ANNUAL REPORT
PRINCIPAL EXECUTIVE OFFICE
3700 South Stonebridge Drive
McKinney, Texas 75070
(972) 569-4000
ANNUAL MEETING
OF SHAREHOLDERS
10:00 a.m. CDT, Thursday, May 12, 2016
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) 569-3239
Fax: (972) 569-3282
E-Mail: tmkir@torchmarkcorp.com
INDEPENDENT REGISTERED PUBLIC
ACCOUNTANTS
Deloitte & Touche LLP
2200 Ross Avenue
Suite 1600
Dallas, Texas 75201
STOCK EXCHANGE LISTINGS
New York Stock Exchange
Symbol: TMK
The London Stock Exchange,
London, England
INDENTURE TRUSTEE FOR
9 1/4%, 77/8%, 63/8%, AND 34/5% SENIOR NOTES AND
5 7/8% JUNIOR SUBORDINATED DEBENTURES
The Bank of New York Mellon
Trust Company, N.A.
601 Travis Street, 16th Floor
Houston, TX 77002
Attention: Corporate Trust Administration
Toll-Free Number: (800) 254-2826
Website: www.bnymellon.com/corporatetrust
The 5 7/8% debentures trade through
Depository Trust Company under global
certificates listed on the New York Stock
Exchange (NYSE Symbol TMKPRB).
STOCK TRANSFER 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
TORCHMARK CORPORATION WEBSITE
On the www.torchmarkcorp.com home
page are links to the web pages of:
(cid:121) Company
(cid:121) Brands
(cid:121) Careers
(cid:121) Community
(cid:121) Investors
(cid:121) Contact
The Investors page contains a menu with
links to many topics of interest to investors
and other interested third parties:
(cid:121) Annual Reports, 10-K and
Proxy Statements
(cid:121) Calendar
(cid:121) News Releases
(cid:121) SEC Filings
(cid:121) XBRL
(cid:121) Financial Reports and Other
Financial Information
(cid:121) Investor Contact Information
(cid:121) Calls and Meetings
- Management Presentations
- Conference Calls on the Web
- Conference Call Replays and
Transcripts
- Annual Meeting of Shareholders
(cid:121) Stock Information
- Stock Transfer Agent and Shareholder
Assistance
- Dividend Reinvestment
- Automatic Deposit of Dividends
(cid:121) Corporate Governance
- Shareholders’ Rights Policy
- Code of Business Conduct and Ethics
- Corporate By-laws
- Code of Ethics for CEO and Senior
Financial Officers
DIVIDEND REINVESTMENT
Torchmark maintains a dividend reinvestment
plan for 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.
- Corporate Governance Guidelines
- Related Party Policy
- Employee Complaint Procedure
(cid:121) Board of Directors
- Members of the Board
- Committees
- Audit Committee
- Compensation Committee
- Governance and Nominating
Committee
- Executive Sessions
- Director Qualification Standards
- Director Independence Criteria
- Director Resignation Policy
| TORCHMARK CORPORATION | 1
2015 IN FOCUS
$ in thousands
$2,998,720
Total Premium
From
Continuing Operations
$522,913
Net Operating
Income From
Continuing Operations
$2,150,498
Annualized Life
Premium In Force
FINANCIAL HIGHLIGHTS*
In thousands, except percentage and per share amounts
OPERATIONS
Total Premium From
Continuing Operations
Net Operating Income From
Continuing Operations
Annualized Life Premium In Force
Annualized Health Premium In Force
Diluted Average Shares Outstanding
Net Operating Income From All
Operations as a Return on Average
Common Equity
2015
2014
% CHANGE
$2,998,720
$2,836,140
522,913
519,603
2,150,498
2,044,545
973,042
126,757
947,323
132,640
14.5%
14.9%
5.7
0.6
5.2
2.7
4.4
$973,042
Annualized Health
Premium In Force
PER COMMON SHARE (ON A DILUTED BASIS)
Net Operating Income From
Continuing Operations
Shareholders‘ Equity at Year End
$4.13
$30.09
$3.92
$27.91
5.4
7.8
* Certain financial data differ from the comparable GAAP financial data. Reconciliations to GAAP financial
data are presented on pages 14-15.
2 | TORCHMARK CORPORATION |
“ We are very enthusiastic
about Torchmark’s prospects.
The Company is uniquely
positioned to meet the basic
protection needs of a vastly
underserved market – a
market that we believe offers
unlimited growth potential. ”
LETTER TO SHAREHOLDERS*
2015 was another good year for Torchmark. We had life sales growth in each of our distribution channels for the second
year in a row, life premium grew 5.4% (the highest growth rate in ten years) and return on equity, excluding net unrealized
gains on fixed maturities, was 14.5%. As we have stated in previous years, we believe Torchmark’s long-term success is
driven by distinctive components of our business model that set it apart from other life insurers. These components,
which have allowed the Company to thrive regardless of general economic conditions, are discussed below:
INSURANCE MARKET
We operate in niches of the vastly
underinsured middle-income market.
CONTROLLED DISTRIBUTION
We distribute our insurance products
primarily through exclusive agency and
direct response marketing channels.
CASH FLOWS
Our highly persistent block of inforce
business produces very strong free cash
flows year in and year out. Our persistency
has been consistent throughout the years,
even during the global financial crisis of
2008-2009. Nearly 90% of our revenue each
year is generated by policies that were sold
in prior years.
PRODUCTS
We offer basic life and health protection
products that match up well with
the needs of our customers and are
not impacted by equity or credit
market fluctuations.
MARGINS
Torchmark is well known for its
administrative efficiencies. Our ability to
control both administrative and acquisition
expenses helps produce high underwriting
margins.
RETURN OF EXCESS CAPITAL TO
SHAREHOLDERS
We are committed to returning excess capital
to our shareholders. Due to the high level of
excess cash flows generated year after year,
we have returned approximately 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. Unless
noted otherwise, net operating income represents net operating income from continuing operations.
LETTER TO SHAREHOLDERS | TORCHMARK CORPORATION | 3
The below chart illustrates the strong return on equity generated by
Torchmark over the years.
RETURN ON EQUITY
(Excluding Net Unrealized Gains or Losses on Fixed Maturities)*
15.9%*
15.8%*
14.7%
15.5%
14.5%
14.3%*
2005
2007
2009
2011
2013
2015
* Values prior to 2011 are not retroactively adjusted for the effect of ASU 2010-26.
While we believe strongly in our business model and will continue
to take advantage of the significant opportunity it provides, we are
committed to finding innovative and strategic ways to constantly
improve and grow our business.
Our society is currently undergoing vast changes. In recent years
there has been considerable discussion regarding the potential
impact of digital technology, data analytics and the millennial
generation on the insurance marketplace. It is critical to maintain
an awareness of key technological and societal developments and
understand the potential opportunities and challenges they present.
We intend to quickly adapt to these changes in a manner that will
help maintain our market position and enhances our business
model. We are currently exploring and implementing several
strategic initiatives designed to take advantage of digital technology
that will help us do just that.
Torchmark has consistently generated strong growth in operating
income per share and book value per share as can be seen in the
charts below.
NET OPERATING INCOME PER SHARE*
Compound Annual Growth Rate 10 Year – 7.3%, 5 Year – 10.4%
$4.13
$3.65
$2.91
$2.33
$2.04*
$2.18
2005
2007
2009
2011
2013
2015
* 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 – 8.3%, 5 Year – 8.7%
$30.09
$25.85
$21.31
$17.88
$13.51*
$14.77
2005
2007
2009
2011
2013
2015
* Values prior to 2007 are not retroactively adjusted for the effect of ASU 2010-26.
4 | TORCHMARK CORPORATION | LETTER TO SHAREHOLDERS
INSURANCE OPERATIONS
DISTRIBUTION CHANNELS
COMPONENTS OF NET OPERATING INCOME
($ in millions, except per share data)
Underwriting Income
Excess Investment Income
Tax and Parent Expenses
Net Operating Income
Discontinued Operations - Part D
Net Operating Income from all Operations
PER SHARE
$4.69
1.73
(2.29)
$4.13
.08
$4.21
$595
220
(292)
$523
11
$534
Underwriting income reflects premiums less policy benefits,
acquisition costs, and administrative expenses. While many
life insurers depend heavily on investment income to generate
earnings, most of Torchmark’s operating income is generated by
insurance underwriting margin. Underwriting income accounted
for approximately 73% of pre-tax operating income before parent
expenses in 2015.
Torchmark serves niche markets through several distinct distribution
channels. The following charts illustrate the relative contributions of
these channels.
2015 TOTAL UNDERWRITING MARGIN
19%
6%
21%
American Income
Globe Life Direct Response
16%
General Agency
Family Heritage
Liberty National
38%
COMPONENTS OF UNDERWRITING INCOME
($ in millions)
Underwriting Margin
Life
Health
Other
Total
Administrative Expenses net of Other Income
Underwriting Income
$
$569
204
5
$778
(183)
$595
AS % OF
PREMIUM
27.5%
22.1%
26.0%
6.1%
19.8%
Our core focus is life insurance due to its superior profitability.
LIFE AND HEALTH NET SALES*
($ in millions)
2015
2014
LIFE
American Income
Globe Life Direct Response
Liberty National
Other Distribution
$198
164
36
14
$172
158
34
14
TOTAL LIFE
$412
$378
HEALTH
General Agency
Family Heritage
Globe Life Direct Response
Liberty National
American Income
$71
50
5
18
12
$84
47
23
18
9
TOTAL HEALTH
$156
$181
% CHANGE
15
4
4
2
9
15
7
78
4
26
13
* 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.
Life sales increased in each distribution channel for the second
consecutive year in 2015. The decline in general agency health
sales was anticipated due to the unusually large amount of group
sales that occurred in 2014. Individual general agency health sales
increased 35% in 2015.
LETTER TO SHAREHOLDERS | TORCHMARK CORPORATION | 5
AMERICAN INCOME LIFE
GLOBE LIFE DIRECT RESPONSE
American Income (AIL) is our largest contributor to premium and
underwriting margin. As seen in the chart below, AIL has enjoyed a
long history of growth, with life premium growing at a compound
annual growth rate of 8.1% over the past ten years. Life sales have
grown at a double digit pace for the last two years.
Our second largest distribution system is the Direct Response
operation at Globe Life (Globe). Like AIL, Globe has a long history of
consistent growth. As can be seen in the chart below, life premium
has grown at a compound annual growth rate of 5.8% over the past
ten years.
Deep-rooted ties with organized labor help provide a strong niche
market position for AIL. While union relationships continue to
anchor AIL’s business, a concerted effort over the last ten years to
push for referrals and other sources of new business has greatly
expanded AIL’s marketing base in the middle-income market. Today,
30% of new sales come from union-endorsed leads compared to
70% ten years ago. In the last ten years, the producing agent count
at AIL has grown from approximately 2,000 to over 6,500, while net
life sales have grown from $84 million to $198 million.
AIL operates in a greatly underserved market which offers
unlimited opportunity as long as we continue to grow our agency
force. To ensure sustainable growth, the agency must be grown in
a deliberate manner through prudent development of leadership
talent. We believe that an agent count of 10,000 is an achievable
goal over the next several years and know that our market could
support an agency of 20,000 agents. We see a very bright future
for AIL.
AMERICAN INCOME - LIFE PREMIUM
($ in millions)
10-Year Compound Annual Growth Rate - 8.1%
$831
$715
$608
$508
$380
$440
2005
2007
2009
2011
2013
2015
DIRECT RESPONSE - LIFE PREMIUM
($ in millions)
10-Year Compound Annual Growth Rate - 5.8%
$747
$664
$594
$537
$424
$484
2005
2007
2009
2011
2013
2015
Globe’s roots go back fifty years in the direct mail business. The
secret to Globe’s success over the years has been an ongoing
process of innovation, supported by the extensive experience and
data developed in this market. Over the years, we’ve added insert
media and electronic media to the Direct Response distribution.
The combination of these distribution channels allows us to more
effectively monetize leads and connect with consumers, giving us
an advantage over our competitors.
While many companies are placing significant focus on big
data and analytics these days as a new tool, the use of data and
analytic models has been a foundation of Globe’s marketing
approach for many years. We will continue to search for ways to
improve our operations and leverage new technologies as they
become available.
Another area of focus for Globe is branding. It’s now been two
years since we began our naming rights partnership with the Texas
Rangers. During that time, we have seen significant increases in
name recognition, response rates, and sales in the five-state region
associated with the Rangers. We have even seen a nationwide
increase in name recognition outside of that region. Due to the
success of this partnership, we continue to explore additional cost-
effective branding opportunities.
6 | TORCHMARK CORPORATION | LETTER TO SHAREHOLDERS
LIBERTY NATIONAL LIFE
UNITED AMERICAN
Liberty National Life (Liberty) markets products through in-home
and worksite channels. In recent years, we have restructured the
Liberty agency operations from a fixed cost sales model to a variable
cost model. While completely transforming the agency has been a
significant challenge, this change was necessary to put Liberty in a
position to create profitable long-term growth.
Liberty’s life and health sales both increased for the second year in
a row in 2015. The key to sustainable future growth at Liberty will
be agency growth through continued geographic expansion out of
the southeast into more densely populated urban areas across the
country. This expansion has been slow and steady as expected and
we are very encouraged by Liberty’s progress.
FAMILY HERITAGE LIFE
Family Heritage Life (FHL) primarily markets supplemental health
insurance products in non-urban areas. Most of these products
include a unique return-of-premium feature which differentiates
them from typical supplemental health insurance offerings. This
feature helps produce a longer revenue stream, a higher margin,
and an opportunity to produce significant investment income.
FHL has been a very good acquisition for Torchmark. We continue
to see positive agent growth. Net health sales increased 7% in 2015,
while the producing agent count increased 16%. We believe FHL
has the potential to produce significant long-term growth through
continued improvement in recruiting and the development of
new agencies.
United American primarily markets individual and group Medicare
Supplement products via independent agents and Direct Response.
While we focus primarily on life insurance at Torchmark, we take an
opportunistic approach in the Medicare Supplement market. Our
Medicare Supplement business delivers consistently strong margins
and we administer it very efficiently. Overall Medicare Supplement
sales were down in 2015 due to an unusually large amount of group
sales in 2014, but individual Medicare Supplement sales increased
36% in 2015. While group Medicare Supplement sales fluctuate
significantly from year to year due to the impact of large groups,
group sales have grown significantly over the long run.
United American has also participated in the Medicare Part D
Prescription Drug Program for the last ten years. As we have noted
before, Part D is in effect a one year term business that is re-bid
annually. Accordingly, we have evaluated our Part D involvement
on an annual basis. While historically beneficial for us, this line
of business has changed rapidly during the past few years.
When we evaluated the Part D business this year, we considered
the following factors:
• Deteriorating margin
• Increasing competition
• Shifting of risk from the government to carriers
• Skyrocketing drug costs
• Negative impact on investment income
• Increased compliance requirements resulting in increased
administrative expenses
For these reasons, and because Part D has become a distraction
taking focus from our core business, we have committed to a plan
to sell our Part D business in 2016. Therefore, we have reflected its
financial results in discontinued operations.
LETTER TO SHAREHOLDERS | TORCHMARK CORPORATION | 7
INVESTMENT OPERATIONS
INVESTMENT PORTFOLIO
COMPONENTS OF NET OPERATING INCOME
($ in millions, except per share data)
Underwriting Income
Excess Investment Income
Tax and Parent Expenses
Net Operating Income
Discontinued Operations - Part D
$595
220
(292)
$523
11
Net Operating Income from all Operations
$534
PER SHARE
$4.69
1.73
(2.29)
$4.13
.08
$4.21
EXCESS INVESTMENT INCOME
Excess investment income is net investment income less the
required interest on the net policy liabilities and the interest on our
debt. Approximately 27% of our pre-tax operating income before
parent expenses was produced by excess investment income.
EXCESS INVESTMENT INCOME
($ in millions)
Net Investment Income
Required Interest on Net Policy Liabilities
Interest on Debt
Excess Investment Income
$774
(478)
(76)
$220
Low interest rates have been a drag on our growth for several years
now. In recent years excess investment income has either not grown
at all or has grown at a slower pace than our invested assets largely
due to the impact of our Part D operations. Going forward, we
expect that our excess investment income will grow at about the
same rate as our invested assets.
INVESTMENT PORTFOLIO - DECEMBER 31, 2015
Invested Assets ($ in millions)
Fixed Maturities (at amortized cost)
$13,252
96%
$
% OF TOTAL
Equities
Policy Loans
Other Investments
Total
1
492
92
0
4
0
$13,837
100%
Torchmark maintains a conservative investment philosophy. Our
investment portfolio consists primarily of investment grade fixed-
maturity assets. Due to the strength of our insurance underwriting
margins, we don’t need to pursue an aggressive investment
strategy. When making investment decisions, the most important
criteria we consider is preservation of principal.
We invest in long-term, investment grade fixed-rate assets as they
best match our fixed-rate long-term liabilities. As such, we seek to
invest in entities that we expect to be around for a very long time.
The ability to weather severe downturns is a critical component of
our selection criteria. This is particularly true in the energy industry,
due to the volatility of oil prices.
We closely monitor our energy holdings and believe there is
minimal risk of realizing losses over the next year or two for the
following reasons:
• 94% of our energy holdings are investment grade. For NAIC
purposes, 91% of our energy holdings are investment grade;
• Only about 9% of our energy holdings are in the oil field service
and drilling sector. Approximately 70% of the oil field service and
drilling holdings are investment grade;
• Based on a consensus of industry expert views, we believe oil is
more likely to increase to over $45 a barrel during the next 12 to 24
months than remain at the $30 a barrel level we saw in 2015. We
believe the companies in our portfolio can continue to operate
for a very long time with oil prices at $45 to $50 a barrel. However,
even if oil was around $30 a barrel for the next 12 to 24 months, we
wouldn’t expect to have significant defaults during that period;
8 | TORCHMARK CORPORATION | LETTER TO SHAREHOLDERS
$320
- $330
2016
Estimate
• And finally, the companies we have invested in have a variety
of options they can utilize to avoid default, including but not
limited to:
interest rate environment. We would like to see rising new money
interest rates because of the positive effect that it would have on
our investment income.
