment profits after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
534,468
Add back income taxes applicable to segment profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (deduct) realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct Part D adjustments(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct amortization of low-income housing(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct legal settlement expenses(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct administrative settlements(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
260,046
23,548
0
(29,079)
(2,337)
(8,178)
Pretax income per Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 778,468
(1) Medicare Part D items adjusted to GAAP from the segment analysis, which matches expected benefits with policy premium.
(2) Administrative expense is not allocated to insurance segments.
(3) Elimination of intersegment commission.
(4) Amortization of low-income housing expense, considered a component of income tax expense in the segment analysis.
(5) Legal settlement expenses.
(6) Administrative settlements.
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
Life
Health*
Medicare
Part D*
Annuity Investment
Other
Corporate Adjustments Consolidated
For the year 2013
Revenue:
Premium . . . . . . . . . . . . . . . . . . . . . . . . . $1,885,332 $863,818 $300,008 $
Net investment income . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . .
532
$ 734,650
Total revenue . . . . . . . . . . . . . . . . . 1,885,332 863,818 300,008
532
734,650
$
2,208
2,208
Expenses:
Policy benefits . . . . . . . . . . . . . . . . . . . . 1,227,857 558,982 247,496
Required interest on:
43,302
Policy reserves . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . .
Amortization of acquisition costs . . . . .
Commissions, premium taxes, and
non-deferred acquisition costs . . . . .
Insurance administrative expense(2) . . . .
Parent expense . . . . . . . . . . . . . . . . . . .
Stock-based compensation
expense . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . .
(508,236)
164,981
323,950
(59,858)
22,568
69,724
0 (57,294) 625,388
1,811 (190,025)
8,714
665
2,520
131,721
75,895
14,027
60
178,898
$ 8,495
25,642
80,461
$2,584(1)
(24,907)(4)
(277)(3)
$3,052,274
709,743
1,931
(22,600)
3,763,948
11,209(1,6)
2,088,846
(1,519)(7)
(277)(3)
1,155(5)
500(6)
0
0
403,389
221,426
180,053
8,995
25,642
80,461
Total expenses . . . . . . . . . . . . . . . . 1,340,273 667,311 264,708
(3,407) 515,824
178,898
34,137 11,068
3,008,812
Subtotal
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-operating items . . . . . . . . . . . . . . .
Amortization of low-income housing
interests . . . . . . . . . . . . . . . . . . . . . . .
Measure of segment profitability
545,059 196,507
35,300
3,939
218,826 (176,690)
(34,137) (33,668)
8,761(5,6,7)
755,136
8,761
24,907(4)
24,907
(pretax) . . . . . . . . . . . . . . . . . . . . . . $ 545,059 $196,507 $ 35,300 $ 3,939 $ 218,826 $(176,690) $(34,137) $
0
788,804
Deduct applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Segment profits after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add back income taxes applicable to segment profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (deduct) realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct Medicare Part D adjustments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct amortization of low-income housing(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct Guaranty Fund Assessment(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct legal settlement expenses(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add Family Heritage Life acquisition adjustments(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(258,137)
530,667
258,137
7,990
0
(24,907)
(1,155)
(9,125)
1,519
Pretax income per Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 763,126
(1) Medicare Part D items adjusted to GAAP from the segment analysis, which matches expected benefits with policy premium.
(2) Administrative expense is not allocated to insurance segments.
(3) Elimination of intersegment commission.
(4) Amortization of low-income housing interests.
(5) Guaranty Fund Assessment.
(6) Legal settlement expenses.
(7) Family Heritage Life acquisition adjustments.
*
Retrospectively adjusted to give effect to the reorganization of segments described earlier in this Note.
101
Expenses:
Policy benefits . . . . . . . . . .
Required interest on:
Policy reserves . . . . . . .
Deferred acquisition
costs . . . . . . . . . . . . . .
Amortization of acquisition
costs . . . . . . . . . . . . . . . .
Commissions, premium
taxes, and non-deferred
acquisition costs . . . . . .
Insurance administrative
expense(3)
. . . . . . . . . . .
Parent expense . . . . . . . . .
Stock-based
compensation
expense . . . . . . . . . . . . .
Interest expense . . . . . . . .
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
Life
Health*
Medicare
Part D*
Annuity Investment
Other
Corporate Adjustments Consolidated
For the Year 2012
Revenue:
Premium . . . . . . . . . . . . . . $1,808,524 $730,019 $317,764 $
Net investment income . . .
Other income . . . . . . . . . . .
559
$ 715,918
Total revenue . . . . . . .
1,808,524 730,019 317,764
559
715,918
$
1,898
1,898
1,172,020 472,988 266,957
44,121
(483,892)
(40,963)
0 (59,293) 584,148
163,875
18,475
584
2,238 (185,172)
309,930
62,910
2,368
9,959
$
(404)(1)
(22,274)(2)(5)
(321)(4)
$2,856,462
693,644
1,577
(22,999)
3,551,683
(404)(1)
1,955,682
0
0
385,167
137,115
52,625
14,498
69
(321)(4)
203,986
165,405
$ 8,222
2,944(6)
80,298
21,605
214(2)
165,405
11,166
21,605
80,512
Total expenses . . . . .
1,299,048 566,035 284,407
(2,906) 479,274
165,405
29,827
2,433
2,823,523
Sub total
. . . . . . . . . . . . . . . .
Non operating items . . . . .
Amortization of low-
income housing
interests . . . . . . . . . . . . .
Measure of segment
509,476 163,984
33,357
3,465
236,644 (163,507)
(29,827)
(25,432)
2,944(6)
728,160
2,944
22,488(5)
22,488
profitability (pretax) . . $ 509,476 $163,984 $ 33,357 $ 3,465 $ 236,644 $(163,507) $(29,827) $
0
753,592
Deduct applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Segment profits after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add back income taxes applicable to segment profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (deduct) realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct Medicare Part D adjustments(1)
Deduct amortization of low-income housing(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct Family Heritage Life acquisition expense(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(246,945)
506,647
246,945
37,833
0
(22,488)
(2,944)
Pretax income per the Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 765,993
(1) Medicare Part D items adjusted to GAAP from the segment analysis, which matches expected benefits with policy premium.
(2) Reclassification of interest amount due to accounting rule requiring deconsolidation of Trust Preferred Securities.
(3) Administrative expense is not allocated to insurance segments.
(4) Elimination of intersegment commission.
(5) Amortization of low-income housing interests.
(6) Family Heritage Life acquisition expense.
*
Retrospectively adjusted to give effect to the reorganization of segments described earlier in this Note.
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
The following table summarizes the measures of segment profitability as determined in the three
preceding tables for comparison with prior periods. The table also reconciles segment profits to net income.
Analysis of Profitability by Segment
2014
2013
2012
Change %
Change %
2014
2013
Life insurance underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . . . $ 556,489 $ 545,059 $ 509,476 $11,430
2,812
Health insurance underwriting margin* . . . . . . . . . . . . . . . . . . . . . .