- reducing distributions to partners,
- drawing on lines of credit, and
- reducing exploration activities.
While we don’t currently expect to realize losses, we do believe
that rating agency downgrades could occur which could pressure
our RBC ratio. To illustrate the potential impact of downgrades, let’s
consider a stress scenario in which each of our energy holdings is
downgraded one NAIC risk classification level. In this scenario, our
consolidated RBC ratio would be reduced by about 25 percentage
points. To fully restore the RBC ratio, approximately $125 million
of capital would be required to be contributed to the insurance
companies. While we certainly don’t expect such a scenario to
occur, we have sufficient sources of liquidity to address such a
situation without materially impacting the cash flow returned to
shareholders through stock buybacks and shareholder dividends.
We are not concerned about the possibility of unrealized losses
generated by significant rate increases, as we have the intent and
more importantly, the ability, to hold our investments to maturity.
CAPITAL MANAGEMENT
FREE CASH FLOW
($ in Millions)
$353
$300
$281
$367*
$364
$358
BELOW INVESTMENT GRADE BONDS
As a Percent of Fixed Maturities*
2005
2007
2009
2011
2013
2015
8.0%
8.1%
8.1%
*Excludes $305 of free cash flow from the sale of United Investors.
6.4%
4.8%
4.5%
2005
2007
2009
2011
2013
2015
* Excluding net unrealized gains and losses
Our below investment grade (BIG) bonds make up 4.8% of our fixed
maturity portfolio at amortized cost. Because of our relatively low
portfolio leverage, the ratio of BIG bonds to equity, excluding net
unrealized gains on fixed maturities, is only 17%.
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 generated by our insurance
operations, we don’t expect to be required to increase reserves or
write-off deferred acquisition costs as a result of an extended low
We define free cash flow as the cash that is available to the parent
company from the annual dividends received from the insurance
subsidiaries after paying interest expense on debt and dividends
to Torchmark shareholders. We have a large, stable block of inforce
policies that generates substantial free cash flow year after year. As
you can see in the chart above, we generated significant free cash
flow even during the global financial crisis.
On a per share basis, free cash flow has increased from $1.26 per
share in 2005 to $2.82 per share at the end of 2015. Once again, free
cash flow is cash available after paying shareholder dividends and
interest expense. Shareholder dividends have grown from $0.20 per
share to $0.53 per share over that same period.
In 2016, we expect to generate free cash flow of around $320 to
$330 million. The reduction from prior years is due to a decline in
dividends from the insurance subsidiaries in 2016. These dividends
will be lower in 2016 because of a decline in 2015 statutory net
income caused primarily by the strong life sales growth we’ve had
over the past few years. High first-year acquisition costs associated
with life sales have a negative short-term impact on statutory net
income and therefore reduce the amount of dividends available to
the parent. This is a good problem to have, as high sales growth will
ultimately create long-term growth in free cash flow.
LETTER TO SHAREHOLDERS | TORCHMARK CORPORATION | 9
SHARE REPURCHASES
AVERAGE
PRICE
NO. OF SHARES
(IN 000’S)
TOTAL SPENT
(IN MILLIONS)
P/E
RATIO†
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
$56.99
$52.42
$43.48
$32.13
$27.78
$23.78
$10.12
$24.83
$29.06
$25.54
6,292
7,155
8,280
11,219
28,347
8,560
4,613
17,185
13,837
12,544
$359
$375
$360
$360
$788
$204
$47
$427
$402
$320
13.5
13.0
11.4
9.3
9.3
8.7
4.0
10.1
12.7
11.5
† Values prior to 2007 are not restated for the effect of accounting standard ASU 2010-26
due to lack of information. Ratios were calculated using total net operating income,
including discontinued operations.
We have been conducting our share repurchase program for thirty
years now. During that time, the only year we didn’t repurchase
stock was in 1995 due to the acquisition of American Income.
Since 1986 we have spent $6.5 billion to repurchase 78% of the
outstanding shares of the Company.
We are firmly committed to returning excess capital to our
shareholders. As noted earlier, we have returned approximately
77% of our net income to shareholders since 1986 through
dividends and share repurchases. Over the past ten years, that
percentage has been approximately 85%.
RETURN TO SHAREHOLDERS
($ in Millions)
SHARE
REPURCHASES
DIVIDENDS
PAID
(A) TOTAL CASH
RETURNED
(B) NET
INCOME
(A)/(B)
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
$359
$375
$360
$360
$788
$204
$47
$427
$402
$320
$67
$65
$61
$56
$49
$50
$47
$49
$50
$48
$426
$440
$421
$416
$837
$254
$94
$476
$452
$368
$527
$543
$528
$529
$497
$499
$383
$427
$497
$519
10-Year Total
$4,184
$4,949
81%
81%
80%
79%
168%
51%
24%
111%
91%
71%
85%
10 | TORCHMARK CORPORATION | LETTER TO SHAREHOLDERS
CONCLUSION
We are very enthusiastic about Torchmark’s prospects. The
Company is uniquely positioned to meet the basic protection
needs of a vastly underserved market – a market that we believe
offers unlimited growth potential. We are going to focus intently on
executing our fundamental business model while taking advantage
of opportunities created by technological and societal evolution.
We expect this powerful combination of old-fashioned hard work
and strategic innovation to deliver significant shareholder value for
years to come. Thank you for your investment in Torchmark.
GARY L. COLEMAN
Co-Chairman and
Chief Executive Officer
LARRY M. HUTCHISON
Co-Chairman and
Chief Executive Officer
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, 2015, 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.
LETTER TO SHAREHOLDERS | TORCHMARK CORPORATION | 11
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
OFFICERS OF SUBSIDIARIES
AMERICAN INCOME LIFE
ROGER SMITH
Chief Executive Officer and President
FAMILY HERITAGE LIFE
KENNETH J. MATSON
President
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
President of International
House of Pancakes, LLC
Glendale, California
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
CHRISTOPHER T. MOORE
Assistant Secretary
W. MICHAEL PRESSLEY
Executive Vice President and
Chief Investment Officer
FRANK M. SVOBODA
Executive Vice President and
Chief Financial Officer
UNITED AMERICAN
MICHAEL C. MAJORS
President
BEN W. LUTEK
Executive Vice President and
Chief Actuary
MICHAEL C. MAJORS
Vice President, Investor Relations
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
GLOBE LIFE
BILL E. LEAVELL
President
LIBERTY NATIONAL LIFE
ROGER SMITH
Chief Executive Officer
STEVEN J. DICHIARO
President
LETTER TO SHAREHOLDERS | TORCHMARK CORPORATION | 13
OPERATING SUMMARY
Unaudited and in thousands except per share amounts
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
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 from continuing operations
Operating EPS on a diluted basis from continuing operations
Discontinued operations - Part D
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
Administrative settlements
Legal settlement expenses
Net Income
EPS on a diluted basis
Twelve months ended December 31,
2015
2014
% Increase
or Decrease
5
2
6
3
6
1
2
2
0
5
0
4
$2,073,065
(822,310)
(621,583)
(59,770)
569,402
925,520
(533,553)
(167,624)
(19,966)
204,377
4,568
778,347
2,379
(186,191)
594,535
$1,966,300
(763,192)
(590,894)
(55,725)
556,489
869,440
(495,416)
(155,779)
(18,926)
199,319
4,312
760,120
2,354
(174,832)
587,642
773,951
758,286
(674,650)
196,845
(76,642)
219,504
(9,003)
805,036
(263,491)
541,545
(18,632)
$522,913
$4.13
10,807
$533,720
$4.21
126,757
(649,848)
192,052
(76,126)
224,364
(8,159)
803,847
(263,312)
540,535
(20,932)
$519,603
$3.92
14,865
$534,468
$4.03
132,640
$533,720
$534,468
(5,714)
(906)
0
$527,100
$4.16
15,306
(5,316)
(1,519)
$542,939
$4.09
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
Assets:
Fixed maturities at amortized cost*
Cash and short-term investments
Mortgages and real estate
Other investments
Deferred acquisition costs*
Goodwill
Other assets
Assets held for sale
Total assets*
Liabilities and shareholders’ equity:
Policy liabilities
Accrued income taxes*
Short-term debt
Long-term debt and trust preferred securities
Other liabilities
Liabilities held for sale
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
At December 31,
2015
2014
$
$
$
$
$
$
13,251,871
116,149
203
530,697
3,625,004
441,591
1,076,571
312,843
19,354,929
12,681,718
1,276,489
490,129
743,733
380,158
51,035
3,731,667
19,354,929
122,370
123,996
30.09
14.5%
3,670,364
24.8%
$
$
$
$
$
$
12,823,612
81,901
203
483,832
3,473,948
441,591
1,026,230
288,045
18,619,362
12,171,793
1,207,556
238,398
992,130
347,526
38,876
3,623,083
18,619,362
127,930
129,812
27.91
14.9%
3,577,014
25.4%
Reconciliation of Torchmark management’s view of selected financial measures to comparable GAAP measures*:
Shareholders’ equity, excluding fair value adjustments*
Effect of fair value adjustments required by ASC 320*:
Increase fixed maturities
Decrease deferred acquisition costs
Increase accrued income taxes
Shareholders’ equity*
Other comparable GAAP measures:
Fixed maturities
Deferred acquisition costs
Total assets
Shareholders’ equity
Accrued income taxes
Book value (shareholders’ equity) per diluted share
Net income as a return on average equity
Average equity
Debt to capital ratio
$
3,731,667
$
3,623,083
506,153
(7,869)
(174,399)
4,055,552
13,758,024
3,617,135
19,853,213
4,055,552
1,450,888
32.71
11.9%
4,445,201
23.3%
$
$
$
$
$
$
1,669,448
(16,551)
(578,514)
4,697,466
14,493,060
3,457,397
20,272,259
4,697,466
1,786,070
36.19
12.5%
4,340,254
20.8%
*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 | CONDENSED BALANCE SHEET
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
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
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Securities registered pursuant to Section 12(g) of the Act: None
Yes
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.
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
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.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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).
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):
Yes
No
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
As of June 30, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
$7,291,560,829 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 19, 2016
121,264,589 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Proxy Statement for the Annual Meeting of Stockholders to be
held May 12, 2016 (Proxy Statement)
Parts Into Which Incorporated
Part III
PART I.
PART II.
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 ..............................................................................
Consolidated Balance Sheets .........................................................................................................
Consolidated Statements of Operations .........................................................................................
Consolidated Statements of Comprehensive Income .....................................................................
Consolidated Statements of Shareholders' Equity ..........................................................................
Consolidated Statements of Cash Flows ........................................................................................
Notes to Consolidated Financial Statements ..................................................................................
Note 1- Significant Accounting Policies ...........................................................................................
Note 2- Statutory Accounting ..........................................................................................................
Note 3- Supplemental Information About Changes to Accumulated Other Comprehensive Income
Note 4- Investments .......................................................................................................................
Note 5- Deferred Acquisition Costs .................................................................................................
Note 6- Discontinued Operations ....................................................................................................
Note 7- Liability for Unpaid Health Claims ......................................................................................
Note 8- Income Taxes .....................................................................................................................
Note 9- Postretirement Benefits ......................................................................................................
Note 10-Supplemental Disclosures of Cash Flow Information ........................................................
Note 11- Debt
.................................................................................................................................
Note 12- Shareholders' Equity ........................................................................................................
Note 13- Stock-Based Compensation .............................................................................................
Note 14- Business Segments .........................................................................................................
Note 15- Commitments and Contingencies ....................................................................................
Note 16- Selected Quarterly Data ...................................................................................................
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...........
Page
1
6
11
12
12
12
13
15
16
47
48
50
51
52
53
54
55
55
64
65
67
77
78
80
81
83
90
91
93
94
99
106
108
109
Item 9A. Controls and Procedures ................................................................................................................
109
Item 9B. Other Information ...........................................................................................................................
109
PART III.
PART IV.
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 ...........................................................................................................................................
112
112
112
Item 13. Certain Relationships and Related Transactions and Director Independence .................................
112
Item 14. Principal Accountant Fees and Services .........................................................................................
112
Item 15. Exhibits and Financial Statement Schedules ..................................................................................
113
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
Products and Target
Markets
Distribution
American
Income
Exclusive
Agency
American Income
Life Insurance
Company
Waco, Texas
Individual life and
supplemental health
insurance marketed to
working families.
6,552 producing
agents in the U.S.,
Canada, and New
Zealand.
Globe Life Direct
Response
Globe Life And
Accident Insurance
Company
Oklahoma City,
Oklahoma
Individual life and
supplemental health
insurance including juvenile
and senior life coverage and
Medicare Supplement to
middle-income Americans.
Direct mail,
internet, television,
magazine;
nationwide.
Family Heritage
Exclusive
Agency
Family Heritage Life
Insurance Company
of America
Cleveland, Ohio
Supplemental limited-benefit
health insurance to middle-
income families.
911 captive agents
in the U.S.
Liberty National
Exclusive
Agency
Liberty National Life
Insurance Company
McKinney, Texas
Individual life and
supplemental health
insurance marketed to
middle-income families.
1,478 producing
agents in the U.S.
United American
Independent
Agency
United American
Insurance Company
McKinney, Texas
Medicare Supplement
coverage to Medicare
beneficiaries and, to a lesser
extent, supplemental limited-
benefit health coverage to
people under age 65.
3,893 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)
2014
2013
2015
Whole life:
Traditional ........................................................................................ $ 1,378,290
50,808
Interest-sensitive ..............................................................................
642,599
Term .....................................................................................................
78,801
Other ....................................................................................................
$ 2,150,498
$ 1,296,403
54,490
619,782
73,870
$ 2,044,545
$ 1,235,904
58,549
591,628
69,320
$ 1,955,401
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.
Globe Life Direct Response ................................................................. $
Exclusive agents:
Annualized Premium in Force
(Amounts in thousands)
2014
721,261
2015
757,518
$
$
2013
688,866
American Income ...............................................................................
Liberty National ..................................................................................
880,021
284,597
807,935
285,201
749,165
287,079
Independent agents:
United American .................................................................................
Other ..................................................................................................
14,488
213,874
$ 2,150,498
15,831
214,317
$ 2,044,545
17,846
212,445
$ 1,955,401
Health Insurance
Torchmark offers limited-benefit supplemental health insurance products that include primarily critical illness 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.
On February 4, 2016, Torchmark announced that management has committed to a plan to sell its Medicare Part D
business during the calendar year 2016. Torchmark no longer wishes to emphasize its Medicare Part D business due
to declining margins, increased risks, higher drug costs, and increased administrative and compliance costs.
Management believes this sale will allow the Company to better focus on its core protection life and health insurance
businesses. As the historical results for the Medicare Part D business are accounted for as discontinued operations,
all business results and relevant forward looking statements of the Company are reported as continuing operations.
For further discussion of the disposition of the Medicare Part D business, see Note 6—Discontinued Operations in
the Notes to the Consolidated Financial Statements.
2
The following table presents supplemental health annualized premium in force information for the three years ended
December 31, 2015 by product category.
Annualized Premium in Force
(Amounts in thousands)
2014
2013
2015
Amount
Medicare Supplement ............................................... $498,696
474,346
Limited-benefit plans ................................................
$973,042
% of
Total
51
49
100
Amount
$488,142
459,181
$947,323
% of
Total
52
48
100
Amount
$435,788
451,656
$887,444
% of
Total
49
51
100
The following table presents supplemental health annualized premium in force for the three years ended
December 31, 2015 by marketing (distribution) method.
Annualized Premium in Force
(Amounts in thousands)
2014
2013
2015
Globe Life Direct Response ..................................................................... $
Exclusive agents:
72,423
$
72,659
$
55,270
Liberty National ...................................................................................
American Income ................................................................................
Family Heritage ...................................................................................
216,139
74,058
234,120
226,599
71,942
217,742
240,581
71,354
201,054
Independent agents:
United American ..................................................................................
376,302
$ 973,042
358,381
$ 947,323
319,185
$ 887,444
Annuities
Annuity products include single-premium and flexible-premium deferred annuities. Annuities in each of the three years
ended December 31, 2015 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.
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.
3
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 the 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 96% of total investments at fair value at December 31, 2015. (See Note 4—Investments in the Notes to
Consolidated Financial Statements and Management’s Discussion and Analysis.)
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 subject to examination at any time. Under the rules of the National Association of Insurance Commissioners (NAIC),
insurance companies are examined periodically by one or more of the supervisory agencies.
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.
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.
4
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.
Personnel
At the end of 2015, Torchmark had 3,115 employees.
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. As 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 Globe Life 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 Globe Life 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. Economic conditions could
also impact our investment portfolio as discussed under Investment Risks below.
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 require
policy obligations to be increased and 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.
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
6
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 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 Globe Life
Direct Response solicitation. Deterioration of our relationships with organized labor or adverse changes in the public’s
receptivity to unsolicited Globe Life 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 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.
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 fixed-maturity investments is comprised of corporate
bonds, exposing us to the risk that individual 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 material increase in unrealized losses in our investment portfolio. Significant
7
unrealized losses can 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. Significant downgrades of issuers could negatively impact our risk-based capital ratios,
leading to potential downgrades by our rating agencies, potential reduction in future dividend capacity, and/or higher
financing costs at the holding company should additional statutory capital be required. 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 write downs
of impaired investments. Current net income would be negatively impacted by the write downs, and prospective net
income would be adversely impacted by the loss of future interest income.
Declines 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, including our credit facility, commercial paper, long-term debt, intercompany
financing, and reinsurance.
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
8
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:
Our businesses are heavily regulated, and changes in regulation may reduce our profitability and growth.
Insurance companies, including our insurance subsidiaries, are subject 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 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.
Currently, the U.S. federal government does not directly regulate the business of insurance. However, the Dodd-Frank
Wall Street Record and Consumer Protection Act of 2010 has established a Federal Insurance Office (FIO) within the
9
Department of the Treasury, and the Affordable Care Act and a Financial Stability Oversight Council (FSOC) 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 oversight or regulation of the insurance industry. We cannot predict what impact, if any, the FIO, FSOC
and CCIIO, as well as any other proposals for federal oversight or regulation of insurance 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 affect 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 generally accepted accounting principles 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 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 discretion
creates the potential for unpredictable material adverse judgments in any given punitive 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.
10
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 security breach, the introduction of malware in our computing environment, employee error or malfeasance,
unauthorized access, a natural or man-made disaster, or other unanticipated event could compromise the
information security systems of Torchmark or its subsidiaries, and could damage our business and adversely
affect our financial condition and results of operations.
A failure in our information security systems could result in a loss or disclosure of confidential information, damage to
our reputation, loss of cash flow and impairment of our ability to conduct business effectively. In some cases we may
not become aware of such incident for some time after it occurs, which could increase our exposure.
Anyone who is able to circumvent our security measures could access, view, misappropriate, alter or delete confidential
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 such breach of confidential information could damage our reputation in the marketplace, deter
people from purchasing our products, result in the loss of existing customers, subject us to significant civil and criminal
liability, and require us to incur significant technical, legal and other expenses.
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.
As of December 31, 2015, Torchmark had no unresolved staff comments.
Item 1B. Unresolved Staff Comments
11
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 Life 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 10,800 square feet in a building across the street from
the main office building. American Income Marketing Services, a 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.
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.
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 various states through their respective
Departments of Revenue, and have not resulted in any financial assessment from any state nor indicated any liability.
The audits are wide-ranging and seek large amounts of data regarding claims handling, procedures, and payments of
contract benefits arising from unreported death claims. No estimate of range can be made at this time for loss
contingencies related to possible administrative penalties or amounts that could be payable to the states for the
escheatment of abandoned property.
Not Applicable.
Item 4. Mine Safety Disclosures.
12
PART II
Item 5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities
(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 2,915
shareholders of record on December 31, 2015, 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.
Year-end closing price
Quarter
1
2
3
4
Quarter
1
2
3
4
$ 57.16
$
$
2015
Market Price
High
Low
Dividends
Per Share
55.66 $
59.15
63.12
61.19
50.07 $
54.98
55.62
55.36
0.1267
0.1350
0.1350
0.1350
2014
Market Price
High
Low
Dividends
Per Share
53.51 $
55.07
55.68
55.42
48.37 $
50.97
52.37
50.32
0.1133
0.1267
0.1267
0.1267
Year-end closing price
$ 54.17
The line graph shown below 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.
*100 invested on 12/31/10 in stock or index, including reinvestment of dividends. (Copyright © 2016 S&P, a division of McGraw Hill Financial.)
13
(c) Purchases of Certain Equity Securities by the Issuer and Others for the Fourth Quarter 2015
(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
400,649 $
447,661
657,764
56.95
59.69
59.17
400,649
447,661
657,764
Period
October 1-31, 2015
November 1-30, 2015
December 1-31, 2015
On August 5, 2015, Torchmark’s Board reaffirmed its continued authorization of the Company’s stock repurchase
program in amounts and with timing that management, in consultation with the Board, determined to be in the best
interest of the Company. The program has no defined expiration date or maximum shares to be purchased.
14
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,
Premium revenue:
2015
2014
2013
2012
2011
Life .................................................................................. $ 2,073,065
$ 1,966,300
$ 1,885,332
$ 1,808,524
$ 1,726,244
Health ..............................................................................
Other ...............................................................................
925,520
135
869,440
863,818
730,019
733,783
400
532
559
608
Total ...........................................................................
Net investment income(1) ....................................................
Realized investment gains (losses) ....................................
Total revenue(1) ..................................................................
Income from continuing operations ....................................
Income from discontinued operations, net of tax
Loss on disposal, net of tax ................................................
2,998,720
2,836,140
2,749,682
2,539,102
2,460,635
773,951
(8,791)
758,286
23,548
734,650
7,990
716,132
37,833
707,305
25,904
3,766,065
3,620,095
3,494,253
3,294,644
3,195,995
516,293
10,807
—
528,074
14,865
—
507,205
21,267
—
509,297
20,027
—
483,237
14,379
(455)
Net income .........................................................................
527,100
542,939
528,472
529,324
497,161
Per common share:
Basic earnings:
Income from continuing operations ...........................
Income (loss) from discontinued operations ..............
Net income ...........................................................
Diluted earnings:
Income from continuing operations ...........................
Income (loss) from discontinued operations ..............
Net income ...........................................................
Cash dividends declared ...............................................
Cash dividends paid ......................................................
4.13
0.08
4.21
4.07
0.09
4.16
0.54
0.53
4.04
0.11
4.15
3.98
0.11
4.09
0.51
0.49
3.68
0.16
3.84
3.63
0.16
3.79
0.45
0.44
3.51
0.14
3.65
3.47
0.13
3.60
0.40
0.38
2.98
0.08
3.06
2.93
0.09
3.02
0.31
0.30
Basic average shares outstanding .....................................
Diluted average shares outstanding ...................................
125,095
126,757
130,722
132,640
137,647
139,564
144,921
146,848
162,417
164,723
As of December 31,
Cash and invested assets(2) ............................................... $ 14,405,073
Total assets(2) .....................................................................
Short-term debt ..................................................................
Long-term debt(3) ................................................................
Shareholders' equity ..........................................................
19,853,213
490,129
743,733
4,055,552
2015
2014
2013
2012
2011
$ 15,058,996
$ 13,456,944
$ 14,155,919
$ 12,437,699
20,272,259
18,217,757
18,810,132
16,611,781
238,398
992,130
229,070
990,865
319,043
989,686
224,842
914,282
4,697,466
3,776,342
4,361,786
3,859,631
Per diluted share ...........................................................
Effect of fixed maturity revaluation on diluted equity per
share(4) ...............................................................................
Annualized premium in force:
Life(2) ..............................................................................
Health(2) .........................................................................
Total ...........................................................................
32.71
2.62
36.19
8.28
27.66
1.81
30.56
7.07
25.27
3.96
2,150,498
2,044,545
1,955,401
1,895,017
1,813,705
973,042
947,323
887,444
902,753
733,406
3,123,540
2,991,868
2,842,845
2,797,770
2,547,111
Basic shares outstanding ...................................................
Diluted shares outstanding .................................................
122,370
123,996
127,930
129,812
134,252
136,537
141,353
142,707
150,869
152,712
Note: Certain balances were retrospectively adjusted to give effect to the discontinued continued operations presentation as described in Note 6-Discontinued Operations.
(1) Net investment income retrospectively adjusted to give effect to the adoption of new accounting guidance as described in Note 1- Significant Accounting Policies
under the caption "Low-Income Housing Tax Credit Interests."
(2) 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.
(3) Includes Torchmark's 7.1% Junior Subordinated Debentures reported as "Due to affiliates" on the Consolidated Balance Sheet at year end 2011 in the amount of
$123.7 million.
(4) There is an accounting rule (ASC 320-10-35-1, Investments- Debt and Equity Securities) 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. See
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.
15
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
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 to middle income households throughout the United
States. We view our operations by segments, which are the insurance product lines of life, health, 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.
Insurance Product Line Segments. As fully explained in Note 14—Business Segments in the Notes to the
Consolidated Financial Statements, 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
The tables in Note 14—Business Segments in the Notes to the Consolidated Financial Statements reconcile
Torchmark’s revenues and expenses by segment to its major income statement line items for each of the years in the
three-year period ended December 31, 2015. 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.
16
%
2
1
9
3
7
—
18
2
2
2
1
6
(7)
1
1
1
146
819
(6,225)
15,558
(5,355)
10,203
1
3,801
11,341
(522)
4,412
751
(5,316)
Analysis of Profitability by Segment
(Dollar amounts in thousands)
Life insurance underwriting margin .............................................. $ 569,402
$ 556,489
$ 545,059
$ 12,913
Health insurance underwriting margin .........................................
204,377
199,319
196,507
Annuity underwriting margin ........................................................
4,568
4,312
3,939
5,058
256
2015
2014
2013
2015
Change
%
2
3
6
Excess investment income ..........................................................
219,504
224,364
218,161
(4,860)
(2)
2014
Change
$ 11,430
2,812
373
6,203
Other insurance:
Other income ..........................................................................
2,379
2,354
2,208
25
Administrative expense ..........................................................
(186,191)
(174,832)
(175,651)
(11,359)
Corporate and adjustments ..........................................................
(37,667)
(40,362)
(34,137)
Pre-tax total .......................................................................
776,372
771,644
756,086
2,695
4,728
Applicable taxes ..........................................................................
(253,459)
(252,041)
(246,686)
(1,418)
After-tax total, before discontinued operations ..................
Discontinued operations (after tax)(1) ...........................................
Total ..................................................................................
522,913
519,603
509,400
3,310
10,807
14,865
21,267
(4,058)
(27)
(6,402)
(30)
533,720
534,468
530,667
(748) —
Realized gains (losses)—investments (after tax) .........................
(5,714)
15,306
3,965
(21,020)
Family Heritage acquisition finalization adjustments (after tax)....
Legal settlement expenses (after tax) ..........................................
Guaranty Fund assessment (after tax) .........................................
—
—
—
Administrative settlements (after tax) ...........................................
(906)
Net income ........................................................................ $ 527,100
—
522
—
(1,519)
(5,931)
1,519
—
(5,316)
(751)
—
—
4,410
$ 542,939
$ 528,472
$ (15,839)
(3) $ 14,467
3
(1) Income from discontinued operations (after tax) is included for purposes of reconciling to net income.
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 $527 million in 2015, compared with $543 million in 2014. Net income
increased in 2014 from $528 million in 2013. On a diluted per share basis, 2015 net income rose 2% to $4.16 after an
8% increase in 2014. Net income per diluted share in 2014 rose to $4.09 from $3.79 in 2013. 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 $(0.05), $0.12, and $0.03, in 2015, 2014 and 2013,
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 to be part of our segment
operating income.
Management has committed to a plan to sell the Medicare Part D business in 2016. Torchmark no longer emphasizes
its Medicare Part D business due to declining margins, increased risks, higher drug costs, and increased administrative
and compliance costs. Management believes this sale will allow the Company to better focus on its core protection life
and health insurance businesses as well as provide additional capital to invest. The Medicare Part D business met the
criteria for discontinued operations in accordance with applicable accounting guidance, and as such, the business is
reflected as discontinued operations in the financial statements. As this business has been classified as held for sale
and its operations are discontinued, the financial results of this business are excluded from Torchmark's continuing
operations. For more information, refer to Note 6—Discontinued Operations in the Notes to the Consolidated Financial
Statements.
As shown in the above chart, after-tax segment results of continuing operations rose each year over the prior year
from $509 million in 2013 to $520 million in 2014 to $523 million in 2015. The primary contributor to the growth in both
2015 and 2014 was the underwriting margin in our life insurance segment, in which margins rose $13 million in 2015
and $11 million in 2014. The life insurance segment is our strongest segment and is the largest contributor to earnings
17
in each year presented. Also contributing to growth in income in both years was our health insurance segment, which
provided $5 million of additional margin in 2015 and $3 million in 2014.
Excess investment income, the measure of profitability of our investment segment, decreased to $220 million or 2%
from the prior year amount of $224 million. In 2014, excess investment income increased 3%. Although interest rates
increased slightly in 2015, the low interest rate environment continued to pressure investment yields and spreads
related to required interest on net policy liabilities throughout the three-year period. Excess investment income has
also been hampered by a lag in government reimbursements of Medicare Part D costs. The impact of the lost investment
income from delayed receipt of reimbursements is reflected in income from continuing operations rather than
discontinued operations in accordance with applicable accounting rules. As noted previously, the Medicare Part D
business has been classified as discontinued operations. In 2015 and 2014, the timing of cash flows in the Medicare
Part D business had a negative impact on excess investment income, pre-tax of approximately $8 million and $5 million,
respectively.
Total revenues rose 4% in 2015 to $3.8 billion, or $146 million over the prior year total of $3.6 billion. Life premium
rose 5% or $107 million in 2015 to $2.1 billion. Life premium increased $81 million in 2014 to $2.0 billion. Net investment
income rose $24 million or 3% in 2014, and rose 2% or $16 million in 2015. Health premium increased 6% to $926
million in 2015 and contributed $56 million to 2015 revenue growth, after having gained 1% to $869 million in 2014.
Health premium contributed $6 million to 2014 revenue growth.
Life insurance premium and underwriting margins have grown steadily in each of the three years ended December
31, 2015. 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 2015 to 27%, after decreasing from 29%
to 28% from 2013 to 2014. These fluctuations were due primarily to higher than expected claims. Net life sales increased
9% in 2015 to $412 million after increasing 12% in 2014. 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 and limited-benefit products
including critical illness and accident products. In 2013 and 2014, the limited-benefit health premiums have exceeded
the Medicare supplement premiums due to the inclusion of Family Heritage at the end of 2012. In late 2014, we
experienced an unusually large volume of group sales of our Medicare Supplement product. As a result of increased
growth in group sales, the Medicare Supplement premiums increased $43 million, which exceeded the limit-benefit
premiums. Health insurance premium income increased 6% to $926 million in 2015. Health net sales fell 13% to $156
million during 2015, as a result of a 29% decrease in Medicare Supplement sales. First-year collected health premium
rose 32% to $157 million from the prior year total of $119 million. The decrease in 2015 Health net sales and increase
in 2015 first-year collected premium was reflective of the previously mentioned large volume of group sales in 2014.
Health margins declined to 22%, with underwriting income increasing to $204 million for 2015. Margins were $199
million for the same period in 2014. The 2015 change was due to lower pricing margins on the group business sold in
2014.
We do not currently market annuities. See the caption Annuities for discussion of the Annuity segment.
The investment segment’s pretax profitability, or excess investment income, is based on three major components: net
investment income, required interest on net policy liabilities (interest applicable to insurance products), and financing
costs. In 2015, net investment income rose 2%, compared with 3% in 2014. At the same time, our investment portfolio
grew 3% in both 2015 and 2014. In recent years, net investment income has not grown as fast as the portfolio due to
new investments being 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 2015 and 2014, net
investment income was negatively impacted by 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 reduced our funds available for investment in 2015
and 2014, resulting in reduced investment income in both periods.
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
18
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. 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 2015 were up slightly to $77 million from $76 million in 2014. This increase was primarily the result
of increased short term borrowings coupled with slightly higher short term interest rates. The 2014 decline resulted
from the maturity and repayment in 2013 of our $94.5 million principal amount 7.375% 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 96% of our invested assets at fair value consist of fixed maturities of which 96% were
investment grade at December 31, 2015. 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 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 the Consolidated Financial Statements
for a more detailed discussion of this segment.
Insurance administrative expenses were up 6.5% in 2015 when compared with the prior year period. The primary
reasons for the increase in administrative expenses are higher information technology and employee costs, including
pension-related costs. Stock compensation expense declined $4 million in 2015 to $28.7 million compared with an
increase of $7 million in 2014 to $32.2 million. The decline in stock compensation expense in 2015 resulted primarily
from lower expense associated with performance shares as well as lower option values on 2015 option awards.
In each of the years 2013 through 2015, 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. Accordingly, as described in Note 14—Business
Segments in the Notes to the Consolidated Financial Statements, 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 last three years.
Analysis of Share Purchases
(Amounts in thousands)
Purchases
Excess cash flow ..................................................
Option proceeds ...................................................
Total .....................................................................
Shares Amount
Shares Amount
Shares Amount
6,292 $ 358,552
7,155 $ 375,042
8,280 $ 360,001
1,049
59,974
1,394
74,266
2,789
122,263
7,341 $ 418,526
8,549 $ 449,308
11,069 $ 482,264
2015
2014
2013
Throughout the remainder of this discussion, share purchases refer only to those made from excess cash flow and
borrowings.
19
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 in the Notes to the Consolidated Financial
Statements.
Life Insurance. Life insurance is our largest insurance segment, with 2015 life premium representing 69% of total
premium. Life underwriting income before other income and administrative expense represented 73% of the total in
2015. Additionally, investments supporting the reserves for life products produce the majority of excess investment
income attributable to the investment segment.
Life insurance premium rose 5% to $2.1 billion in 2015 after having increased 4% in 2014 to $2.0 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)
2015
2014
2013
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
American Income Exclusive Agency............. $ 830,903
Globe Life Direct Response ..........................
746,693
Liberty National Exclusive Agency................
Other Agencies .............................................
271,113
224,356
40 $ 766,458
39 $ 715,366
36
13
11
702,023
272,265
225,554
36
14
11
663,544
275,980
230,442
38
35
15
12
$ 2,073,065
100 $ 1,966,300
100 $ 1,885,332
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 Globe Life 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 $2.15 billion at December 31, 2015, an increase of 5% over $2.04 billion a year
earlier. Annualized life premium in force was $1.96 billion at December 31, 2013.
20
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)
2015
2014
2013
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
American Income Exclusive Agency............ $ 198,046
164,348
Globe Life Direct Response .........................
35,782
Liberty National Exclusive Agency...............
13,705
Other Agencies ............................................
$ 411,881
48 $ 172,271
158,089
40
34,402
9
13,492
3
45 $ 152,646
144,363
42
31,050
9
11,000
4
45
43
9
3
100 $ 378,254
100 $ 339,059
100
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)
2015
2014
2013
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
American Income Exclusive Agency............ $ 156,206
Globe Life Direct Response .........................
106,417
Liberty National Exclusive Agency...............
27,554
Other Agencies ............................................
12,036
$ 302,213
52 $ 134,202
50 $ 127,978
35
9
4
100,287
25,777
10,473
37
9
4
93,089
25,580
9,962
50
36
10
4
100 $ 270,739
100 $ 256,609
100
The American Income Exclusive Agency has historically marketed primarily to members of labor unions. While labor
unions are still the core market for this agency, American Income has diversified in recent years by focusing heavily
on other affinity groups and referrals to help ensure sustainable growth. The life business of this agency is Torchmark’s
highest-margin life business and it is the largest contributor to life premium of any distribution channel at 40% of
Torchmark’s 2015 total. This group produced premium income of $831 million, an increase of 8% over the prior year
total of $766 million, after having risen 7% in 2014. First-year collected premium was $156 million compared to $134
million in 2014, an increase of 16%. First-year collected premium rose 5% in 2014. Net sales increased 15% to $198
million in 2015 over the 2014 total of $172 million. Net sales increased 13% in 2014 over the 2013 total of $153 million.