(8,034)
Medicare Part D underwriting margin* . . . . . . . . . . . . . . . . . . . . . . .
373
Annuity underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,265
Other insurance:
199,319
27,266
4,312
225,091
196,507
35,300
3,939
218,826
163,984
33,357
3,465
236,644
2 $ 35,583
1
(23)
9
3
7
32,523 20
6
474 14
(8)
(17,818)
1,943
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,354
(179,955)
(40,362)
2,208
(178,898)
(34,137)
1,898
(165,405)
(29,827)
7
146
(1,057)
1
(6,225) 18
(13,493)
310 16
8
(4,310) 14
Pre-tax total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
794,514
(260,046)
788,804
(258,137)
753,592
(246,945)
5,710
(1,909)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains (losses)—investments (after tax) . . . . . . . . . . . . . .
Acquisition expense—Family Heritage (after tax) . . . . . . . . . . . . . .
Family Heritage acquisition finalization adjustments (after tax) . . .
. . . . . . . . . . . . . . . . . . . . . . .
Legal settlement expenses (after tax)
Guaranty Fund assessment (after tax) . . . . . . . . . . . . . . . . . . . . . . .
Administrative settlements (after tax) . . . . . . . . . . . . . . . . . . . . . . . .
534,468
15,306
0
0
(1,519)
0
(5,316)
530,667
3,965
0
522
(5,931)
(751)
0
506,647
24,591
(1,914)
0
0
0
0
3,801
11,341
0
(522)
4,412
751
(5,316)
1
1
1
5
5
5
35,212
(11,192)
24,020
(20,626)
1,914
522
(5,931)
(751)
0
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 542,939 $ 528,472 $ 529,324 $14,467
3 $ (852)
0
*
Retrospectively adjusted to give effect to the reorganization of segments described earlier in this Note.
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
Assets for each segment are reported based on a specific identification basis. The insurance
segments’ assets contain deferred acquisition costs (including the value of insurance purchased). The
investment segment includes the investment portfolio, cash, and accrued investment income. Goodwill is
assigned to the insurance segments at the time of purchase based on the excess of cost over the fair
value of assets acquired for the benefit of that segment. All other assets are included in the Other
category. The table below reconciles segment assets to total assets as reported in the consolidated
financial statements.
Assets by Segment
Life
Health
Medicare
Part D
Annuity
Investment
Other
Consolidated
At December 31, 2014
Cash and invested assets . . . . . . . . .
Accrued investment income . . . . . . .
Deferred acquisition costs . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . .
$2,946,995
309,609
$493,880
131,982
$14,384
$16,522
$15,058,996
204,879
$15,058,996
204,879
3,471,781
441,591
1,037,483
$1,037,483
Total assets . . . . . . . . . . . . . . . . . . . .
$3,256,604
$625,862
$14,384
$16.522
$15,263,875
$1,037,483
$20,214,730
Life
Health
Medicare
Part D
Annuity
Investment
Other
Consolidated
At December 31, 2013*
Cash and invested assets . . . . . . . . .
Accrued investment income . . . . . . .
Deferred acquisition costs . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Goodwill
Other assets . . . . . . . . . . . . . . . . . . . .
$2,809,199
309,609
$485,527
131,982
$12,216
$30,707
$13,456,944
200,038
$13,456,944
200,038
3,337,649
441,591
755,522
$ 755,522
Total assets . . . . . . . . . . . . . . . . . . . .
$3,118,808
$617,509
$12,216
$30,707
$13,656,982
$ 755,522
$18,191,744
Other Balances by Segment
Future policy benefits . . . . . . . . . . . . . . . . . . . .
Unearned and advance premium . . . . . . . . . .
Policy claims and other benefits payable . . . .
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31, 2014
Life
Health
$8,900,344
17,238
125,884
$1,489,963
54,465
128,265
Medicare
Part D
$
572
(42,012)
Annuity
Investment Consolidated
$1,360,188
$11,750,495
72,275
212,137
1,230,528
$1,230,528
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,043,466
$1,672,693
$(41,440) $1,360,188
$1,230,528
$13,265,435
Future policy benefits . . . . . . . . . . . . . . . . . . . .
Unearned and advance premium . . . . . . . . . .
Policy claims and other benefits payable . . . .
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31, 2013*
Life
Health
$8,493,972
16,970
121,661
$1,384,365
54,248
116,559
Medicare
Part D
$ 2,956
(14,840)
Annuity
Investment Consolidated
$1,377,818
$11,256,155
74,174
223,380
1,219,935
$1,219,935
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,632,603
$1,555,172
$(11,884) $1,377,818
$1,219,935
$12,773,644
* Retrospectively adjusted to give effect to the reorganization of segments described earlier in this Note.
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 15—Commitments and Contingencies
Reinsurance:
Insurance affiliates of Torchmark reinsure that portion of insurance risk which is in
excess of their retention limits. Retention limits for ordinary life insurance range up to $2.0 million per life.
Life insurance ceded represented less than .1% of total life insurance in force at December 31, 2014.
Insurance ceded on life and accident and health products represented .2% of premium income for 2014.
Torchmark would be liable for the reinsured risks ceded to other companies to the extent that such
reinsuring companies are unable to meet their obligations.
Insurance affiliates also assume insurance risks of other companies. Life reinsurance assumed
represented 2.2% of life insurance in force at December 31, 2014 and reinsurance assumed on life and
accident and health products represented .8% of premium income for 2014.
Leases: Torchmark leases office space and office equipment under a variety of operating lease
arrangements. Rental expense for operating leases was $4.2 million in 2014, $4.1 million in 2013, and
$3.6 million in 2012. Future minimum rental commitments required under operating leases having
remaining noncancelable lease terms in excess of one year at December 31, 2014 were as follows: 2015,
$9 million; 2016, $8 million; 2017, $7 million; 2018, $4 million; 2019, $4 million and in the aggregate,
$46 million.
Low-Income Housing Tax Credit Interests: As described in Note 1, Torchmark had $318 million
invested in entities which provide certain tax benefits at December 31, 2014. As of December 31, 2014,
Torchmark remained obligated under these commitments for $76 million, of which $44 million is due in
2015, $19 million in 2016, $6 million in 2017, and $7 million thereafter.
Concentrations of Credit Risk: Torchmark maintains a diversified investment portfolio with limited
concentration in any given issuer. At December 31, 2014, the investment portfolio, at fair value, consisted
of the following:
Investment-grade corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities of state and municipal governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Below-investment-grade securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans, which are secured by the underlying insurance policy values . . . . . . . . . . . . . .