Sales growth in our captive agencies is generally dependent on growth in the size of the agency force. The American
Income Agency's average agent count rose 11% to 6,529 for the year ended December 31, 2015 compared with 5,868
for the same period in 2014. The average agent count is based on the actual count at the end of each week during
the period. The American Income Agency has been focusing on growing and strengthening middle management to
support sustainable growth of the agency force. To accomplish this, we have placed an increased emphasis on agent
training programs and financial incentives that appropriately reward agents at all levels for helping develop and train
personnel. The agency continues to provide more home-office and webinar training programs. These programs are
designed to provide each agent, from new recruits to top level managers, coaching and instruction specifically designed
for each individual’s level of experience and responsibility.
The Globe Life Direct Response unit offers adult and juvenile life insurance through a variety of direct-to-consumer
marketing approaches, which include direct mailings, insert media, and electronic media. These different approaches
support and complement one another in the unit’s efforts to reach the consumer. The Globe Life Direct Response
channel’s growth 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
21
has focused on driving traffic to the inbound call center. We continually introduce new initiatives in this unit in an attempt
to increase response rates.
While the juvenile market is an important source of sales, it also is a vehicle to reach the parents and grandparents of
juvenile policyholders, who are more likely to respond favorably to a Globe Life Direct Response solicitation for life
coverage on themselves than is the general adult population. Also, both juvenile policyholders and their parents are
low acquisition-cost targets for sales of additional coverage over time.
Globe Life Direct Response’s life premium income rose 6% to $747 million, representing 36% of Torchmark’s total life
premium during 2015. Life premium in this channel increased 6% in 2014 to $702 million over the 2013 total of $664
million. Net sales of $164 million for this group increased 4% from $158 million in 2014, after a 10% in 2014. First-year
collected premium increased 6% to $106 million in 2015 after having risen 8% in 2014.
The Liberty National Exclusive Agency markets individual and group life insurance to middle-income customers.
Life premium income for this agency was $271 million in 2015, a slight decline from $272 million in 2014. Life premium
income in 2013 totaled $276 million. Net sales increased 4% during 2015 to $36 million over the 2014 total of $34
million. Net sales in 2014 increased 11%. The increase in net sales during 2014 marked the first increase in several
years, reflecting changes in structure of the agency that management has put in place in recent years. First-year
collected premium increased 7% to $28 million during 2015 and was flat in 2014 compared to 2013 at $26 million.
The Liberty average agent count increased 2% to 1,535 for the year ended December 31, 2015 compared with 1,505
for the same period in 2014. We continue to execute our long term plan to grow this agency through expansion from
small-town markets in the southeast to more densely populated areas with larger pools of potential agent recruits and
customers. Expansion of this agency’s presence into more heavily populated, less-penetrated areas will help create
long term agency growth. Additionally, our prospecting training program has helped to improve the ability of agents to
develop new work site marketing business.
The Other Agencies distribution channels offering life insurance include the Military Agency, the UA Independent
Agency (which predominantly writes health insurance), and various smaller distribution channels. The Other Agencies
contributed $224 million of life premium income, or 11% of Torchmark’s total in 2015, but contributed only 3% of net
sales for the year.
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
2015
2014
2013
Amount
% of
Premium
Amount
% of
Premium
Amount
% of
Premium
Premium and policy charges ..................... $2,073,065
1,374,608
Policy obligations .......................................
Required interest on reserves ...................
(552,298)
822,310
Net policy obligations ..............................
Commissions, premium taxes, and non-
deferred acquisition expenses ...................
Amortization of acquisition costs ...............
154,811
526,542
Total expense ..........................................
1,503,663
Insurance underwriting margin before
other income and administrative
expenses ................................................... $ 569,402
100 $1,966,300
100 $1,885,332
67
(27)
40
1,293,384
(530,192)
763,192
66
(27)
39
1,227,857
(508,236)
719,621
8
25
73
143,174
503,445
1,409,811
7
26
72
131,721
488,931
1,340,273
27 $ 556,489
28 $ 545,059
100
65
(27)
38
7
26
71
29
Life insurance underwriting income before insurance administrative expense was $569 million in 2015 compared with
$556 million in 2014 and $545 million in 2013. As a percentage of premium, underwriting margins declined to 27% in
2015 from 28% in 2014. The decrease in underwriting margin as a percentage of premium in 2015 and 2014 was due
primarily to higher than expected Globe Life Direct Response policy obligations and to increases in non-deferred
acquisition costs in the Globe Life Direct Response and American Income units. Non-deferred acquisition expense
22
increased primarily as a result of additional investments made to support our distribution channels which are expected
to result in increased sales and premium income in future periods. The higher than expected claims in the Globe Life
Direct Response Unit primarily relate to policies issued since 2011 where prescription information was used in the
underwriting process for certain policies in order to improve the overall mortality of the policies written. To date,
improvements in the actual mortality on such policies have been less than expected, causing an increase in our net
policy obligations.
Health Insurance. Health insurance sold by Torchmark includes primarily Medicare Supplement insurance, critical
illness coverage, accident coverage, and other limited-benefit supplemental health products. In this analysis, all health
coverage plans other than Medicare Supplement are classified as limited-benefit plans.
Health premium accounted for 31% of our total premium in 2015, while the health underwriting margin accounted for
26% of total underwriting margin, reflective of the lower underwriting margin as a percent of premium for health compared
with life insurance. As noted under the caption Life Insurance, we have emphasized life insurance sales relative to
health, due to life’s superior profitability and its greater contribution to excess investment income.
HEALTH INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
2015
2014
2013
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans .......................................... $ 15,260
Medicare Supplement ........................................
330,070
345,330
37
Family Heritage Exclusive Agency
Limited-benefit plans ..........................................
221,091
Medicare Supplement ........................................
—
$ 19,028
286,340
305,368
204,667
—
35
$ 24,173
274,125
298,298
190,923
—
35
221,091
24
204,667
24
190,923
22
Liberty National Exclusive Agency
Limited-benefit plans ..........................................
Medicare Supplement ........................................
American Income Exclusive Agency
Limited-benefit plans ..........................................
Medicare Supplement ........................................
Direct Response
Limited-benefit plans ..........................................
Medicare Supplement ........................................
Total Premium
142,130
67,020
209,150
79,984
355
80,339
869
68,741
69,610
143,722
78,295
152,415
88,849
23
222,017
25
241,264
28
78,244
478
78,722
805
57,861
58,666
9
7
78,862
573
79,435
313
53,585
53,898
9
6
9
7
Limited-benefit plans ..........................................
Medicare Supplement ........................................
459,334
466,186
50
50
446,466
422,974
51
49
446,686
417,132
52
48
$925,520
100
$869,440
100
$863,818
100
23
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)
2015
2014
2013
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans .......................................... $
Medicare Supplement ........................................
Family Heritage Exclusive Agency
Limited-benefit plans ..........................................
Medicare Supplement ........................................
Liberty National Exclusive Agency
Limited-benefit plans ..........................................
Medicare Supplement ........................................
American Income Exclusive Agency
Limited-benefit plans ..........................................
Medicare Supplement ........................................
Direct Response
Limited-benefit plans ..........................................
Medicare Supplement ........................................
Total Net Sales
Limited-benefit plans ..........................................
Medicare Supplement ........................................
734
70,891
71,625
50,266
—
50,266
18,021
41
18,062
11,501
—
11,501
—
5,003
5,003
46
$
873
82,971
83,844
47,102
—
46
$
916
40,512
41,428
43,520
—
38
32
47,102
26
43,520
39
17,084
299
13,906
394
12
17,383
10
14,300
13
9,162
—
9,162
6
23,099
23,105
7
3
6,985
—
5
6,985
6
591
3,685
4,276
65,918
44,591
$110,509
4
60
40
100
13
41
59
100
80,522
75,935
$156,457
51
49
100
74,227
106,369
$180,596
24
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)
2015
2014
2013
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans .......................................... $
Medicare Supplement ........................................
Family Heritage Exclusive Agency
Limited-benefit plans ..........................................
Medicare Supplement ........................................
Liberty National Exclusive Agency
Limited-benefit plans ..........................................
Medicare Supplement ........................................
American Income Exclusive Agency
Limited-benefit plans ..........................................
Medicare Supplement ........................................
Direct Response
Limited-benefit plans ..........................................
Medicare Supplement ........................................
Total First-Year Collected Premium
Limited-benefit plans ..........................................
Medicare Supplement ........................................
660
76,575
77,235
39,196
—
39,196
14,690
168
14,858
12,041
—
12,041
(2)
13,843
13,841
66,585
90,586
$
710
49,519
50,229
49
$
795
38,399
39,194
42
39
36,392
—
36,340
—
25
36,392
31
36,340
36
13,132
306
12,010
558
9
13,438
11
12,568
12
9,500
—
9,500
143
9,196
9,339
59,877
59,021
8
9
42
58
8,957
—
8,957
544
3,310
3,854
58,646
42,267
9
4
58
42
8
8
50
50
$157,171
100
$118,898
100
$100,913
100
Health premium increased 6% to $926 million in 2015 compared with $869 million in 2014 after an increase of 1% in
2014 over the 2013 total of $864 million. Medicare Supplement premium increased 10% to $466 million, while other
limited-benefit health premium increased 3% to $459 million.
Health net sales declined 13% to $156 million in 2015 from $181 million in 2014. Net sales in 2013 totaled $111 million.
Medicare Supplement net sales decreased 29% to $76 million in 2015. A decrease in 2015 Medicare Supplement net
sales was expected due to the unusually high level of group sales and individual sales in late 2014. Group sales can
vary significantly from period to period due to the impact of large groups that can occur from time to time. Limited-
benefit net sales increased 8% to $81 million. Health first-year collected premium rose 32% to $157 million due to the
aforementioned high level of group sales in 2014. Health first-year collected premium was up 18% during 2014. First
year Medicare Supplement premium was up 53% as a result of an increase in the UA independent agency individual
sales and the 2014 group sales noted above. As a result of the Medicare Supplement sales activity occurring in the
fourth quarter, the full impact of this activity on collected premium is seen in the following year.
25
We do not expect recent health care reform activity to have a significant impact on our operations. The Affordable Care
Act (ACA) imposes an annual fee to health insurance issuers offering commercial health insurance as well as another
fee for premium stabilization. These taxes totaled $1.2 million and $1.8 million in 2015 and 2014, respectively.
The UA Independent Agency consists of independent agencies appointed with Torchmark who may also sell for other
companies. The UA Independent Agency was Torchmark’s largest health agency in terms of health premium income.
In 2015, premium income was $345 million, representing 37% of Torchmark’s total health premium. Net sales were
$72 million, or 46% of Torchmark’s health sales. This agency is Torchmark’s largest producer of Medicare Supplement
insurance, with Medicare Supplement premium income of $330 million. The UA Independent Agency represents
approximately 71% of all Torchmark Medicare Supplement premium and 93% of Medicare Supplement net sales.
Medicare Supplement premium in this agency rose 15%. Total health premium increased 13% in 2015 and 2% in 2014.
Medicare Supplement net sales decreased 15% in 2015 from prior year. Individual sales were up 36% due to the high
volume of sales in late 2014 and 2015. As previously discussed, group sales significantly increased in late 2014 resulting
in a 42% decline in the current year, which is consistent with historical fluctuation from period to period.
The Family Heritage Exclusive Agency primarily markets limited-benefit supplemental health insurance in non-urban
areas. Most of their policies include a cash-back feature, such as a return of premium whereby any excess of premiums
over claims paid is returned to the policyholder at the end of a specified period stated within the insurance policy.
Management expects to grow this agency through geographic expansion and continuing incorporation of Torchmark’s
recruiting programs. The Family Heritage Agency contributed $50 million in net sales in 2015, compared with $47
million in 2014 and $44 million in 2013. Health premium income was $221 million in 2015, representing 24% of
Torchmark’s health premium. This compared with $205 million or 24% of health premium in 2014 and $191 million or
22% in 2013. The average agent count was 882 for the year ended December 31, 2015, compared with 740 for the
same period in 2014, an increase of 19%.
The Liberty National Exclusive Agency represented 23% of all Torchmark health premium income at $209 million
in 2015. The Liberty Agency markets limited-benefit supplemental health products consisting primarily of critical illness
insurance. Much of Liberty’s health business is now generated through work site marketing targeting small businesses
of 10 to 25 employees. In 2015, health premium income in the Agency declined 6% from prior year premium of $222
million after declining 8% during 2014. Liberty’s health premium decline has been due primarily to its declining Medicare
Supplement block.
Other distribution. Certain of our other distribution channels market health products, although their main emphasis
is on life insurance. On a combined basis, they accounted for 16% of health premium in 2015. The American Income
Exclusive Agency primarily markets accident plans. The Direct Response group markets primarily Medicare
Supplements to employer or union-sponsored groups. Direct Response added $5 million of Medicare Supplement net
sales in 2015 compared with $23 million in 2014. The higher net sales in 2014 were due to the addition of a large new
group in the third quarter of 2014.
As presented in the following table, Torchmark’s health insurance underwriting margin before other income and
administrative expense increased 3% to $204 million in 2015, after an increase of 1% to $199 million in 2014. As a
percentage of health premium, margins were down slightly to 22% in 2015, due to increased benefit ratios in the Direct
Response and UA channels. The group business sold in 2014 was priced at higher benefit ratios.
26
HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
2015
2014
2013
Amount
% of
Premium
Amount
% of
Premium
Amount
Premium ...................................................... $ 925,520
Policy obligations .........................................
Required interest on reserves......................
602,610
Net policy obligations.................................
(69,057)
533,553
Commissions, premium taxes, and non-
deferred acquisition expenses .....................
Amortization of acquisition costs .................
Total expense ............................................
Insurance underwriting income before other
income and administrative expense ............ $ 204,377
81,489
106,101
721,143
100 $ 869,440
100 $ 863,818
65
(7)
58
9
11
78
559,817
(64,401)
495,416
79,475
95,230
670,121
64
(7)
57
9
11
77
558,982
(59,858)
499,124
75,895
92,292
667,311
22 $ 199,319
23 $ 196,507
% of
Premium
100
65
(7)
58
9
10
77
23
Annuities. Our fixed annuity balances at the end of 2015, 2014, and 2013 were $1.32 billion, $1.36 billion, and
$1.38 billion, respectively. Underwriting income was $4.6 million, $4.3 million, and $3.9 million in each of the respective
years.
While the fixed annuity account balance has been declining slightly year over 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 based on a function of account size and time lapsed since
deposit. 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.
27
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, 2015.
Operating Expenses Selected Information
(Dollar amounts in thousands)
2015
2014
2013
Amount
% of
Premium
Amount
% of
Premium
Amount
% of
Premium
Insurance administrative expenses:
Salaries .................................................... $ 87,262
Non-salary employee costs .....................
30,683
Other administrative expense ..................
61,001
Legal expense—insurance ......................
7,245
Total insurance administrative expenses.
186,191
9,003
Parent company expense ..............................
Stock compensation expense ........................
28,664
Litigation settlements .....................................
State Guaranty Fund Assessment..................
—
—
Total operating expenses, per
Consolidated Statements of
Operations ............................................ $223,858
2.9
1.0
2.0
0.3
6.2
$ 81,227
27,471
56,169
9,965
174,832
8,159
32,203
2,337
—
2.9
1.0
2.0
0.3
6.2
$ 81,002
33,221
51,834
9,594
175,651
8,495
25,642
500
1,155
2.9
1.2
1.9
0.4
6.4
$217,531
$211,443
Insurance administrative expenses:
Increase (decrease) over prior year .............
Total operating expenses:
Increase (decrease) over prior year .............
6.5%
2.9%
(0.5)%
2.9%
8.2%
8.4%
Insurance administrative expenses were up 6.5% in 2015 when compared with the prior year after declining slightly
during 2014. As a percentage of total premium, insurance administrative expenses were flat during 2015 when compared
to 2014 at 6.2% and down when compared to 2013 which stood at 6.4%. Total operating expenses increased 2.9%,
consistent with the 2014 increase over 2013. The primary reasons for the increase in administrative expenses are
higher information technology and employee costs, including pension-related costs. The decline in stock compensation
expense is primarily due to lower expense associated with performance share awards and lower option values on the
2015 grants. The decline in legal settlement expense was attributable to certain legal and administrative settlements
that occurred in 2014. As described in Note 14—Business Segments in the Notes on the Consolidated Financial
Statements, we recorded legal accruals involving non-insurance matters, partially offset by proceeds for investment
litigation. Litigation not related to our direct insurance operations is not considered an insurance administrative expense
by Torchmark management and is removed from its analysis of core insurance operations in its segment reporting.
28
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 $6.5 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)
Net investment income (1) ..................................................................... $
Interest on net insurance policy liabilities:
2015
773,951
2014
758,286
$
2013
734,650
$
Interest on reserves .......................................................................
(674,650)
(649,848)
(625,388)
Interest on deferred acquisition costs ............................................
196,845
192,052
189,360
Net required interest ................................................................
(477,805)
(457,796)
(436,028)
Financing costs ....................................................................................
Excess investment income ................................................................... $
Excess investment income per diluted share ....................................... $
1.73
Mean invested assets (at amortized cost) ............................................ $13,697,129
Average net insurance policy liabilities(2) ..............................................
8,574,699
Average debt and preferred securities (at amortized cost)...................
219,504
1,343,663
(76,642)
(76,126)
224,364
1.69
$
$
(80,461)
218,161
1.56
$
$
$13,278,028
$12,838,010
8,240,435
1,287,740
7,851,625
1,321,102
(1) Net investment income has been retrospectively adjusted for ASU 2014-01 Investments-Equity Method and Joint Ventures: Accounting for
Investments in Qualified Affordable Housing Projects; see additional information at Note 1—Significant Accounting Policies in the Notes to the
Consolidated Financial Statements.
(2) Net of deferred acquisition costs, excluding the associated unrealized gains and losses thereon.
Excess investment income decreased $5 million or 2% in 2015 over the prior year. Excess investment income increased
$6 million or 3% in 2014. 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 2% to
$1.73 in 2015. Excess investment income increased 8% to $1.69 per share in 2014, after having declined 3% in the
prior year. The significant increase in the 2014 per share amount over 2013 and the increase in the 2015 per share
amount over 2014, versus the decrease in dollar amount of excess investment income, is a result of the share repurchase
program.
The largest component of excess investment income is net investment income, which rose 2% to $774 million in 2015.
It increased 3% to $758 million in 2014 from $735 million in 2013. 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 2015,
fixed maturity yields averaged 5.84% on a tax-equivalent and effective-yield basis, compared with 5.91% in 2014 and
5.94% in 2013. 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. The overall average portfolio yield decreased in the 2013
29
to 2015 periods as new money is being invested at lower prevailing yields, and from 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. A significant amount of calls were a negative factor on net investment income in 2013, but calls and
maturities were very limited in their affect in 2014 and 2015. During 2014 and 2015, 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 and 2015 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 of the overall design of the program and higher Part D claims
due to the approval of new Hepatitis C drugs and higher overall drug costs, we have incurred extensive upfront costs
that are not reimbursed by CMS until late in the following respective year. These delays in reimbursements have caused
a delay in cash flows available for new investments that resulted in a loss of approximately $5 million and $8 million
of pre-tax net investment income in 2014 and 2015, respectively, and will cause us to lose approximately $9 million of
additional investment income in 2016.
Presented in the following chart is the growth in net investment income and the growth in mean invested assets.
Growth in net investment income ...................................................
Growth in mean invested assets (at amortized cost) ......................
2.1%
3.2%
3.2%
3.4%
2.6%
9.3%
2015
2014
2013
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. We anticipate that less
than 2% of fixed maturities on average are expected to run off each year over the next five years and the average yield
rate on assets acquired with the proceeds of dispositions is not expected to be significantly less than the yield rate
earned on the assets prior to their disposal. Accordingly, we believe it is unlikely that dispositions will have a significant
negative impact on net investment income and the growth rate of net investment income in the next few years.
Required interest on net insurance policy liabilities reduces net investment income as it is the amount of net investment
income considered by management necessary to “fund” the required interest included in the insurance segments. As
such, it is removed from the investment segment and applied to the insurance segments to offset the effect of the
required interest from the insurance segments. As discussed in Note 14-Business Segments in the Notes to the
Consolidated Financial Statements, management believes this provides a more meaningful analysis of the investment
and insurance segments. Required interest is based on the actuarial interest assumptions used in discounting the
benefit reserve liability and the amortization of deferred acquisition costs for our insurance policies in force. The great
majority of our life and health insurance policies are fixed interest-rate protection policies, not investment products,
and are accounted for under current accounting guidance for long-duration insurance products which mandates that
interest rate assumptions for a particular block of business be “locked in” for the life of that block of business. Each
calendar year, we set the discount rate to be used to calculate the benefit reserve liability and the amortization of the
deferred acquisition cost asset for all insurance policies issued that year. That rate is based on the new money yields
that we expect to earn on cash flow received in the future from policies of that issue year, and cannot be changed. The
discount rate used for policies issued in the current year has no impact on the in force policies issued in prior years
as the rates of all prior issue years are also locked in. As such, the overall discount rate for the entire in force block is
a weighted average of the discount rates being used from all issue years. Changes in the overall weighted-average
discount rate over time are caused by changes in the mix of the reserves and the deferred acquisition cost asset by
issue year on the entire block of in force business. Business issued in the current year has very little impact on the
overall weighted-average discount rate due to the size of our in force business.
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.
30
Information about interest on policy liabilities is shown in the following table.
Required Interest on Net Insurance Policy Liabilities
(Dollar amounts in thousands)
Required
Interest
Average Net
Insurance
Policy
Liabilities
Average
Discount
Rate
2015
Life and Health .................................................................................. $ 418,432
Annuity ..............................................................................................
59,373
Total ................................................................................................... $ 477,805
Increase in 2015 ................................................................................
4.37%
$ 7,256,732
1,317,967
$ 8,574,699
4.06%
2014
Life and Health .................................................................................. $ 396,658
61,138
Annuity ..............................................................................................
Total ................................................................................................... $ 457,796
Increase in 2014 ................................................................................
4.99%
$ 6,901,566
1,338,869
$ 8,240,435
4.95%
2013
Life and Health .................................................................................. $ 373,079
Annuity ..............................................................................................
62,949
Total ................................................................................................... $ 436,028
Increase in 2013 ................................................................................
9.13%
$ 6,528,469
1,323,156
$ 7,851,625
10.53%
5.77%
4.50
5.57
5.75%
4.57
5.56
5.71%
4.76
5.55
The large increases in 2013 are due to the inclusion of Family Heritage for a full year.
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)
Interest on funded debt ....................................................................... $
Interest on short-term debt ..................................................................
Other ...................................................................................................
Financing costs ................................................................................... $
71,180 $
5,457
5
76,642 $
71,072 $
5,013
41
76,126 $
75,136
5,299
26
80,461
2015
2014
2013
Financing costs increased slightly from 2014 to 2015. The decrease of $4 million or 5% in 2014 was related to the
maturity and repayment of our $94 million par amount 7.375% Notes during the third quarter of 2013. In 2015, interest
on short-term debt increased primarily because of the increase in the weighted-average interest rate and the average
balance on short-term debt. More information on our debt transactions are disclosed in the Financial 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 as has been the case in recent years.
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 less than 2% of fixed maturities
are expected to run off each year over the next five years.
31
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.
Investment Acquisitions. Torchmark’s investment policy calls for investing in fixed maturities that are investment grade
and meet our quality and yield objectives. We generally prefer to invest in securities with longer maturities because
they more closely match the long-term nature of our policy liabilities. We believe this strategy is appropriate because
our cash flows are generally stable and predictable. If longer-term securities that meet our quality and yield objectives
are not available, we do not relax our quality objectives, but instead, consider investing in shorter term or lower yielding
securities, taking into consideration the slope of the yield curve and other factors.
During calendar years 2013 through 2015, Torchmark invested almost exclusively in fixed maturity securities, primarily
in corporate bonds with longer-term maturities. The following table summarizes selected information for fixed maturity
purchases for the last three years. The effective annual yield shown is the yield calculated to the potential termination
date that produces the lowest yield, commonly referred to as the “worst call date.” For non-callable bonds, the worst-
call date is always the maturity date. For callable bonds, the worst-call date is the call date that produces the lowest
yield, typically the first call date.
Fixed Maturity Acquisitions Selected Information
(Dollar amounts in thousands)
Year Ended December 31,
2014
2013
2015
Cost of acquisitions:
Investment-grade corporate securities ............................................. $ 1,026,520
Taxable municipal securities ............................................................
29,092
Other investment-grade securities ...................................................
15,296
Total fixed-maturity acquisitions ............................................. $ 1,070,908
$
696,264
$ 1,113,175
—
8,729
—
30,666
$
704,993
$ 1,143,841
Effective annual yield (one year compounded)(1)................................
Average life (in years, to next call) .....................................................
Average life (in years to maturity) .......................................................
Average rating ....................................................................................
4.79%
27.2
27.9
BBB+
4.77%
22.9
23.4
BBB+
4.65%
26.0
26.5
BBB+
(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.
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 absent sales, 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 2013 through 2015, acquisitions consisted of securities spanning a diversified range of issuers,
industry sectors, and geographical regions. All of the acquired securities were investment grade. In addition to the
fixed maturity acquisitions, Torchmark invested $30 million in a limited partnership in 2015. The limited partnership is
a diversified investment fund that currently invests opportunistically in global credit assets with the potential for attractive
returns relative to risk. It is classified within long-term investments.
32
New cash flow available for investment has been primarily provided through our insurance operations and coupons
received on existing investments. In some years, a significant amount of new investments can be derived from proceeds
from dispositions including issuer calls. Issuer calls, as a result of the low-interest environment experienced during the
past three years were an important factor, especially in 2013. 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 those of the bonds that were called. Issuer calls were $178 million
in 2015, $160 million in 2014, and $344 million in 2013. The higher level of acquisitions in 2013 was primarily due to
the additional funds available from the higher level of 2013 calls. The lower level of acquisitions in 2014 was primarily
due to the delay in receiving CMS reimbursements as discussed earlier.
Portfolio Composition. The composition of the investment portfolio at book value on December 31, 2015 was as
follows:
Invested Assets At December 31, 2015
(Dollar amounts in thousands)
Fixed maturities(at amortized cost) ................................................................................ $ 13,251,871
Equities (at cost) ............................................................................................................
776
Policy loans ....................................................................................................................
Other long-term investments ..........................................................................................
492,462
36,803
Short-term investments ..................................................................................................
54,766
Total ............................................................................................................................... $ 13,836,678
96
—
4
—
—
100
Amount
% of Total
Approximately 96% of our investments at book value are in a diversified fixed maturity portfolio. Policy loans, which
are secured by policy cash values, make up approximately 4% of our investments. We also have insignificant
investments in equity securities and other long-term investments. Because fixed maturities represent such a significant
portion of our investment portfolio, the remainder of the discussion of portfolio composition will focus on fixed maturities.
Selected information concerning the fixed maturity portfolio is as follows:
Fixed Maturities
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
2015
5.83%
5.89%
17.8
20.3
10.2
11.2
17.8
20.5
10.9
12.0
(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.
33
Credit Risk Sensitivity. The following table summarizes certain information about the major corporate sectors
(representing 4% or more of the portfolio) and security types held in our fixed-maturity portfolio at December 31, 2015.
Fixed Maturities by Sector
At December 31, 2015
(Dollar amounts in thousands)
Below Investment Grade
Total FIxed Maturities
% of Total Fixed
Maturities
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
At
Amortized
Cost
At
Fair
Value
Corporates:
Financial
Insurance - life,
health, P&C ............
Banks .....................
Other financial ........
$
58,534
$
2,410
$
(6,366) $
54,578
$ 1,912,580
$ 212,640
$
(21,634)
$ 2,103,586
41,606
74,954
452
—
(4,781)
(29,916)
37,277
45,038
605,957
624,532
65,740
69,170
(5,942)
(32,086)
665,755
661,616
Total financial ......
175,094
2,862
(41,063)
136,893
3,143,069
347,550
(59,662)
3,430,957
Utilities
Electric....................
Gas and water ........
Total utilities.........
Industrial - Energy
Pipelines.................
Exploration and
production...............
Oil field services .....
Refiner....................
Driller ......................
9,646
—
9,646
45,420
10,923
38,962
—
5,382
Total energy.........
100,687
Industrial - Basic
materials
Chemicals...............
—
Metals and mining ..
49,891
—
49,891
13,499
76,457
26,771
123,889
575,934
Forestry products
and paper ...............
Total basic
materials..............
Industrial -
Consumer, non-
cyclical.......................
Other industrials ........
Industrial -
Transportation ...........
Other corporate
sectors.......................
Total corporates ...
Other fixed
maturities:
Government (U.S.,
municipal, and
foreign) ......................
Collateralized debt
obligations .................
Other asset-backed
securities ...................
Mortgage-backed
securities(1) ................
Total fixed
maturities .............. $
(1) Includes GNMA's
1,003
—
1,003
—
—
—
10,649
1,571,784
—
438,101
10,649
2,009,885
(16,971)
(872)
28,449
10,051
(11,088)
27,874
—
(2,600)
—
2,782
830,190
532,425
87,986
63,072
54,719
194,932
29,334
224,266
29,638
15,975
4,226
3,937
—
(20,000)
1,746,716
(8,319)
459,116
(28,319)
2,205,832
(124,357)
(61,838)
(11,455)
(1,162)
(20,289)
735,471
486,562
80,757
65,847
34,430
(31,531)
69,156
1,568,392
53,776
(219,101)
1,403,067
—
—
(27,661)
22,230
—
—
493,634
402,545
103,599
16,254
4,389
8,386
(21,339)
(90,070)
(2,952)
488,549
316,864
109,033
(27,661)
22,230
999,778
29,029
(114,361)
914,446
—
—
—
—
—
—
—
—
—
—
1,106
1,195
—
(5,704)
14,605
71,948
1,158,828
979,187
86,401
64,579
(26,917)
1,218,312
(36,555)
1,007,211
—
(7,953)
18,818
571,474
44,720
(26,702)
589,492
1,337
7,503
(7,339)
117,887
1,051,925
(121,251)
462,186
11,482,538
69,297
919,618
(26,376)
1,094,846
(537,993)
11,864,163
87
86
554
—
(255)
299
1,684,846
133,117
(16,148)
1,801,815
63,662
16,158
(9,438)
70,382
63,662
16,158
(9,438)
70,382
—
—
—
0
—
0
—
—
16,078
4,747
550
290
—
(1)
16,628
5,036
13
—
—
—
13
1
—
—
640,150
$
23,661
$ (130,944) $ 532,867
$13,251,871
$1,069,733
$ (563,580)
$13,758,024
100
100
34
14
5
5
24
12
3
15
6
4
1
1
—
12
4
3
1
8
9
7
4
8
15
5
5
25
13
3
16
5
4
1
—
—
10
4
2
1
7
9
7
4
8
At December 31, 2015, fixed maturities had a fair value of $13.8 billion, compared with $14.5 billion at December 31,
2014. The net unrealized gain position in the fixed maturity portfolio decreased from $1.7 billion at December 31, 2014
to $506 million at December 31, 2015, primarily as a result of an increase in market interest rates. The December 31,
2015 net unrealized gain consisted of gross unrealized gains of $1.1 billion offset by $564 million of gross unrealized
losses, compared with the December 31, 2014 net unrealized gain which consisted of a gross unrealized gain of $1.7
billion and a gross unrealized loss of $79 million. As described in Note 4—Investments in the Notes to the Consolidated
Financial Statements, the increase in gross unrealized losses was partially attributable to rising interest rates in the
financial markets, but also resulted from deteriorating conditions in the energy and metals and mining sectors.
Corporate securities are diversified over a variety of industry sectors and issuers.The total fixed maturity portfolio
consists of 563 issuers, with 205 issuers within the financial, utility, and energy sectors.
Financial and Utilities. At December 31, 2015, the fixed maturity securities in the financial and utility sectors had net
unrealized gains of $288 million and $196 million, respectively. Less than 6% of the book value of the holdings in each
of these sectors was rated below-investment grade. While the fair market value of the securities in these two sectors
declined during the year, Torchmark does not believe that its fixed maturity securities in the financial and utility sectors
pose a significant credit risk in the foreseeable future or that any of these securities are other-than-temporarily impaired.
Energy and Basic Materials. The current low price of oil and other commodities is putting some downward price
pressure on some of our holdings in the energy and basic materials sectors, resulting in lower fair values of these
sectors as noted above. Our energy sector investments accounted for 12% of fixed maturities at amortized cost and
10% of fixed maturities at fair value as of December 31, 2015. At amortized cost, over 93% of the energy holdings
are investment grade. Within our energy portfolio, 53% of the holdings at amortized cost are in pipelines, 34% are in
exploration and production, 6% are in oil field services, and the remainder are in refineries and drilling. We believe
securities in drilling and oil field services with an amortized cost of $44 million rated below investment grade have the
greatest risk of exposure to the current market conditions. Our investments in basic materials accounted for 8% of
fixed maturities at amortized cost and 7% of fixed maturities at fair value as of December 31, 2015. At amortized cost,
over 95% of these holdings are investment grade. Within this sector, 49% of the holdings at amortized cost are in
chemicals, 40% are in mining, and the remainder are in forestry products.
While a sustained period of low oil and natural gas prices and depressed demand for commodities may lead to some
downgrades in these sectors, we believe that our investments will be able to withstand lower energy and commodity
prices for an extended duration. Due to the strong and stable cash flows generated by our 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 intends to hold to maturity any securities
which are temporarily impaired. As of December 31, 2015, Torchmark does not believe that any of its holdings in the
energy and basic materials sectors are other-than-temporarily impaired.
For more information about our fixed maturity portfolio by component at December 31, 2015 and 2014, including a
discussion of other-than-temporary impairments, an analysis of unrealized investment losses and a schedule of
maturities, see Note 4—Investments in the Notes to the Consolidated Financial Statements.
An analysis of the fixed maturity portfolio by a composite rating at December 31, 2015 is shown in the following table.
The composite rating for each security, other than private-placement securities managed by third parties, 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 $542 million at amortized cost ($546 million at fair value) for which the ratings were assigned by the third party
managers.
35
Fixed Maturities by Rating
At December 31, 2015
(Dollar amounts in thousands)
Amortized
Cost
%
Fair
Value
%
Investment grade:
AAA ................................................................................ $
AA ..................................................................................
A ....................................................................................
BBB+ .............................................................................
BBB ...............................................................................
BBB- ..............................................................................
Investment grade .....................................................
679,571
1,377,164
3,880,303
2,746,917
2,881,888
1,045,878
12,611,721
Below investment grade:
BB ..................................................................................
B ....................................................................................
Below B ..........................................................................
Below investment grade ..........................................
396,995
125,018
118,137
640,150
$ 13,251,871
5
10
29
21
22
8
95
3
1
1
5
100
$
692,509
1,516,112
4,281,509
2,874,861
2,861,855
998,311
13,225,157
308,036
101,979
122,852
532,867
$ 13,758,024
5
11
31
21
21
7
96
2
1
1
4
100
Of the $13.3 billion of fixed maturities at amortized cost as of December 31, 2015, $12.6 billion or 95% were investment
grade with an average rating of A-. Below-investment-grade bonds were $640 million with an average rating of B+.
Below-investment-grade bonds at amortized cost were 17% of our shareholders’ equity, excluding the effect of
unrealized gains and losses on fixed maturities as of December 31, 2015. Overall, the total portfolio had a weighted
average quality rating of A- based on amortized cost, the same as at the end of 2014.
An analysis of changes in our portfolio of below-investment grade fixed maturities at amortized cost is as follows:
Below-investment grade fixed maturities
At December 31, 2015
(Dollar amounts in thousands)
Balance at December 31, 2014 ......................................................................................................... $
Downgrades by rating agencies .................................................................................................
Upgrades by rating agencies ......................................................................................................
Disposals ....................................................................................................................................
Amortization ................................................................................................................................