Government-sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81%
10
4
3
2
100%
As of December 31, 2014, securities of state and municipal governments represented 10% of
invested assets at fair value. Such investments are made throughout the U.S. At year-end 2014, 5% or
more of the state and municipal bond portfolio at fair value was invested in securities issued within the
following states: Texas (31%), Ohio (7%), Washington (7%), Illinois (6%), and Alabama (5%). Otherwise,
there was no significant concentration within any given state.
Corporate debt and equity investments are made in a wide range of industries. Below are the ten
largest industry concentrations held in the corporate portfolio at December 31, 2014, based on fair value:
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18%
Electric utilities and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17%
7%
Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6%
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5%
Oil and gas extraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5%
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4%
Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3%
Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3%
Gas utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3%
REITs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 15—Commitments and Contingencies (continued)
At year-end 2014, 4% of invested assets at fair value was represented by fixed maturities rated
below investment grade (BB or lower as determined by the weighted average of available ratings from
rating services). Par value of these investments was $635 million, amortized cost was $561 million, and
fair value was $550 million. While these investments could be subject to additional credit risk, such risk
should generally be reflected in their fair value.
Guarantees: At December 31, 2014, Torchmark had in place three guarantee agreements, of which
were either parent company guarantees of subsidiary obligations to a third party, or parent company
guarantees of obligations between wholly-owned subsidiaries. As of December 31, 2014, Torchmark had
no liability with respect to these guarantees.
Letters of Credit: Torchmark has guaranteed letters of credit in connection with its credit facility
with a group of banks as disclosed in Note 11. The letters of credit were issued by TMK Re, Ltd., a
wholly-owned subsidiary, to secure TMK Re, Ltd.’s obligation for claims on certain policies reinsured
by TMK Re, Ltd. that were sold by other Torchmark insurance companies. These letters of credit
facilitate TMK Re, Ltd.’s ability to reinsure the business of Torchmark’s insurance carriers. The
agreement expires in 2019. The maximum amount of letters of credit available is $250 million.
Torchmark (parent company) would be liable to the extent that TMK Re, Ltd. does not pay the
reinsured party. At December 31, 2014, $198 million of letters of credit were outstanding.
Equipment leases: Torchmark has guaranteed performance of certain subsidiaries as lessees
under three leasing arrangements, two for aviation equipment and the other for computer software and
other furniture and equipment. One aviation lease expires in August, 2022, and the second expires in
September, 2024. The other lease expires in December, 2017. At December 31, 2014, total remaining
undiscounted payments under the leases were approximately $23 million. Torchmark (parent company)
would be responsible for any subsidiary obligation in the event the subsidiary did not make payments or
otherwise perform under the terms of the lease.
Unclaimed Property Audits: 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 seven states through their respective Departments of Revenue, and have not
resulted in any financial assessment from any state nor indicated any Company liability. These 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 amounts or penalties that could be payable to the
states for the escheatment of abandoned property.
Litigation:
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
juries and appellate courts in the future. This bespeaks caution, particularly in states with
judges,
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.
With respect to its current litigation, at this time management believes that the possibility of a material
judgment adverse to Torchmark is remote, and no estimate of range can be made for loss contingencies
that are at least reasonably possible but not accrued.
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 16—Selected Quarterly Data (Unaudited)
The following is a summary of quarterly results for the two years ended December 31, 2014. The
information is unaudited but includes all adjustments (consisting of normal accruals) which management
considers necessary for a fair presentation of the results of operations for these periods.
March 31,
June 30,
September 30, December 31,
Three Months Ended
2014:
Premium and policy charges . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses)
. . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition expenses . . . . . . . . .
Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net income per common share* . . . . . . . .
Diluted net income per common share* . . . . . . .
2013:
Premium and policy charges . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses)
. . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition expenses . . . . . . . . .
Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net income per common share* . . . . . . . .
Diluted net income per common share* . . . . . . .
$ 819,020
181,000
16,619
1,017,120
586,517
104,733
190,487
132,856
1.00
.98
$ 784,814
176,839
(3,907)
958,216
552,003
101,714
173,063
119,632
.85
.84
$799,866
182,877
577
983,983
555,207
104,561
186,758
130,923
1.00
.98
$765,851
177,964
5,913
950,339
524,499
102,488
192,784
133,901
.97
.96
$785,715
182,101
(1,483)
967,001
535,532
103,834
189,564
132,412
1.02
1.00
$750,998
176,656
4,459
932,789
516,783
98,444
190,850
132,122
.97
.95
$804,819
183,229
7,835
996,192
541,944
105,644
211,659
146,748
1.14
1.13
$750,611
178,284
1,525
930,594
495,561
100,743
206,429
142,817
1.06
1.04
*
Per share amounts have been retrospectively adjusted for the stock split effective July 1, 2014. Basic and diluted net income
per share by quarter may not add to per share income on a year-to-date basis due to share weighting and rounding.
107
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No disagreements with accountants on any matter of accounting principles or practices or financial
statement disclosure have been reported on a Form 8-K within the twenty-four months prior to the date of
the most recent financial statements.
Item 9A. 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 year completed December 31, 2014, 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-K. 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-K.
As of the quarter ended December 31, 2014, 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.
There were no items required.
Item 9B. Other Information
108
Management’s Report on Internal Control over Financial Reporting
Management at Torchmark Corporation is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company and for assessing the effectiveness of internal
control on an annual basis. As a framework for assessing internal control over financial reporting, the
Company utilizes the criteria for effective internal control over financial reporting described in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
There are inherent limitations in the effectiveness of any internal control, including the possibility of
human error and the circumvention or overriding of controls. Accordingly, even effective internal controls
can provide only reasonable assurance with respect to financial statement preparation. Further, because
of changes in conditions, the effectiveness of internal control may vary over time.
Management evaluated the Company’s internal control over financial reporting, and based on its
assessment, determined that the Company’s internal control over financial reporting was effective as of
December 31, 2014. The Company’s independent registered public accounting firm has issued an
attestation report on the Company’s internal control over financial reporting as stated in their report which
is included herein.
/s/ Gary L. Coleman
Gary L. Coleman
Co-Chairman and Chief Executive Officer
/s/ Larry M. Hutchison
Larry M. Hutchison
Co-Chairman and Chief Executive Officer
/s/ Frank M. Svoboda
Frank M. Svoboda
Executive Vice President and
Chief Financial Officer
February 27, 2015
109
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Torchmark Corporation
McKinney, Texas
We have audited the internal control over financial reporting of Torchmark Corporation and subsidiaries
(Torchmark) as of December 31, 2014, based on criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Torchmark’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on Torchmark’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit
internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
included obtaining an understanding of
the company’s principal executive and principal
A company’s internal control over financial reporting is a process designed by, or under the supervision
of,
financial officers, or persons performing similar
functions, and effected by the company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of
financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of
transactions are
financial statements in accordance with generally
recorded as necessary to permit preparation of
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of
the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
the company; (2) provide reasonable assurance that
financial reporting and the preparation of
the assets of
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may
not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of
the internal control over financial reporting to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, Torchmark maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2014, based on the criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial statement schedules as of and
for the year ended December 31, 2014 of Torchmark and our report dated February 27, 2015 expressed
an unqualified opinion on those financial statements and financial statement schedules.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
February 27, 2015
110
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item is incorporated by reference from the sections entitled “Election of
Directors,” “Profiles of Director Nominees,” “Executive Officers,” “Audit Committee Report,” “Governance
Guidelines and Codes of Ethics,” “Director Qualification Standards,” “Procedures for Director Nominations
by Stockholders,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement
for the Annual Meeting of Stockholders to be held April 30, 2015 (the Proxy Statement), which is to be
filed with the Securities and Exchange Commission (SEC).