Balance at December 31, 2015 ......................................................................................................... $
2015
560,890
164,968
(38,821)
(51,322)
4,435
640,150
Our 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. Our investment portfolio
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 and we are not a party to
any credit default swaps or other derivative contracts. We do not participate in securities lending, we have no off-
balance sheet investments, and we have only an insignificant exposure to European sovereign debt consisting of $2
million in German government bonds at December 31, 2015. Our exposure to Puerto Rican obligations is insignificant.
36
Market Risk Sensitivity. Torchmark’s investment 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 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, 2015 and 2014. 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
(Dollar amounts in thousands)
Change in Interest Rates (1)
(200)
(100)
0
100
200
$
At December 31,
2015
17,184,975 $
15,337,923
13,758,025
12,397,872
11,219,241
2014
18,401,177
16,286,904
14,493,061
12,961,260
11,644,621
(1) In basis points.
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 bonds sold because of deterioration in investment quality of issuers or calls
by the issuers. Investment losses are also caused by write downs 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 period-to-period trends of net income that are not indicative of historical core operating results or predictive
of the future trends of core operations. Accordingly, they have no bearing on core insurance operations or segment
results as we view 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.
37
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, 2015.
Analysis of Realized Gains (Losses), Net of Tax
(Dollar amounts in thousands, except for per share data)
2015
Year Ended December 31,
2014
2013
Amount
Per Share
Amount
Per Share
Amount
Per Share
Fixed maturities:
Sales ........................................... $ (10,813) $
Called or tendered .......................
Loss on redemption of debt................
Other ..................................................
4,652
—
447
(0.09) $ 10,209 $
0.04
—
—
4,851
(168)
414
Total ...................................... $ (5,714) $
(0.05) $ 15,306 $
0.08 $
0.04
—
—
0.12 $
3,015 $
5,525
—
(4,575)
3,965 $
0.02
0.04
—
(0.03)
0.03
As described in Note 4—Investments under the caption Other-than-temporary impairments, we have not incurred any
write downs in our fixed maturity portfolio as a result of other-than-temporary impairment for the years 2013 through
2015. 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 that year.
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 Company dividends to Torchmark
shareholders. In 2015, the Parent received $466 million of cash dividends from its subsidiaries, compared with $479
million in 2014 and $488 million in 2013. 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 2015 of approximately $358 million, compared with $377 million in 2014 and $364 million in 2013. Parent
Company cash flow in excess of its operating requirements is available for other corporate purposes, such as insurance
subsidiary capital or financing needs, strategic acquisitions or share repurchases. In 2016, it is expected that the Parent
Company will receive approximately $450 million in dividends and transfers from subsidiaries and that approximately
$320 to $330 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 more than sufficient for the cash flow needs of the Parent
Company.
38
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 agreement, as discussed in Note 11—Debt in the Notes to Consolidated
Financial Statements, under the caption Commercial Paper. The facility, like the previous, is further designated as a
back-up line of credit for a commercial paper program. As of December 31, 2015, we had available $332 million of
additional borrowing capacity under this new facility, compared with $314 million a year earlier. There have been no
difficulties in accessing the commercial paper market during the three years ended December 31, 2015.
In summary, Torchmark expects to have readily available funds for 2016 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, additional borrowings on our
short-term credit facility, and intercompany borrowing.
Consolidated Liquidity. Consolidated net cash inflows provided from operations were $1.1 billion in 2015, compared
with $880 million in 2014 and $1.1 billion in 2013. In addition to cash inflows from operations, our companies received
proceeds from maturities, calls, and repayments of fixed maturities in the amount of $376 million in 2015, compared
with $273 million in 2014 and $494 million in 2013.
Our cash and short-term investments were $116 million at year-end 2015 and $82 million at year-end 2014. 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 $13.8 billion at December 31, 2015. 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 aforementioned credit facility, Torchmark had outstanding $177
million in stand-by letters of credit at December 31, 2015, compared with $198 million a year earlier. 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, 2015, we had no unconsolidated affiliates and no guarantees of the obligations of third party
entities. All of our guarantees were guarantees of the performance of consolidated subsidiaries, as disclosed in Note
15—Commitments and Contingencies in the Notes to Consolidated Financial Statements.
39
The following table presents information about future payments under our contractual obligations for the selected
periods as of December 31, 2015.
Contractual Obligations
(Amounts in thousands)
Fixed and determinable:
Actual
Liability
Total
Payments
Less than
One Year
One to
Three Years
Three to
Five Years
More than
Five Years
Debt—principal(1) ......... $ 1,233,862 $ 1,243,803 $ 490,544 $
Debt—interest(2) ...........
6,284
Capital leases ..............
523,332
62,018
—
—
—
Operating leases..........
Purchase obligations ...
Pension obligations(3)...
Future insurance
obligations(4).................
—
68,949
191,464
40,955
68,949
263,063
8,304
36,582
19,273
— $ 292,647 $
109,090
65,997
—
12,626
31,215
43,064
—
8,903
767
460,612
286,227
—
11,122
385
48,316
152,410
41,648,625
Total......................... $13,746,370 $ 50,629,265 $ 2,003,735 $ 2,928,835 $ 3,137,314 $ 42,559,381
12,245,811
48,489,163
2,732,840
2,720,684
1,387,014
Interest on debt is based on our fixed contractual obligations.
(1) Funded debt is itemized in Note 11—Debt and includes short-term commercial paper.
(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, 2015, these pension obligations were $477 million, but there were also assets of $308 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 $22 million. Please refer to Note 9—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, 2015.
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
$12.2 billion at December 31, 2015, along with future premiums and investment income, will be sufficient to fund all future insurance obligations.
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 and the current maturity of funded debt), 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 funded debt was $993 million at December 31, 2015, compared with $992 million a year
earlier. Torchmark has a 6.375% Senior Note that matures on June 15, 2016 with a par value and book value of $250
million. As this issue matures within one year, it has been reclassified to short term debt. Torchmark intends to refinance
the debt during calendar 2016 with a hybrid debt instrument.
Our insurance subsidiaries generally target a capital ratio of 325% of Company action level regulatory capital under
Risk-Based Capital (RBC), a formula designed by insurance regulatory authorities to monitor the adequacy of capital.
The 325% target is considered sufficient for the subsidiaries because of their strong reliable cash flows, the relatively
low risk of their product mix, and because that ratio is in line with rating agency expectations for Torchmark. At
December 31, 2015, our insurance subsidiaries in the aggregate had RBC ratios of approximately 320%. Should we
experience impairments and/or ratings downgrades within its fixed maturity portfolio in the future, the ratio could fall
below targeted levels. In such a case, management believes more than sufficient liquidity exists at the Parent Company
to make additional contributions as necessary to maintain the targeted ratio.
As noted under the caption Summary of Operations in this report, we have an ongoing share repurchase program.
Under this program, we acquired 6 million shares at a cost of $359 million in 2015, 7 million shares at a cost of
$375 million in 2014, and 8 million shares for $360 million in 2013. The majority of purchased shares are retired each
40
year. Please refer to the description of our share repurchase program under the caption Summary of Operations in
this report.
Torchmark has continually increased the quarterly dividend on its common shares over the past three years. In the
first quarter of 2013, it was increased to $0.1133 per share from $0.10 per share. In the first quarter of 2014, it was
raised to $0.1267 per share. Finally, in the first quarter of 2015, dividends were raised to $0.135 per share.
Shareholders’ equity was $4.1 billion at December 31, 2015, compared with $4.7 billion at December 31, 2014. During
the twelve months since December 31, 2014, shareholders’ equity was reduced by the $359 million in share purchases
under the repurchase program, $60 million to offset the dilution from stock option exercises, and $750 million of after-
tax unrealized losses in the fixed maturity portfolio. However, it was increased by $527 million of net income.
We plan to use excess cash available at the Parent Company as efficiently as possible in the future. Possible uses of
excess cash flow include, but are not limited to share repurchases, acquisitions, 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.
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 consistently
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.
41
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.
(Amounts in thousands except per share and percentage data)
Selected Financial Data
At December 31, 2015
At December 31, 2014
At December 31, 2013
Effect of
Accounting
Rule
Requiring
Revaluation (1)
GAAP
Effect of
Accounting
Rule
Requiring
Revaluation (1)
Effect of
Accounting
Rule
Requiring
Revaluation (1)
GAAP
GAAP
Fixed maturities ........................ $13,758,024
Deferred acquisition costs (2) .....
3,617,135
Total assets ............................... 19,853,213
Short-term debt .........................
490,129
Long-term debt .........................
743,733
$ 506,153
$14,493,060
$ 1,669,448
$12,879,133
$ 390,258
(7,869)
3,457,397
(16,551)
3,325,433
(10,351)
498,284
20,272,259
1,652,897
18,217,757
379,907
—
—
238,398
992,130
—
—
229,070
990,865
—
—
Shareholders’ equity .................
4,055,552
323,885
4,697,466
1,074,383
3,776,342
246,940
Book value per diluted share.....
Debt to capitalization (3) .............
Diluted shares outstanding........
Actual shares outstanding .........
32.71
23.3%
123,996
122,370
2.62
(1.5)%
36.19
20.8%
129,812
127,930
8.28
(4.6)%
27.66
24.4%
136,537
134,252
1.81
(1.3)%
(1) Amount added to (deducted from) comprehensive income to produce the stated GAAP item.
(2)
(3) Torchmark’s debt covenants require that the effect of the accounting rule requiring revaluation be removed to determine this ratio. This ratio
Includes the value of insurance purchased.
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 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 11.0 times
in 2015, compared with 11.3 times in 2014 and 10.4 times in 2013 (as adjusted for discontinued operations and the
adoption of ASU 2014-01 Investments-Equity Method and Joint Ventures: Accounting for Investments in Qualified
Affordable Housing Projects). 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.
42
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,
2015.
Liberty ............................................................................................................
Globe .............................................................................................................
United American .............................................................................................
American Income ...........................................................................................
Family Heritage ..............................................................................................
Standard
& Poor’s
AA-
AA-
AA-
AA-
NR
A.M
Best
A+ (Superior)
A+ (Superior)
A+ (Superior)
A+ (Superior)
A (Excellent)
A.M. Best states that it assigns an A+ (Superior) rating to insurance companies that have, in its opinion, a superior
ability to meet their ongoing insurance obligations. It assigns an A (Excellent) rating to insurance companies that
have, in its opinion, an excellent ability to meet their ongoing insurance obligations.
The AA financial strength rating category is assigned by Standard & Poor’s Corporation (S&P) to those insurers which
have very strong capacity to meet its financial commitments which differs from the highest-rated insurers only to a
small degree. An insurer rated A has strong capacity to meet its financial commitments but it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic conditions than insurers in higher-rated
categories. The plus sign (+) or minus sign (-) shows the relative standing within the major rating category.
In the third quarter of 2014, Standard and Poor's (S&P) revised its outlook on Torchmark's capital position to a negative
outlook. That updated outlook was due to S&P's view at that time at certain internal components of Torchmark's capital
position rather than a change in the capital position itself. However, during the fourth quarter of 2015, S&P formally
reviewed our operations and financial outlook. Based on their review, they revised their outlook from negative to stable
and confirmed our "AA-" financial strength ratings at our insurance subsidiaries and Torchmark Corporation's senior
debt "A" credit rating. We intend to maintain adequate capital levels for S&P and any changes to our capital position
to maintain such levels are not expected to have any significant impact on our share repurchase program or our financial
results in future periods.
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 Consolidated Financial
Statements.
43
CRITICAL ACCOUNTING POLICIES
Future Policy Benefits: Due to 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 85% of our liabilities for future policy benefits at December 31, 2015 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, 2015.
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 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, the cost of acquiring blocks of
insurance business or insurance 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, 2015 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, 2015.
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, 2015.
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
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
44
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 is disclosed in 100 basis point 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.
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 in the Notes to Consolidated Financial Statements under the captions Fair Value Measurements in both
notes.
Impairment of Investments: We continually monitor our investment portfolio for investments where fair value has
declined below carrying value and that have become impaired in 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, 2015, our gross liability under these funded plans was $477
million, but was offset by assets of $308 million.
45
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 discount rate and the long-term rate of return on assets assumed on our defined benefit pension plans
expense for the year 2015 and projected benefit obligation as of December 31, 2015.
Assumption
Discount Rate: (1)
% Change
Impact on
Expense
Impact on
Projected
Benefit
Obligation
(Dollars in Thousands)
Increase .................................................................................................
0.25
$
(2,335) $
(17,795)
Decrease ...............................................................................................
(0.25)
2,455
18,850
Expected Return: (2)
Increase .................................................................................................
Decrease ...............................................................................................
0.25
(0.25)
(799)
799
(1) The discount rate was 4.23% for 2015 expense and 4.64% for the projected benefit obligation at December 31, 2015.
(2) The expected return rate assumed was 6.96%.
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.
46
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 of this report.
47
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm ..............................................................................
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2015 and 2014 ....................................................................
Consolidated Statements of Operations for each of the three years in the period ended December 31,
2015 ...............................................................................................................................................................
Consolidated Statements of Comprehensive Income for each of the three years in the period ended
December 31, 2015 ........................................................................................................................................
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended
December 31, 2015 ........................................................................................................................................
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
2015 ...............................................................................................................................................................
Notes to Consolidated Financial Statements ..................................................................................................
Page
49
50
51
52
53
54
55
48
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, 2015 and 2014, 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, 2015. 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.
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, 2015 and 2014, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2015, 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, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Torchmark’s internal control over financial reporting as of December 31, 2015, 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 26, 2016 expressed an unqualified opinion on Torchmark’s internal control
over financial reporting.
/s/ Deloitte & Touche LLP
Dallas, Texas
February 26, 2016
49
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share data)
December 31,
2015
2014(1)
Assets:
Investments:
Fixed maturities-available for sale, at fair value (amortized cost: 2015–$13,251,871;
2014–$12,823,612) .............................................................................................................. $ 13,758,024
Equity securities, at fair value (cost: 2015–$776; 2014–$776) ............................................
1,635
Policy loans .........................................................................................................................
Other long-term investments ................................................................................................
Short-term investments ........................................................................................................
492,462
36,803
54,766
$ 14,493,060
1,477
472,109
10,449
15,882
Total investments ..........................................................................................................
14,343,690
14,992,977
Cash ......................................................................................................................................
Accrued investment income ...................................................................................................
Other receivables ...................................................................................................................
61,383
209,915
344,552
66,019
204,879
327,856
Deferred acquisition costs ......................................................................................................
3,617,135
3,457,397
Goodwill
.................................................................................................................................
Other assets ...........................................................................................................................
441,591
522,104
Assets held for sale ................................................................................................................
312,843
Total assets ................................................................................................................... $ 19,853,213
Liabilities:
Future policy benefits ............................................................................................................. $ 12,245,811
Unearned and advance premiums .........................................................................................
67,021
Policy claims and other benefits payable ................................................................................
Other policyholders' funds ......................................................................................................
272,898
95,988
441,591
493,495
288,045
$ 20,272,259
$ 11,750,495
71,703
254,149
95,446
Total policy liabilities .....................................................................................................
12,681,718
12,171,793
Current and deferred income taxes payable ...........................................................................
1,450,888
1,786,070
Other liabilities .......................................................................................................................
Short-term debt
......................................................................................................................
Long-term debt (estimated fair value: 2015–$856,291; 2014–$1,148,749) ...........................
Liabilities held for sale ............................................................................................................
380,158
490,129
743,733
51,035
347,526
238,398
992,130
38,876
Total liabilities ...............................................................................................................
15,797,661
15,574,793
Commitments and Contingencies (Note 15)
Shareholders' equity:
Preferred stock, par value $1 per share–Authorized 5,000,000 shares; outstanding: -0- in
2015 and 2014 .......................................................................................................................
Common stock, par value $1 per share–Authorized 320,000,000 shares; outstanding:
(2015–130,218,183 issued, less 7,848,231 held in treasury and 2014–134,218,183 issued,
less 6,287,907 held in treasury)
.............................................................................................
Additional paid-in capital
........................................................................................................
Accumulated other comprehensive income (loss) ..................................................................
—
—
130,218
482,284
231,947
134,218
457,613
997,452
Retained earnings ..................................................................................................................
3,614,369
3,376,846
Treasury stock ........................................................................................................................
(403,266)
(268,663)
Total shareholders' equity .............................................................................................
4,055,552
Total liabilities and shareholders' equity ........................................................................ $ 19,853,213
4,697,466
$ 20,272,259
(1) Certain balances were adjusted to give effect to discontinued operations as described in Note 1—Significant Accounting Policies.
See accompanying Notes to Consolidated Financial Statements.
50
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
Year Ended December 31,
2014(1)
2013(1)
2015
Revenue:
Life premium .............................................................................................. $
Health premium .........................................................................................
Other premium ..........................................................................................
2,073,065
$
1,966,300
$
1,885,332
925,520
135
869,440
400
863,818
532
Total premium ................................................................................
2,998,720
2,836,140
2,749,682
Net investment income ..............................................................................
Realized investment gains (losses) ...........................................................
Other-than-temporary impairments ............................................................
Other income .............................................................................................
773,951
(8,791)
—
2,185
758,286
23,548
—
2,121
734,650
10,668
(2,678)
1,931
Total revenue .................................................................................
3,766,065
3,620,095
3,494,253
Benefits and expenses:
Life policyholder benefits ...........................................................................
1,374,608
1,301,562
1,227,857
Health policyholder benefits .......................................................................
Other policyholder benefits ........................................................................
602,610
38,994
559,817
42,005
567,607
43,302
Total policyholder benefits ..............................................................
2,016,212
1,903,384
1,838,766
Amortization of deferred acquisition costs .................................................
Commissions, premium taxes, and non-deferred acquisition expenses .....
Other operating expense ...........................................................................
Interest expense ........................................................................................
445,625
237,541
223,858
76,642
415,914
222,463
217,531
76,126
400,869
207,399
211,443
80,461
Total benefits and expenses ..........................................................
2,999,878
2,835,418
2,738,938
Income before income taxes ........................................................................
Income taxes ...............................................................................................
Income from continuing operations ..............................................................
766,187
(249,894)
516,293
784,677
(256,603)
528,074
755,315
(248,110)
507,205
Discontinued operations:
Income from discontinued operations, net of tax ........................................
10,807
14,865
21,267
Net income .................................................................................... $
527,100
$
542,939
$
528,472
Basic net income per common share:
Continuing operations ................................................................................ $
Discontinued operations ............................................................................