Item 11. Executive Compensation
Information required by this item is incorporated by reference from the sections entitled
“Compensation Discussion and Analysis”, “Compensation Committee Report”, “Summary Compensation
Table”, “2014 Grants of Plan-based Awards”, “Outstanding Equity Awards at Fiscal Year End 2014”,
“Option Exercises and Stock Vested during Fiscal Year Ended December 31, 2014”, “Pension Benefits at
December 31, 2014”, “Potential Payments upon Termination or Change in Control”, “2014 Director
Compensation”,
“Payments to Directors” and “Compensation Committee Interlocks and Insider
Participation” in the Proxy Statement, which is to be filed with the SEC.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
(a)
Equity Compensation Plan Information
As of December 31, 2014
Number of securities to be
issued upon exercise of
outstanding options,
warrants, and rights
Weighted-average
exercise price of
outstanding options,
warrants, and rights
Number of securities
remaining available for
future issuance under
equity compensation plans
7,889,321
$32.91
8,458,593
Plan Category
Equity compensation
plans approved by
security holders . . .
Equity compensation
plans not approved
by security
holders . . . . . . . . . .
Total . . . . . . . . . . . . . .
7,889,321
(b) Security ownership of certain beneficial owners:
0
0
$32.91
0
8,458,593
Information required by this item is incorporated by reference from the section entitled “Principal
Stockholders” in the Proxy Statement, which is to be filed with the SEC.
(c) Security ownership of management:
Information required by this item is incorporated by reference from the section entitled “Stock
Ownership” in the Proxy Statement, which is to be filed with the SEC.
(d) Changes in control:
Torchmark knows of no arrangements, including any pledges by any person of its securities, the
operation of which may at a subsequent date result in a change of control.
Item 13. Certain Relationships and Related Transactions and Director Independence
Information required by this item is incorporated by reference from the sections entitled “Related
Party Transaction Policy and Transactions” and “Director Independence Determinations” in the Proxy
Statement, which is to be filed with the SEC.
Item 14. Principal Accountant Fees and Services
Information required by this Item is incorporated by reference from the section entitled “Principal
Accounting Firm Fees” and “Pre-approval Policy” in the Proxy Statement, which is to be filed with the
SEC.
111
PART IV
Item 15. Exhibits and Financial Statement Schedules
Index of documents filed as a part of this report:
Page of
this report
Financial Statements:
Torchmark Corporation and Subsidiaries:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at December 31, 2014 and 2013 . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for each of the three years in
the period ended December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for each of the three years in
the period ended December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedules Supporting Financial Statements for each of the three years in the period
ended December 31, 2014:
II. Condensed Financial Information of Registrant (Parent Company) . . . . . . . . . . . . .
IV. Reinsurance (Consolidated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54
55
56
57
58
59
60
120
124
Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X.
112
EXHIBITS
Page of
this
Report
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
10.1
Restated Certificate of Incorporation of Torchmark Corporation, filed with the Delaware
Secretary of State on April 30, 2010 (incorporated by reference from Exhibit 3.1.2 to
Form 8-K dated May 5, 2010)
Amended and Restated By-Laws of Torchmark Corporation, as amended April 20, 2012
(incorporated by reference from Exhibit 3.2 to Form 8-K dated April 24, 2012)
Specimen Common Stock Certificate (incorporated by reference from Exhibit 4(a) to
Form 10-K for the fiscal year ended December 31, 1989)
Trust Indenture dated as of February 1, 1987 between Torchmark Corporation and
Morgan Guaranty Trust Company of New York, as Trustee (incorporated by reference
from Exhibit 4(b)
to Form S-3 for $300,000,000 of Torchmark Corporation Debt
Securities and Warrants (Registration No. 33-11816))
Junior Subordinated Indenture, dated November 2, 2001, between Torchmark
the 7 3⁄4% Junior
Corporation and The Bank of New York defining the rights of
Subordinated Debentures (incorporated by reference from Exhibit 4.3 to Form 8-K dated
November 2, 2001)
Supplemental
Indenture, dated as of December 14, 2001, between Torchmark,
BankOne Trust Company, National Association and The Bank of New York,
supplementing the Indenture Agreement dated February 1, 1987 (incorporated herein by
reference to Exhibit 4(b) to Torchmark’s Registration Statement on Form S-3 (File No.