Total basic net income per common share ..................................... $
Diluted net income per common share:
Continuing operations ................................................................................ $
Discontinued operations ............................................................................
Total diluted net income per common share ................................... $
4.13
0.08
4.21
4.07
0.09
4.16
$
$
$
$
4.04
0.11
4.15
3.98
0.11
4.09
$
$
$
$
3.68
0.16
3.84
3.63
0.16
3.79
(1) Certain balances were adjusted to give effect to discontinued operations and the adoption of new accounting guidance as described in Note
1- Significant Accounting Policies under the caption "Low-Income Housing Tax Credit Interests."
See accompanying Notes to Consolidated Financial Statements.
51
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Net income ........................................................................................................... $
527,100
$
542,939
$
528,472
Year Ended December 31,
2015
2014
2013
Other comprehensive income (loss):
Unrealized investment gains (losses): .............................................................
Unrealized gains (losses) on securities: ......................................................
Unrealized holding gains (losses) arising during period ..........................
(1,163,259)
1,312,841
(1,166,332)
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 fair value .........
9,478
(6,346)
(3,010)
(23,771)
(13,138)
(8,621)
(1,567)
(6,569)
(1,173)
Unrealized gains (losses) on securities .......................................................
(1,163,137)
1,278,882
(1,187,212)
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 ..........................................
(1,793)
(1,102)
(2,895)
4,180
—
4,180
28
3,532
3,560
Total unrealized investment gains (losses) .............................................
(1,166,032)
1,283,062
(1,183,652)
Less applicable (taxes) benefits ........................................................
408,092
(448,985)
415,481
Unrealized gains (losses) on investments, net of tax .......................................
(757,940)
834,077
(768,171)
Unrealized gains (losses) attributable to deferred acquisition costs .................
Less applicable (taxes) benefits ..................................................................
Unrealized gains (losses) attributable to deferred acquisition costs, net of tax
Foreign exchange translation adjustments, other than securities .....................
Less applicable (taxes) benefits ..................................................................
Foreign exchange translation adjustments, other than securities, net of tax ....
Pension adjustments:
......................................................................................
Amortization of pension costs .....................................................................
Plan amendments .......................................................................................
Experience gain (loss) ................................................................................
Pension adjustments ..................................................................................
Less applicable (taxes) benefits .............................................................
Pension adjustments, net of tax .......................................................................
8,682
(3,039)
5,643
(20,651)
6,892
(13,759)
14,586
(2,104)
(11,632)
850
(299)
551
(6,200)
2,170
(4,030)
(10,770)
3,290
(7,480)
14,906
(5,217)
9,689
(2,962)
1,220
(1,742)
10,285
18,366
—
(65,817)
(55,532)
19,436
(36,096)
—
52,296
70,662
(24,732)
45,930
Other comprehensive income (loss) .....................................................................
(765,505)
786,471
(714,294)
Comprehensive income (loss) ................................................................ $
(238,405) $ 1,329,410
$
(185,822)
See accompanying Notes to Consolidated Financial Statements.
52
Year Ended December 31, 2013
Balance at January 1, 2013 ............. $
Other Comprehensive
income (loss) ...................................
Common dividends declared
($.45 per share) ...............................
Acquisition of treasury stock ............
Stock-based compensation..............
Exercise of stock options .................
Retirement of treasury stock ............
Balance at December 31, 2013.....
Year Ended December 31, 2014
Other Comprehensive
income (loss) ...................................
Common dividends declared
($.51 per share) ...............................
Acquisition of treasury stock ............
Stock-based compensation..............
Exercise of stock options .................
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
— $ 158,718
$
439,782
$
925,275
$ 3,350,432
$ (512,421) $
4,361,786
(714,294)
528,472
(61,991)
(482,264)
563
1,615
(25,195)
122,871
(296,748)
326,751
(185,822)
(61,991)
(482,264)
25,642
118,991
—
23,464
21,315
(7,500)
(22,503)
—
151,218
462,058
210,981
3,495,533
(543,448)
3,776,342
786,471
542,939
1,329,410
(65,998)
(449,308)
362
526
(22,641)
78,934
(573,349)
644,633
(65,998)
(449,308)
32,203
74,817
—
31,315
18,524
Retirement of treasury stock ............
(17,000)
(54,284)
Balance at December 31, 2014.....
Year Ended December 31, 2015
Other Comprehensive
income (loss) ...................................
Common dividends declared
($.54 per share) ...............................
Acquisition of treasury stock ............
Stock-based compensation..............
Exercise of stock options .................
Retirement of treasury stock ............
—
134,218
457,613
997,452
3,376,846
(268,663)
4,697,466
(765,505)
527,100
(67,182)
(2,132)
(36,322)
(418,526)
8,983
72,280
21,813
17,577
(4,000)
(14,719)
(183,941)
202,660
(238,405)
(67,182)
(418,526)
28,664
53,535
—
Balance at December 31, 2015..... $
— $ 130,218
$
482,284
$
231,947
$ 3,614,369
$ (403,266) $
4,055,552
See accompanying Notes to Consolidated Financial Statements.
53
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Net income ............................................................................................................................... $
527,100
$
542,939
$
528,472
Year Ended December 31,
2014(1)
2013(1)
2015
Adjustments to reconcile net income from continuing operations to cash provided from
continuing operations:
(Income) from discontinued operations, net of income taxes .................................................
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 ..............................................
Other, net ...............................................................................................................................
Net cash provided from (used for) continuing operations ....................................................
Net cash provided from (used for) discontinued operations ................................................
Cash provided from (used for) operations ...........................................................................
(10,807)
631,202
14,609
(612,181)
445,625
103,558
8,791
13,985
1,121,882
(1,832)
1,120,050
(14,865)
585,632
12,521
(562,245)
415,914
102,720
(23,548)
(38,354)
1,020,714
(156,006)
864,708
Cash provided from (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 ...............................................................................................
226,792
376,158
—
3,740
109,024
273,223
700
795
Total investments sold or matured ....................................................................................
606,690
383,742
Acquisition of investments:
Fixed maturities—available for sale .....................................................................................
Other long-term investments ...............................................................................................
Total investments acquired ...............................................................................................
Net increase in policy loans ...................................................................................................
(1,070,908)
(31,707)
(1,102,615)
(20,353)
Net (increase) decrease in short-term investments ................................................................
(38,884)
Net change in payable or receivable for securities .................................................................
Additions to properties ...........................................................................................................
Sales of properties .................................................................................................................
Investments in low-income housing interests .........................................................................
Cash provided from (used for) investment activities ..........................................................
Cash provided from (used for) financing activities:
Issuance of common stock .....................................................................................................
Cash dividends paid to shareholders .....................................................................................
Repayment of 7.375% Notes .................................................................................................
Net borrowing (repayment) of commercial paper ...................................................................
Excess tax benefit from stock option exercises ......................................................................
Acquisition of treasury stock ..................................................................................................
Net receipts (payments) from deposit-type product ................................................................
Cash provided from (used for) financing activities .............................................................
Effect of foreign exchange rate changes on cash .....................................................................
Increase (decrease) in cash .....................................................................................................
Cash at beginning of year .........................................................................................................
—
(36,957)
—
(41,231)
(633,350)
35,958
(66,899)
—
1,978
17,577
(418,526)
(95,793)
(525,705)
34,369
(4,636)
66,019
(704,993)
—
(704,993)
(23,222)
61,008
—
(19,367)
8,752
(56,083)
(350,163)
56,294
(65,006)
—
9,328
18,524
(449,308)
(69,792)
(499,960)
14,491
29,076
36,943
Cash at end of year .................................................................................................................. $
61,383
$
66,019
$
(1) Certain balances were adjusted to give effect to discontinued operations as described in Note 1—Significant Accounting Policies.
See accompanying Notes to Consolidated Financial Statements.
54
(21,267)
578,217
(7,151)
(520,248)
400,869
74,989
(7,990)
27,230
1,053,121
66,159
1,119,280
133,463
493,885
14,000
1,333
642,681
(1,143,840)
(591)
(1,144,431)
(24,837)
17,970
(43,987)
(11,168)
570
(51,176)
(614,378)
97,816
(60,911)
(94,050)
3,983
21,315
(482,264)
(21,808)
(535,919)
6,250
(24,767)
61,710
36,943
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, the Company) through its subsidiaries provides a variety
of life and health insurance products and annuities to a broad base of customers.
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 (VIEs) under accounting guidance which clarifies the definition of
a variable interest and the instructions for consolidating VIEs. Only primary beneficiaries are required or allowed to
consolidate VIEs. Therefore, a company may have voting control of a VIE, but if it is not the primary beneficiary, it is
not permitted to consolidate the VIE. 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 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 expected to be sold during the ensuing year, Torchmark considers
whether the criteria of ASC 205-20, Discontinued Operations, have been met, which includes evaluating if the disposal
of a component represents a strategic shift that has, or will have, a major effect on the Company. If the disposal meets
the criteria for discontinued operations, the assets and liabilities of components held for sale are segregated and are
recorded in the Consolidated Balance Sheets as assets held for sale and liabilities held for sale for all periods presented.
If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. The results of operations
for the component held for sale are reported in "Income from discontinued operations, net of tax" in the Consolidated
Statements of Operations for current and prior periods. Discontinued operations are reported commencing in the period
in which the business is either disposed of or meets the accounting criteria for discontinued operations, including any
gain or loss recognized on the sale or adjustment of the carrying amount to the estimated fair value less cost to sell.
As discussed in further detail in Note 6—Discontinued Operations, Torchmark has classified one of its operating
segments, Medicare Part D, as held for sale and it is reflected as a discontinued operation for the year ended
December 31, 2015. As this business has been classified as held for sale and its operations are discontinued, the
financial results of this business are excluded from Torchmark's continuing operations and the Notes to the Consolidated
Financial Statements, other than Note 2—Statutory Accounting and Note 6—Discontinued Operations.
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
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
carried at unpaid principal balances. 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. Investments in limited
partnerships, also included in "Other long-term investments," are accounted for using the cost method of accounting
as Torchmark's partnership interest is minor since Torchmark lacks the ability to exercise significant influence over the
partnership's operating and financial policies. The Company considers its cost method investments for impairment
when the carrying value of such investments exceeds the net asset value (“NAV”). 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 investment income and realized
investment gains and losses are not allocated to insurance policyholders’ liabilities.
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.
The great majority of Torchmark's fixed maturities are not actively traded and direct quotes are not generally available.
Management therefore determines the fair values of these securities after consideration of data provided by third-party
pricing services, independent broker/dealers, and other resources. At December 31, 2015, Torchmark's investments
in fixed maturities were primarily composed of the following significant security types: Corporate securities, state and
municipal securities, redeemable preferred stocks, and U.S. government securities. The remaining security types
represented less than 1% of the total in the aggregate.
Over 95% of the fair value reported at December 31, 2015 was determined using data provided by third-party pricing
services. Prices provided by these services are not binding offers but are estimated exit values. Third-party pricing
services use proprietary pricing models to determine security values by discounting cash flows using a market-adjusted
spread to a benchmark yield. For all asset classes within Torchmark’s significant security types, third-party pricing
services use a common valuation technique to model the price of the investments using observable market data. The
foundation for these models consists of developing yield spreads based on multiple observable market inputs, including
but not limited to: benchmark yield curves, actual trading activity, new issue yields, broker-dealer quotes, issuer spreads,
two-sided markets, benchmark securities, bids, offers, sector-specific data, economic data, and other inputs that are
corroborated in the market. Pricing vendors monitor and review their pricing data continuously with current market and
economic data feeds, augmented by ongoing communication within the dealer community.
Using the observable market inputs described above, spreads to an appropriate benchmark yield are further developed
by the vendors for each security based on security-specific and/or sector-specific risk factors, such as a security’s
terms and conditions (coupon, maturity, and call features), credit rating, sector, liquidity, collateral or other cash flow
options, and other factors that could impact the risk of the security. Embedded repayment options, such as call and
redemption features, are also taken into account in the pricing models. When the spread is determined, it is added to
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
the security’s benchmark yield. The security's expected cash flows are discounted using this spread-adjusted yield,
and the resulting present value of the discounted cash flows is the evaluated price.
When third-party vendor prices are not available, the Company attempts to obtain valuations from other sources,
including but not limited to broker/dealers, broker quotes, and prices on comparable securities.
When valuations have been obtained for all securities in the portfolio, management reviews and analyzes the prices
to ensure their reasonableness, taking into account available observable information. When two or more valuations
are available for a security and the variance between the prices is 10% or less, the close correlation suggests similar
observable inputs were used in deriving the price, and the mean of the prices is used. Securities valued in this manner
are classified as Level 2. When the variance between two or more valuations for a security exceeds 10%, additional
analysis is performed to determine the most appropriate value for that security, using resources such as broker quotes,
prices on comparable securities, recent trades, and any other observable market data. Further review is performed
on the available valuations to determine if they can be corroborated within reasonable tolerance to any other observable
evidence. If one of the valuations or the mean of the available valuations for a security can be corroborated with other
observable evidence, then the corroborated value is used and reported as Level 2. The Company uses information
and analytical 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. Valuations that cannot be
corroborated within a reasonable tolerance are classified as Level 3. As of December 31, 2015 and 2014, fair value
measurements classified as Level 3 represented 4.4% and 4.0%, respectively, of total fixed maturities and equity
securities.
Torchmark invests in a portfolio of private placement bonds which are not actively traded. This portfolio is managed
by third parties and was $542 million at amortized cost and $546 million at fair value on December 31, 2015, compared
with $497 million at amortized cost and $513 million at fair value a year earlier. The portfolio managers provide 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, 2015, fair values of $15 million were classified
as Level 2, while the remaining balance of $531 million was classified as Level 3. As of December 31, 2014, 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 their fair values cannot be valued separately and apart from the insurance contracts.
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, 2015, they were
classified as Level 2 in the valuation hierarchy. The fair value for each debt instrument as of December 31, 2015 is
disclosed in Note 11—Debt. As described in Note 9—Postretirement Benefits, Torchmark maintains an unqualified
supplemental retirement plan. Therefore 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 (ETFs). The fair value of the insurance cash values approximates carrying value. Fair values for the ETFs
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. 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
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
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
The relative weight given to each of these factors can change over time as facts and circumstances change. In many
cases, management believes it is appropriate to give relatively more weight 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.
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
The nature and amount of recent and expected future sources and uses of cash
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 considered other-than-temporarily
impaired and the full amount of impairment must be charged to 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 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.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
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.
Other Receivables: Other receivables consist primarily of agent debit balances, which represent commissions advanced
to insurance agents. These balances are repaid to the Company over time as the premiums are collected by the
Company and agents' commissions on such premiums are retained. The balance was $334 million and $313 million
at December 31, 2015 and 2014, respectively. Management believes these balances are recoverable as they are less
than the estimated present value of future commissions.
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 matches these
costs with the associated revenues. Policies other than universal life-type policies are 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. However, certain Globe
Life Direct Response advertising costs are capitalized when there is a reliable and demonstrated relationship between
total costs and future benefits that is a direct result of incurring these costs. Globe Life 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. Globe Life Direct Response advertising costs charged to earnings and included in other operating
expense were $10 million, $8 million, and $6 million in 2015, 2014, and 2013, respectively. Capitalized advertising
costs included within deferred acquisition costs were $1.21 billion at December 31, 2015 and $1.15 billion at
December 31, 2014.
Goodwill: The excess cost of business acquired over the fair value of net assets acquired is reported as goodwill.
Goodwill is subject to annual 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, including the goodwill of that unit, against the estimated fair value of
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
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
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.
Torchmark tested its goodwill annually in each of the years 2013 through 2015. 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 goodwill assigned to the unit. In 2015, the qualitative assessment
was employed as permitted by 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.
Low-Income Housing Tax Credit Interests: Torchmark invests 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 $306 million and $318 million at December 31, 2015 and 2014,
respectively. At December 31, 2015, $302 million associated with the federal interests was included in "Other assets"
on the Consolidated Balance Sheets with the remaining $4 million state-related interests included in "Other long-term
investments". At December 31, 2014, the comparable amounts were $313 million, and $5 million, respectively. As of
December 31, 2015, Torchmark was obligated under future commitments of $69 million, which is included in the above
carrying value. Torchmark accounts for the amortization of these tax benefits in accordance with the new guidance
discussed below.
On January 1, 2015, Torchmark adopted new guidance concerning Investments-Equity Method and Joint Ventures:
Accounting for Investments in Qualified Affordable Housing Projects (ASU 2014-01). The guidance replaces the
effective-yield method of amortization with respect to investments in qualified affordable housing acquired after the
date of adoption and, if certain conditions are present, provides for a proportional amortization method. Under the
proportional amortization method, the investor amortizes the initial cost of the investment in proportion to the tax credits
received during the current period to the total expected tax credits to be received over the life of the investment. The
guidance further provides that a company which previously used the effective-yield method of amortization may continue
to use such method with respect to investments acquired before the date of adoption. Amortization, previously required
to be recognized in the Consolidated Statements of Operations as a component of "Net investment income", is now
included in "Income tax expense."
Torchmark continues to use the effective-yield method of amortization with respect to its guaranteed investments
acquired prior to January 1, 2015, and has retrospectively adopted the new guidance and applied the proportional
method of amortization with respect to its non-guaranteed investments. The proportional method of amortization is
consistent with Torchmark’s historical method of amortization. As a result, the only impact of the adoption is the
reclassification of amortization expense from “Net investment income” to “Income tax expense” with no impact on
Torchmark's historical net income, cash flows, or statutory earnings of its insurance subsidiaries.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
The following table reflects a summary of the impact of the retrospectively adjusted balances on the Company's
Consolidated Statements of Operations for the twelve months ended December 31, 2014 and 2013.
Twelve months ended December 31, 2014
Income Statement
As previously
reported(1)
Adjustments
As adjusted
Net investment income ............................................................. $
Total revenue ............................................................................
Income before income taxes ....................................................
Income taxes ............................................................................
Net income ...............................................................................
729,207 $
29,079 $
758,286
3,591,016
755,598
(227,524)
542,939
29,079
29,079
(29,079)
—
3,620,095
784,677
(256,603)
542,939
Twelve months ended December 31, 2013
Income Statement
As previously
reported(1)
Adjustments
As adjusted
Net investment income ............................................................. $
Total revenue ............................................................................