33-11716), and defining the rights of the 6 1⁄4% Senior Notes (incorporated by reference
from Exhibit 4.1 to Form 8-K dated December 14, 2001)
Second Supplemental
Indenture dated as of June 23, 2006 between Torchmark
Corporation, J.P. Morgan Trust Company, National Association and The Bank of New
York Trust Company, N.A. (incorporated by reference from Exhibit 4.1 to Form 8-K filed
June 23, 2006)
Third Supplemental
Indenture dated as of June 30, 2009 between Torchmark
Corporation and The Bank of New York Mellon Trust Company, N.A. (incorporated by
reference from Exhibit 4 to Form 10-Q for the quarter ended June 30, 2009)
Fourth Supplemental Indenture dated as of September 24, 2012 between Torchmark
Corporation and The Bank of New York Mellon Trust Company, N. A., as Trustee,
supplementing the Indenture dated February 1, 1987 (incorporated by reference from
Exhibit 4.2 to Form 8-K dated September 24, 2012)
First Supplemental Indenture dated as of September 24, 2012, between Torchmark
Corporation and The Bank of New York Mellon Trust Company, N. A., as Trustee,
supplementing the Junior Subordinated Indenture dated November 2, 2001,
(incorporated by reference from Exhibit 4.5 to Form 8-K dated September 24, 2012)
Certificate and Declaration of Trust of SAFC Statutory Trust I dated February 16, 2006
(incorporated by reference from Exhibit 4.9 to Form 10-K for the fiscal year ended
December 31, 2012)
Amended and Restated Declaration of Trust of SAFC Statutory Trust I dated March 1,
2006 (incorporated by reference from Exhibit 4.10 to Form 10-K for the fiscal year ended
December 31, 2012)
Indenture dated as of March 1, 2006 for Fixed/Floating Rate Junior Subordinated
Deferrable Interest Debentures due 2036 between Southwestern American Financial
Corporation and Wilmington Trust Company (incorporated by reference from Exhibit
4.11 to Form 10-K for the fiscal year ended December 31, 2012)
Torchmark Corporation and Affiliates Retired Lives Reserve Agreement, as amended,
and Trust (incorporated by reference from Exhibit 10(b) to Form 10-K for the fiscal year
ended December 31, 1991)*
113
Page of
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Report
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Capital Accumulation and Bonus Plan of Torchmark Corporation, as amended,
(incorporated by reference from Exhibit 10(c) to Form 10-K for the fiscal year ended
December 31, 1988)*
Torchmark Corporation Supplementary Retirement Plan (incorporated by reference
from Exhibit 10(c) to Form 10-K for the fiscal year ended December 31, 1992)*
Amended and Restated Credit Agreement dated as of July 16, 2014 among Torchmark
Corporation, as the Borrower, TMK Re, Ltd., as a Loan Party, Wells Fargo Bank,
National Association, as Administrative Agent, Swing Line Lender, L/C Issuer and L/C
Administrator and the other lenders party thereto (incorporated by reference from
Exhibit 10.1 to Form 8-K dated July 21, 2014)
Certified Copy of Resolution Regarding Director Retirement Benefit Program
(incorporated by reference from Exhibit 10(e) to Form 10-K for the fiscal year ended
December 31, 1999)*
Torchmark Corporation Restated Deferred Compensation Plan for Directors, Advisory
Directors, Directors Emeritus and Officers, as amended (incorporated by reference
from Exhibit 10(e) to Form 10-K for the fiscal year ended December 31, 1992)*
The Torchmark Corporation 1987 Stock Incentive Plan (incorporated by reference from
Exhibit 10(f) to Form 10-K for the fiscal year ended December 31, 1998)*
General Agency Contract between Liberty National Life Insurance Company and First
Command Financial Services, Inc., (formerly known as Independent Research Agency
For Life Insurance, Inc.) (incorporated by reference from Exhibit 10(i) to Form 10-K for
the fiscal year ended December 31, 1990)
Amendment to General Agency Contract between First Command Financial Services
and Liberty National Life Insurance Company (incorporated by reference from
Exhibit 10.1 to Form 10-Q for the First Quarter 2005)**
Form of Deferred Compensation Agreement Between Torchmark Corporation or
Subsidiary and Officer at the Level of Vice President or Above Eligible to Participate in
the Torchmark Corporation and Affiliates Retired Lives Reserve Agreement and to
Retire Prior to December 31, 1986 (incorporated by reference from Exhibit 10(k) to
Form 10-K for the fiscal year ended December 31, 1991)*
Form of Deferred Compensation Agreement between Torchmark Corporation or
Subsidiary and Officer at the Level of Vice President or Above Eligible to Participate in
the Torchmark Corporation and Affiliates Retired Lives Reserve Agreement and Not
Eligible to Retire Prior
to December 31, 1986 (incorporated by reference from
Exhibit 10(l) to Form 10-K for the fiscal year ended December 31, 1991)*
Form of Deferred Compensation Agreement Between Torchmark Corporation or
Subsidiary and Officer at
the Level of Vice President or Above Not Eligible to
Participate in Torchmark Corporation and Affiliates Retired Lives Reserve Agreement
(incorporated by reference from Exhibit 10(j) to Form 10-K for the fiscal year ended
December 31, 1991)*
Service Agreement, dated as of January 1, 1991, between Torchmark Corporation and
Liberty National Life Insurance Company (prototype for agreements between
Torchmark Corporation and other principal operating subsidiaries) (incorporated by
reference from Exhibit 10(n) to Form 10-K for the fiscal year ended December 31,
1992)
The Torchmark Corporation Amended and Restated Pension Plan (incorporated by
reference from Exhibit 10.15 to Form 10-K for the fiscal year ended December 31,
2010)*
Amendment Sixteen to the Torchmark Corporation Amended and Restated Pension
Plan (as Restated Effective January 1, 2009) (incorporated by reference from Exhibit
10.16 to Form 10-K for the fiscal year ended December 31, 2012)*
114
Page of
this
Report
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
The Torchmark Corporation 1998 Stock Incentive Plan (incorporated by reference from
Exhibit 10(n) to Form 10-K for the fiscal year ended December 31, 1998)*
The Torchmark Corporation Savings and Investment Plan (amended and restated as of
January 1, 2009)* (incorporated by reference from Exhibit 10.17 to Form 10-K for the
fiscal year ended December 31, 2010)
Torchmark Corporation 2013 Management Incentive Plan effective as of January 1,
2013 (incorporated by reference from Exhibit 10.1 to Form 8-K dated April 30, 2013)*
Coinsurance and Servicing Agreement between Security Benefit Life Insurance
Company and Liberty National Life Insurance Company, effective as of December 31,
1995 (incorporated by reference from Exhibit 10(u) to Form 10-K for the fiscal year
ended December 31, 1995)
Torchmark Corporation 1996 Non-Employee Director Stock Option Plan (incorporated by
reference from Exhibit 10(w) to Form 10-K for the fiscal year ended December 31, 1996)*
Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan
(incorporated by reference from Exhibit 10(x) to Form 10-K for the fiscal year ended
December 31, 1996)*
Form of Retirement Life Insurance Benefit Agreement ($1,995,000 face amount limit)
(incorporated by reference from Exhibit 10(z) to Form 10-K for the fiscal year ended
December 31, 2001)*
Form of Retirement Life Insurance Benefit Agreement ($495,000 face amount limit)
(incorporated by reference from Exhibit 10(aa) to Form 10-K for the fiscal year ended
December 31, 2001)*
Payments to Directors (incorporated by reference from Exhibit 10.1 to Form 10-Q for
quarter ended September 30, 2014)*
Form of Non-Formula Based Director Stock Option Agreement pursuant to Torchmark
Corporation 2005 Non-Employee Director Incentive Plan (incorporated by reference
from Exhibit 10.2 to Form 10-Q for the First Quarter 2005)*
Form of Stock Option Agreement pursuant to Torchmark Corporation 2005 Incentive
Plan (Section 16(a) (restoration)) (incorporated by reference from Exhibit 10.3 to
Form 10-Q for the First Quarter 2005)*
Form of Stock Option Agreement pursuant to Torchmark Corporation 2005 Incentive
Plan (restoration general) (incorporated by reference from Exhibit 10.4 to Form 10-Q
for the First Quarter 2005)*
Form of Stock Option Agreement pursuant to Torchmark Corporation 2005 Incentive
Plan (bonus) (incorporated by reference from Exhibit 10.36 to Form 10-K for the fiscal
year ended December 31, 2005)*
Form of Stock Option Agreement pursuant to Torchmark Corporation 2005 Incentive
Plan (regular vesting) (incorporated by reference from Exhibit 10.37 to Form 10-K for
the fiscal year ended December 31, 2005)*
Torchmark Corporation 2005 Non-Employee Director Incentive Plan (incorporated by
reference from Exhibit 10.1 to Form 8-K dated May 4, 2005)*
Torchmark Corporation 2005 Stock Incentive Plan (incorporated by reference from
Exhibit 10.2 to Form 8-K dated May 4, 2005)*
Form of Deferred Compensation Stock Option Grant Agreement pursuant
to the
Torchmark Corporation 2005 Non-Employee Director Incentive Plan (incorporated by
reference from Exhibit 10.3 to Form 8-K dated May 4, 2005)*
10.33
Torchmark Corporation Amended and Restated 2005 Incentive Plan (incorporated by
reference from Exhibit 10.1 to Form 10-Q for quarter ended March 31, 2006)*
115
Page of
this
Report
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
Torchmark Corporation Amended and Restated 2005 Non-Employee Director Incentive
Plan (incorporated by reference from Exhibit 10.2 to Form 10-Q for quarter ended
March 31, 2006)*
Form of Director Stock Option Issued under Torchmark Corporation Amended and
Restated 2005 Non-Employee Director Incentive Plan (incorporated by reference from
Exhibit 10.3 to Form 10-Q for quarter ended March 31, 2006)*
Amendment One
to Torchmark Corporation Supplementary Retirement Plan
(incorporated by reference from Exhibit 10.4 to Form 10-Q for quarter ended March 31,
2006)*
Torchmark Corporation Supplemental Executive Retirement Plan (incorporated by
reference from Exhibit 10.1 to Form 8-K dated January 25, 2007)*
Torchmark Corporation 2007 Long-Term Compensation Plan (incorporated by reference
from Exhibit 99.1 to Form 8-K dated May 2, 2007)*
Form of Stock Option Award Agreement under Torchmark Corporation 2007 Long-Term
Compensation Plan (incorporated by reference from Exhibit 99.2 to Form 8-K dated
May 2, 2007)*
Form of Restricted Stock Award (Board grant) under Torchmark Corporation 2007 Long-
Term Compensation Plan (incorporated by reference from Exhibit 99.3 to Form 8-K dated
May 2, 2007)*
Torchmark Corporation Non-Employee Director Compensation Plan, as amended and
restated (incorporated by reference from Exhibit 10.1 to Form 8-K dated April 29, 2008)*
Amendment No. 1 to the Torchmark Corporation Supplemental Executive Retirement
Plan (incorporated by reference from Exhibit 10.53 to Form 10-K for the fiscal year ended
December 31, 2007)*
Amendment No. 2 to the Torchmark Corporation Supplemental Executive Retirement
Plan (incorporated by reference from Exhibit 10.54 to Form 10-K for the fiscal year ended
December 31, 2007)*
Amendment No. 2 to the Torchmark Corporation Supplementary Retirement Plan
(incorporated by reference from Exhibit 10.55 to Form 10-K for the fiscal year ended
December 31, 2007)*
Amendment No. 3 to the Torchmark Corporation Supplementary Retirement Plan
(incorporated by reference from Exhibit 10.56 to Form 10-K for the fiscal year ended
December 31, 2007)*
Form of Restricted Stock Award Notice under Torchmark Corporation Non-Employee
Director Compensation Plan (incorporated by reference from Exhibit 10.57 to Form 10-K
for the fiscal year ended December 31, 2007)*
Form of Restricted Stock Unit Award Notice under Torchmark Corporation Non-Employee
Director Compensation Plan (incorporated by reference from Exhibit 10.58 to Form 10-K
for the fiscal year ended December 31, 2007)*
Form of Restricted Stock Award (Compensation Committee grant) under Torchmark
Corporation 2007 Long-Term Compensation Plan (incorporated by reference from
Exhibit 10.59 to Form 10-K for the fiscal year ended December 31, 2007)*
Amendment Four
to the Torchmark Corporation Supplementary Retirement Plan
(incorporated by reference from Exhibit 10.52 to Form 10-K for the fiscal year ended
December 31, 2008)*
Amendment Three to the Torchmark Corporation Supplemental Executive Retirement
Plan (incorporated by reference from Exhibit 10.53 to Form 10-K for the fiscal year ended
December 31, 2008)*
116
Page of
this
Report
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
10.64
10.65
10.66
10.67
10.68
Amendment One to the Torchmark Corporation Restated Deferred Compensation Plan for
Directors, Advisory Directors, Directors Emeritus and Officers (incorporated by reference
from Exhibit 10.54 to Form 10-K for the fiscal year ended December 31, 2008)*
Amendment Two to the Torchmark Corporation Restated Deferred Compensation Plan
(incorporated by reference from Exhibit 10.55 to Form 10-K for the fiscal year ended
December 31, 2008)*
Amendment
to the Torchmark Corporation 2007 Long-Term Compensation Plan
(incorporated by reference from Exhibit 10.56 to Form 10-K for the fiscal year ended
December 31, 2008)*
Amendment Five to the Torchmark Corporation Savings and Investment Plan
(amended and restated as of January 1, 2009) (incorporated by reference from Exhibit
10.54 to Form 10-K for the fiscal year ended December 31, 2011)*
Amendment Six to the Torchmark Corporation Savings and Investment Plan (As
Restated Effective January 1, 2009) (incorporated by reference from Exhibit 10.56 to
Form 10-K for the fiscal year ended December 31, 2012)*
Receivables Purchase Agreement dated as of December 31, 2008 among AILIC
Receivables Corporation, American Income Life Insurance Company and TMK Re, Ltd.
(incorporated by reference from Exhibit 10.1 to Form 8-K dated January 6, 2009)
Amendment No.1 to Receivables Purchase Agreement dated as of December 31, 2008
among AILIC Receivables Corporation, American Income Life Insurance Company,
and TMK Re, Ltd. (incorporated by reference to Exhibit 10.58 to Form 10-K for the
fiscal year ended December 31, 2013)
Torchmark Corporation Amended 2011 Non-Employee Director Compensation Plan
(incorporated by reference from Exhibit 10.2 to Form 10-Q for the quarter ended
September 30, 2014)*
Form of Stock Option under Torchmark Corporation 2011 Non-Employee Director
Compensation Plan (incorporated by reference from Exhibit 10.57 to Form 10-K for
fiscal year ended December 31,2010)*
Form of Restricted Stock Award Notice under Torchmark Corporation 2011 Non-
Employee Director Compensation Plan (incorporated by reference from Exhibit 10.58
to Form 10-K for fiscal year ended December 31, 2010)*
Form of Restricted Stock Unit Award Notice under Torchmark Corporation 2011 Non-
Employee Director Compensation Plan (incorporated by reference from Exhibit 10.59
to Form 10-K for fiscal year ended December 31, 2010)*
Torchmark Corporation 2011 Incentive Plan (incorporated by reference from Exhibit
10.1 to Form 8-K dated May 4, 2011)*
Form of Restricted Stock Award (Executive) under Torchmark Corporation 2011
Incentive Plan (incorporated by reference from Exhibit 10.2 to Form 8-K dated
May 4, 2011)*
Form of Restricted Stock Award (Special) under Torchmark Corporation 2011 Incentive
Plan (incorporated by reference from Exhibit 10.3 to Form 8-K dated May 4, 2011)*
Form of Ten year Stock Option under Torchmark Corporation 2011 Incentive Plan
(incorporated by reference from Exhibit 10.4 to Form 8-K dated May 4, 2011)*
Form of Seven year Stock Option under Torchmark Corporation 2011 Incentive Plan
(incorporated by reference from Exhibit 10.5 to Form 8-K dated May 4, 2011)*
Form of Performance Share Award under Torchmark Corporation 2011 Incentive Plan
(incorporated by reference from Exhibit 10.1 to Form 8-K dated February 27, 2012)*
First Amendment
reference from Exhibit 10.1 to Form 8-K dated April 29, 2014)*
to Torchmark Corporation 2011 Incentive Plan (incorporated by
117
10.69
10.70
10.71
10.72
10.73
10.74
(11)
(12)
(20)
(21)
(23)
(24)
(31.1)
(31.2)
(31.3)
(32.1)
Form of Stock Option Grant Agreement (Special) pursuant to Torchmark Corporation
2011 Incentive Plan (incorporated by reference from Exhibit 10.1 to Form 8-K dated
May 31, 2013)*
Amendment to Restricted Stock Award Agreement of February 26, 2009 between
Torchmark Corporation and Mark S. McAndrew (incorporated by reference from Exhibit
10.2 to Form 8-K dated May 31, 2013)*
Amendment to Restricted Stock Award Agreement of February 25, 2010 between
Torchmark Corporation and Mark S. McAndrew (incorporated by reference from Exhibit
10.3 to Form 8-K dated May 31, 2013)*
to Restricted Stock Award Agreement of April 28, 2011 between
Amendment
Torchmark Corporation and Mark S. McAndrew (incorporated by reference from Exhibit
10.4 to Form 8-K dated May 31, 2013)*
Consent and Acknowledgement of Amendment to Non-Qualified Stock Option Grant
Agreement dated April 8, 2013 (incorporated by reference from Exhibit 10.1 to
Form 8-K dated April 8, 2013)*
Amendment Seventeen to Torchmark Corporation Amended and Restated Pension
Plan (as Restated Effective January 1, 2009)* (incorporated by reference to Exhibit
10.76 to Form 10-K for fiscal year ended December 31, 2013)
Statement re computation of per share earnings
Statement re computation of ratios
Proxy Statement for Annual Meeting of Stockholders to be held April 30, 2015***
Subsidiaries of the registrant
Consent of Deloitte & Touche LLP
Powers of attorney
Rule 13a-14(a)/15d-14(a) Certification by Gary L. Coleman
Rule 13a-14(a)/15d-14(a) Certification by Larry M. Hutchison
Rule 13a-14(a)/15d-14(a) Certification by Frank M. Svoboda
Section 1350 Certification by Gary L. Coleman, Larry M. Hutchison and Frank M.
Svoboda
Page of
this
Report
119
119
(101)
Interactive Data File
Compensatory plan or arrangement.
*
** Certain portions of the exhibit have been omitted pursuant to a request for confidential treatment which was granted June 23,
2010 effective until May 9, 2015. The non-public information was filed separately with the Securities and Exchange Commission
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
*** To be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2014.
118
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Twelve Months Ended December 31,
2013*
2014
2012*
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $542,939,000 $528,472,000 $529,324,000
Basic weighted average shares outstanding . . . . . . .
Diluted weighted average shares outstanding . . . . . .
130,721,738
132,640,244
137,646,885
139,563,785
144,921,299
146,847,582
Basic net income per share . . . . . . . . . . . . . . . . . $
Diluted net income per share . . . . . . . . . . . . . . . . $
4.15 $
4.09 $
3.84 $
3.79 $
3.65
3.60
*
Shares and per share amounts have been retrospectively adjusted for the stock split effective July 1, 2014.
Exhibit 21. Subsidiaries of the Registrant
The following table lists subsidiaries of the registrant which meet the definition of “significant subsidiary”
according to Regulation S-X:
Company
American Income Life
Insurance Company
Globe Life And Accident
Insurance Company
Liberty National Life
Insurance Company
United American
Insurance Company
State of
Incorporation
Indiana
Nebraska
Nebraska
Name Under Which
Company Does
Business
American Income Life
Insurance Company
Globe Life And Accident
Insurance Company
Liberty National Life
Insurance Company
Nebraska
United American
Insurance Company
All other exhibits required by Regulation S-K are listed as to location in the “Index of documents filed as a
part of this report” on pages 113 through 118 of this report. Exhibits not referred to have been omitted as
inapplicable or not required.
119
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Amounts in thousands)
December 31,
2014
2013
Assets:
Investments:
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
38,910
5,686
$
34,816
8,415
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes receivable from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,596
0
6,023,666
50,766
76,050
64,092
43,231
0
5,074,326
50,766
66,168
45,533
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,259,170
$5,280,024
Liabilities and shareholders’ equity:
Liabilities:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 238,398
1,141,773
652
180,881
$ 229,070
1,140,469
652
133,491
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,561,704
1,503,682
Shareholders’ equity:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
351
134,218
808,124
997,452
3,376,846
(619,525)
351
151,218
812,569
210,981
3,495,533
(894,310)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,697,466
3,776,342
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,259,170
$5,280,024
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
120
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands)
Year Ended December 31,
2013
2014
2012
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reimbursements from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,259
4,767
27,026
53,235
(53,040)
79,366
$ 24,268
0
$ 22,968
(3,534)
24,268
19,434
53,255
(46,855)
84,273
49,549
(31,184)
81,145
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
79,561
90,673
99,510
Operating income (loss) before income taxes and equity in earnings of
affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(52,535)
(66,405)
(80,076)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,335
17,390
24,916
Net operating loss before equity in earnings of affiliates . . . . . . . . . . . . . . . .
Equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(39,200)
582,139
(49,015)
577,487
(55,160)
584,484
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
542,939
528,472
529,324
Other comprehensive income (loss):
Attributable to Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Attributable to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(28,680)
815,151
38,557
(752,851)
(31,388)
406,747
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,329,410
$(185,822)
$904,683
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
121
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(continued)
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
2013
2014
2012
Cash provided from (used for) operations before dividends from
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (21,358)
478,840
$ (54,213)
488,376
$
(5,652)
436,814
Cash provided from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
457,482
434,163
431,162
Cash provided from (used for) investing activities:
Disposition of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease (increase) in short-term investments . . . . . . . . . . . . . . . . . .
Acquisition of Family Heritage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in other subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loaned money to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,064
2,729
0
0
(81,000)
81,000
Cash provided from (used for) investing activities . . . . . . . . . . . . . . . . . . . . .
7,793
Cash provided from (used for) financing activities:
Issuance of 3.8% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of 5.875% Junior Subordinated Debentures . . . . . . . . . . . . . . . .
Issue expenses of debt offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of 7.375% Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of 7.1% Junior Subordinated Debentures . . . . . . . . . . . . . . .
Net issuance (repayment) of commercial paper . . . . . . . . . . . . . . . . . . . . .
Issuance of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowed money from affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net borrowings (to)/from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit on stock option exercises . . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
0
0
0
9,328
56,294
(449,309)
168,000
(168,000)
0
6,688
(88,276)
514
(6,805)
0
0
0
0
(6,291)
0
0
0
(94,050)
0
3,983
97,677
(482,264)
0
0
120,000
10,963
(84,181)
3,955
(17,524)
(213,747)
(205)
0
0
(227,521)
300,000
125,000
(7,543)
0
(123,711)
245
181,022
(570,165)
0
0
(69,000)
12,209
(78,797)
Cash provided from (used for) financing activities . . . . . . . . . . . . . . . . . . . . .
(465,275)
(427,872)
(230,740)
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0
0
0
$
0
0
0
(27,099)
27,099
$
0
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
122
TORCHMARK CORPORATION
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Amounts in thousands)
Note A—Dividends from Subsidiaries
Cash dividends paid to Torchmark from the subsidiaries were as follows:
Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$478,840
$488,376
$436,814
2014
2013
2012
Note B—Supplemental Disclosures of Cash Flow Information
The following table summarizes noncash transactions, which are not reflected on the Condensed
Statements of Cash Flows:
Year Ended December 31,
2013
2014
2012
Stock-based compensation not involving cash . . . . . . . .
Debt assumed to acquire Family Heritage . . . . . . . . . . .
Dividend of subsidiary to Parent . . . . . . . . . . . . . . . . . . . .
Dividend of subsidiary applied to loan balance . . . . . . . .
$32,203
0
0
0
$
25,642
0
1,246,557
72,000
$21,605
20,000
0
0
The following table summarizes certain amounts paid (received) during the period:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$77,663
25,581
$85,443
27,820
$76,833
29,251
Year Ended December 31,
2012
2013
2014
Note C—Preferred Stock
As of December 31, 2014, Torchmark had 351 thousand shares of Cumulative Preferred Stock,
Series A, issued and outstanding, of which 280 thousand shares were 6.50% Cumulative Preferred Stock,
Series A, and 71 thousand shares were 7.15% Cumulative Preferred Stock, Series A (collectively, the
“Series A Preferred Stock”). All issued and outstanding shares of Series A Preferred Stock were held by
wholly-owned insurance subsidiaries. In the event of liquidation, the holders of the Series A Preferred
Stock at the time outstanding would be entitled to receive a liquidating distribution out of the assets legally
available to stockholders in the amount of $1 thousand per share or $351 million in the aggregate, plus
any accrued and unpaid dividends, before any distribution is made to holders of Torchmark common
stock. Holders of Series A Preferred Stock do not have any voting rights nor have rights to convert such
shares into shares of any other class of Torchmark capital stock.
See accompanying Report of Independent Registered Public Accounting Firm.
123
TORCHMARK CORPORATION
SCHEDULE IV. REINSURANCE (CONSOLIDATED)
(Amounts in thousands)
Gross
Amount
Ceded
to Other
Companies(1)
Assumed
from Other
Companies
Net
Amount
Percentage
of Amount
Assumed
to Net
For the Year Ended December 31,
2014:
Life insurance in force . . . . . . . . . . . . . . $160,455,963
$795,192
$3,658,511
$163,319,282
2.2%
Premiums:(2)
Life insurance . . . . . . . . . . . . . . . . . . . $ 1,924,605
1,245,671
Health insurance . . . . . . . . . . . . . . . .
$ 4,614
2,951
Total premium . . . . . . . . . . . . . . . . $ 3,170,276
$ 7,565
$
$
25,774
0
$ 1,945,765
1,242,720
25,774
$ 3,188,485
1.3%
0%
.8%
For the Year Ended December 31,
2013:
Life insurance in force . . . . . . . . . . . . . . $154,488,511
$782,125
$3,882,237
$157,588,623
2.5%
Premiums:(2)
Life insurance . . . . . . . . . . . . . . . . . . . $ 1,841,425
1,169,534
Health insurance . . . . . . . . . . . . . . . .
$ 4,645
3,124
Total premium . . . . . . . . . . . . . . . . $ 3,010,959
$ 7,769
$
$
26,960
0
$ 1,863,740
1,166,410
26,960
$ 3,030,150
1.4%
0%
.9%
For the Year Ended December 31,
2012:
Life insurance in force . . . . . . . . . . . . . . $150,107,614
$800,905
$4,138,180
$153,444,889
2.7%
Premiums:(2)
Life insurance . . . . . . . . . . . . . . . . . . . $ 1,762,640
1,049,608
Health insurance . . . . . . . . . . . . . . . .
$ 7,592
2,229
Total premium . . . . . . . . . . . . . . . . $ 2,812,248
$ 9,821
$
$
30,725
0
$ 1,785,773
1,047,379
30,725
$ 2,833,152
1.7%
0%
1.1%
(1) No amounts have been netted against ceded premium
(2) Excludes policy charges of $20,935, $22,124, and $23,310 in each of the years 2014, 2013, and 2012, respectively.
See accompanying Report of Independent Registered Public Accounting Firm.
124
Pursuant to the requirements of Section 12 or 15(d) of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
By:
By:
By:
TORCHMARK CORPORATION
/s/ GARY L. COLEMAN
Gary L. Coleman,
Co-Chairman and Chief Executive Officer and Director
/s/ LARRY M. HUTCHISON
Larry M. Hutchison
Co-Chairman and Chief Executive Officer and Director
/s/ FRANK M. SVOBODA
Frank M. Svoboda, Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
Date: February 27, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
By:
By:
By:
By:
/s/ LLOYD W. NEWTON *
Lloyd W. Newton
Director
/s/ DARREN M. REBELEZ *
Darren M. Rebelez
Director
/s/ LAMAR C. SMITH *
Lamar C. Smith
Director
/s/ PAUL J. ZUCCONI *
Paul J. Zucconi
Director
By:
By:
By:
By:
By:
/s/ CHARLES E. ADAIR *
Charles E. Adair
Director
/S/ MARILYN A. ALEXANDER *
Marilyn A. Alexander
Director
/S/ DAVID L. BOREN *
David L. Boren
Director
/s/
JANE M. BUCHAN *
Jane M. Buchan
Director
/s/ ROBERT W. INGRAM *
Robert W. Ingram
Director
Date: February 27, 2015
*By:
/s/ FRANK M. SVOBODA
Frank M. Svoboda
Attorney-in-fact
125
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3700 S. Stonebridge Drive
McKinney, Texas 75070
www.torchmarkcorp.com