Income before income taxes ....................................................
Income taxes ............................................................................
Net income ...............................................................................
709,743 $
24,907 $
734,650
3,469,346
730,408
(223,203)
528,472
24,907
24,907
(24,907)
—
3,494,253
755,315
(248,110)
528,472
(1) Total revenue, income before income taxes, and income taxes were adjusted for discontinued operations as discussed earlier in this note.
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 certain
events and circumstances become evident that the fair value of the asset is less than its carrying amount. Original
cost of property and equipment was $175 million at December 31, 2015 and $139 million at December 31, 2014.
Accumulated depreciation was $92 million at year end 2015 and $85 million at the end of 2014. Depreciation expense
was $8.0 million in 2015, $7.4 million in 2014, and $6.4 million in 2013. 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.
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 85% 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 reviewed annually 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
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
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 revised assumptions.
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. Torchmark makes an estimate of
unreported claims after careful evaluation of all information available to the Company. This estimate is based on prior
experience and is reviewed quarterly. 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.
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.
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.
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. More information is found in Note 12—Shareholders' Equity.
Recognition of Premium Revenue and Related Expenses: Premium income for traditional long-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 $19 million, $21 million, and $22 million for the years ended December 31, 2015, 2014, and 2013,
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.
Stock-Based 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 2013 through 2015 is as follows:
Volatility factor ................................................................................................
Dividend yield .................................................................................................
Expected term (in years) ................................................................................
Risk-free rate .................................................................................................
23.6%
0.9%
5.66
1.6%
30.9%
0.9%
5.65
1.9%
38.5%
1.1%
5.62
1.1%
2015
2014
2013
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
The expected term is generally derived from Company experience. However, expected terms are determined based
on the simplified method as permitted under the ASC 718 Stock Compensation topic when company experience is
insufficient. The Torchmark Corporation 2011 Incentive Plan replaced all previous plans and allows for option grants
for employees 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. Director grants vest over six months. 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.
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.
Earnings Per Share: Torchmark presents basic and diluted earnings per share (EPS) on the face of the Consolidated
Statements of Operations for income from continuing operations and income from discontinued 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.
Accounting Pronouncements Not Yet Adopted:
Consolidation: The FASB issued Accounting Standards Update No. 2015-02 Consolidation: Amendments to the
Consolidation Analysis (ASU 2015-02), to amend the consolidation requirements in ASC 810, Consolidation. ASU
2015-02 will be effective for Torchmark beginning in calendar year 2016. This new guidance is not expected to have
a material impact on the consolidated financial statements.
Short-Duration Contracts: The FASB issued Accounting Standards Update No. 2015-09 Financial Services-Insurance:
Disclosures about Short-Duration Contracts (ASU 2015-09), requiring companies to disclose additional information
with regards to its short-duration insurance contracts. These new disclosures are intended to provide additional insight
into an insurance entity’s ability to underwrite claims. Torchmark's disclosures under ASU 2015-09 will be effective for
the 2016 annual consolidated financial statements. This guidance consists only of new disclosures and will not impact
the accounting for short-duration contracts.
Defined Benefit Pension Plans: The FASB issued Accounting Standards Update No. 2015-12 Plan Accounting: Defined
Pension Plans, Defined Contribution Pension Plans, Health and Welfare Benefit Plans: (Part I) Fully Benefit-Responsive
Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient
(Consensuses of the FASB Emerging Issues Task Force) (ASU 2015-12) which is a three part standard that is expected
to 1) change the measurement of fully benefit-responsive investment contracts from fair value to contract value, 2)
simplify disclosures related to plan investments, and 3) provide a measurement date practical expedient. ASU 2015-12
will be effective for Torchmark beginning in calendar year 2016. This new guidance will not have a material impact on
the consolidated financial statements.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
Financial Instruments: The FASB issued Accounting Standards Update No. 2016-01 Financial Instruments-Overall:
Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). The guidance addresses
certain aspects of recognition, measurement, presentation and disclosure of financial instruments. In particular, this
guidance requires equity investments to be measured at fair value with changes in fair value recognized in net income
rather than other comprehensive income, and changes the presentation of certain fair value changes for financial
liabilities. ASU 2016-01 will be effective for Torchmark on January 1, 2018. As Torchmark's equity securities portfolio
is insignificant in comparison to its investment portfolio, the Company does not anticipate the guidance to have a
material impact on its operating results.
Leases: The FASB issued Accounting Standards Update No. 2016-02 Leases (ASU 2016-02). This new guidance
states that leases classified as operating leases under current accounting guidance will be recognized on the balance
sheet as lease assets and lease liabilities when the company is the lessee. ASU 2016-02 will be effective for Torchmark
on January 1, 2019 and is required to be presented using a modified retrospective approach. Torchmark is currently
evaluating the impact that this guidance will have on the consolidated financial statements.
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:
Life insurance subsidiaries ............... $
Net Income
Year Ended December 31,
Shareholders’ Equity
At December 31,
2015
393,466 $
2014
2013
2015
2014
446,439 $
572,509 $ 1,253,007 $ 1,262,624
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
$452 million at December 31, 2015. 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 Insurance Commissioners’ (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.
64
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
each of the years 2013 through 2015.
Components of Accumulated Other Comprehensive Income
For the 12 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 .................................
(758,857)
Reclassifications, net of tax ................................
Other comprehensive income (loss) ...................
Balance at December 31, 2013 ..........................
(9,314)
(768,171)
256,196
(16,417) $ 26,608 $ (109,283) $ 925,275
9,689
(1,742)
—
—
9,689
(1,742)
33,992
11,938
45,930
(716,918)
2,624
(714,294)
(6,728)
24,866
(63,353)
210,981
For the 12 months ended December 31, 2014:
Other comprehensive income (loss) before
reclassifications, net of tax .................................
Reclassifications, net of tax ................................
Other comprehensive income (loss) ...................
Balance at December 31, 2014 ..........................
For the 12 months ended December 31, 2015:
Other comprehensive income (loss) before
reclassifications, net of tax .................................
855,132
(21,055)
834,077
1,090,273
(4,030)
(7,480)
(42,781)
800,841
—
—
6,685
(14,370)
(4,030)
(10,758)
(7,480)
17,386
(36,096)
(99,449)
786,471
997,452
(759,976)
5,643
(13,759)
(8,930)
(777,022)
Reclassifications, net of tax ................................
2,036
—
—
9,481
11,517
Other comprehensive income (loss) ...................
Balance at December 31, 2015 .......................... $ 332,333 $
(757,940)
5,643
(13,759)
551
(765,505)
(5,115) $
3,627 $
(98,898) $ 231,947
65
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 (continued)
Reclassifications out of Accumulated Other Comprehensive Income are presented below for each of the years 2013
through 2015.
Reclassification Adjustments
Component Line Item
Unrealized gains (losses) on available for sale
assets: .................................................................
Year Ended December 31,
2015
2014
2013
Affected line items in the
Statement of Operations
Realized (gains) losses ................................ $
9,478
$ (23,771) $
(9,606) Realized investment gains (losses)
Amortization of (discount) premium ..............
Total before tax ....................................................
Tax ...............................................................
(6,346)
3,132
(1,096)
(8,621)
(6,569) Net investment income
(32,392)
(16,175)
11,337
6,861
Income taxes
Total after tax .......................................................
2,036
(21,055)
(9,314)
Pension adjustments: ..........................................
Amortization of prior service cost ..................
Amortization of actuarial (gain) loss ..............
Total before tax ....................................................
Tax ...............................................................
Total after tax .......................................................
377
14,209
14,586
(5,105)
9,481
2,113
8,172
10,285
(3,600)
2,276 Other operating expenses
16,090 Other operating expenses
18,366
(6,428)
Income taxes
6,685
11,938
Total reclassifications (after tax) ........................... $
11,517
$ (14,370) $
2,624
66
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, 2015 and 2014 is as follows:
2015:
Fixed maturities available for sale:
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value(1)
% of Total
Fixed
Maturities(2)
368,718
$
404
$
(14,078) $
355,044
131,516
1,369
301,624
223,535
53,776
294,026
872,961
16,158
668
45,926
731
46,657
1,069,733
859
(1,908)
(163)
1,426,004
22,800
(54,881)
(28,267)
(219,101)
(230,911)
(533,160)
(9,438)
—
(4,781)
(52)
(4,833)
(563,580)
—
3,007,295
2,176,509
1,403,067
4,824,307
11,411,178
70,382
19,631
423,662
29,323
452,985
13,758,024
1,635
$ 1,070,592
$ (563,580) $ 13,759,659
3
10
—
22
16
10
35
83
1
—
3
—
3
100
U.S. Government direct, guaranteed, and
government-sponsored enterprises .......................... $
States, municipalities, and political subdivisions.......
Foreign governments ...............................................
Corporates, by sector:
1,296,396
21,594
Financial ................................................................
Utilities ...................................................................
Energy ...................................................................
Other corporate sectors .........................................
2,760,552
1,981,241
1,568,392
4,761,192
Total corporates ........................................................ 11,071,377
Collateralized debt obligations ..................................
63,662
Other asset-backed securities ..................................
18,963
Redeemable preferred stocks, by sector:
Financial ................................................................
Utilities ...................................................................
Total redeemable preferred stocks ...........................
411,161
Total fixed maturities ......................................... 13,251,871
776
Total fixed maturities and equity securities ........ $13,252,647
Equity securities available for sale ..............................
382,517
28,644
(1) Amount reported in the balance sheet.
(2) At fair value
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
2014:
Fixed maturities available for sale:
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value(1)
% of Total
Fixed
Maturities(2)
U.S. Government direct, guaranteed, and
government-sponsored enterprises ......................... $
States, municipalities, and political subdivisions ......
Foreign governments ...............................................
Corporates, by sector:
367,463
$
5,561
$
(3,183) $
369,841
1,278,429
25,824
177,052
1,350
(718)
(1)
1,454,763
27,173
Financial
...............................................................
Utilities ..................................................................
Energy ..................................................................
Other corporate sectors ........................................
2,659,266
2,154,433
1,511,839
4,240,082
Total corporates ....................................................... 10,565,620
Collateralized debt obligations .................................
67,876
Other asset-backed securities .................................
21,424
Redeemable preferred stocks, by sector:
Financial
...............................................................
Utilities ..................................................................
Total redeemable preferred stocks ...........................
496,976
Total fixed maturities ......................................... 12,823,612
776
Total fixed maturities and equity securities........ $12,824,388
Equity securities available for sale .............................
468,290
28,686
419,303
377,962
173,485
530,462
1,501,212
4,165
1,104
56,845
781
57,626
1,748,070
701
(12,136)
(2,945)
(21,641)
(24,158)
(60,880)
(8,809)
—
(5,008)
(23)
(5,031)
(78,622)
—
3,066,433
2,529,450
1,663,683
4,746,386
12,005,952
63,232
22,528
520,127
29,444
549,571
14,493,060
1,477
$ 1,748,771
$
(78,622) $ 14,494,537
3
10
—
21
17
12
33
83
—
—
4
—
4
100
(1) Amount reported in the balance sheet.
(2) At fair value
A schedule of fixed maturities by contractual maturity at December 31, 2015 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:
Amortized
Cost
Fair
Value
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 ..........................................................
66,545 $
67,585
583,237
1,129,107
4,201,334
7,684,715
92,046
$ 13,251,871 $ 13,758,024
535,903
1,051,912
3,877,844
7,635,180
84,487
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Analysis of investment operations:
As discussed in Note 1—Significant Accounting Policies, net investment income was retrospectively adjusted to
give effect to the adoption of ASU 2014-01 for all periods presented.
Year Ended December 31,
2014
2013
2015
Net investment income is summarized as follows:
Fixed maturities ............................................................................ $
Equity securities ............................................................................
Policy loans ...................................................................................
Other long-term investments .........................................................
Short-term investments .................................................................
Less investment expense .............................................................
Net investment income ................................................................. $
An analysis of realized gains (losses) from investments is as follows:
Realized investment gains (losses):
Fixed maturities ............................................................................ $
Equity securities ............................................................................
Loss on redemption of debt ..........................................................
Other .............................................................................................
Applicable tax ...............................................................................
Realized gains (losses) from investments, net of tax .................... $
An analysis of the net change in unrealized investment gains
(losses) is as follows:
747,663 $
13
36,763
2,008
95
786,542
(12,591)
773,951 $
732,925 $
8
35,015
1,508
75
769,531
(11,245)
758,286 $
709,756
323
33,471
1,281
138
744,969
(10,319)
734,650
(9,479) $
23,170 $
13,138
—
—
688
(8,791)
3,077
601
(258)
35
23,548
(8,242)
(5,714) $
15,306 $
—
—
(5,148)
7,990
(4,025)
3,965
Fixed maturities ............................................................................ $ (1,163,295) $ 1,279,190 $ (1,187,529)
317
Equity securities ............................................................................
(1,187,212)
Net change in unrealized gains (losses) on securities ..................
Other investments .........................................................................
3,560
Net change in unrealized gains (losses) ....................................... $ (1,166,032) $ 1,283,062 $ (1,183,652)
158
(1,163,137)
(2,895)
(308)
1,278,882
4,180
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Additional information about securities sold is as follows:
Fixed maturities:
Proceeds from sales ..................................................................... $
Gross realized gains .....................................................................
Gross realized losses ....................................................................
226,792 $
259
(16,894)
109,024 $
17,583
(1,879)
133,463
5,948
(1,310)
At December 31,
2014
2013
2015
Fair value measurements: The following tables represent the fair value of assets measured on a recurring basis at
December 31, 2015 and 2014:
Description
Fixed maturities available for sale:
Fair Value Measurements at December 31, 2015 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
U.S. Government direct, guaranteed, and
government-sponsored enterprises .................... $
States, municipalities, and political subdivisions
Foreign governments .........................................
Corporates, by sector:
Financial ..........................................................
Utilities .............................................................
Energy .............................................................
Other corporate sectors ...................................
Total corporates .................................................
Collateralized debt obligations ...........................
Other asset-backed securities ............................
Redeemable preferred stocks, by sector:
Financial ..........................................................
Utilities .............................................................
Total redeemable preferred stocks .....................
Total fixed maturities ......................................
Equity securities available for sale ........................
Total fixed maturities and equity securities .... $
Percentage of total ........................................
— $
355,044
$
— $
355,044
—
—
—
22,189
—
—
22,189
—
—
10,124
—
10,124
32,313
765
33,078
$
1,426,004
22,800
2,945,048
2,020,268
1,377,861
4,515,006
10,858,183
—
19,631
413,538
29,323
442,861
13,124,523
—
13,124,523
$
—
—
1,426,004
22,800
62,247
134,052
25,206
309,301
530,806
70,382
—
—
—
—
601,188
870
602,058
3,007,295
2,176,509
1,403,067
4,824,307
11,411,178
70,382
19,631
423,662
29,323
452,985
13,758,024
1,635
$ 13,759,659
0.2%
95.4%
4.4%
100%
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Description
Fixed maturities available for sale:
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
U.S. Government direct, guaranteed, and
government-sponsored enterprises .................... $
States, municipalities, and political subdivisions
Foreign governments .........................................
Corporates, by sector:
Financial ..........................................................
Utilities .............................................................
Energy .............................................................
Other corporate sectors ...................................
Total corporates .................................................
Collateralized debt obligations ...........................
Other asset-backed securities ............................
Redeemable preferred stocks, by sector:
Financial ..........................................................
Utilities .............................................................
Total redeemable preferred stocks .....................
Total fixed maturities ......................................
Equity securities available for sale ........................
— $
369,841
$
— $
369,841
1,504
—
56,517
30,054
—
—
86,571
—
661
17,811
5,134
22,945
111,681
644
1,453,259
27,173
2,940,267
2,366,408
1,636,653
4,463,339
11,406,667
—
21,867
502,316
24,310
526,626
13,805,433
—
—
—
1,454,763
27,173
69,649
132,988
27,030
283,047
512,714
63,232
—
—
—
—
575,946
833
3,066,433
2,529,450
1,663,683
4,746,386
12,005,952
63,232
22,528
520,127
29,444
549,571
14,493,060
1,477
Total fixed maturities and equity securities .... $
Percentage of total ........................................
112,325
$
13,805,433
$
576,779
$ 14,494,537
0.8%
95.2%
4.0%
100.0%
71
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)
Balance at January 1, 2013 ............... $
7,981 $
46,571 $
231,072 $
739 $
Asset-
backed
securities
Collateralized
debt
Obligations
Corporates
Equities
Total gains or losses:
Included in realized gains/
losses ......................................
Included in other
comprehensive income ...........
Acquisitions ...................................
Sales .............................................
Amortization ..................................
Other(1) ..........................................
Transfers into (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(1) ..........................................
Transfers into (out of) Level 3........
Balance at December 31, 2014 .........
Total gains or losses:
Included in realized gains/
losses ......................................
Included in other
comprehensive income ...........
Acquisitions .............................
Amortization ............................
Other(1) ....................................
Transfers into (out of) Level 3........
Balance at December 31, 2015 ......... $
—
426
—
—
(57)
—
(8,350)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10,083
—
—
2,838
(1,287)
—
58,205
15,924
3,323
—
(16,049)
5,519
(3,690)
—
63,232
(17,243)
129,755
—
5
(834)
(42,455)
300,300
1
27,864
186,366
(1)
13
(1,829)
—
512,714
—
1,182
11,365
—
5,536
(9,751)
(11,925)
38,600
17
(9,782)
—
530,806 $
—
— $
—
70,382 $
Total
286,363
—
(6,697)
129,755
—
2,786
(2,121)
(50,805)
359,281
15,925
31,244
186,366
(16,050)
5,532
(5,519)
—
—
37
—
—
—
—
—
776
—
57
—
—
—
—
—
833
576,779
—
37
—
—
—
—
870 $
1,182
(523)
38,600
5,553
(19,533)
—
602,058
(1) Includes capitalized interest, foreign exchange adjustments, and principal repayments.
Acquisitions of Level 3 investments in each of the years 2013 through 2015 are comprised of private-placement fixed
maturities managed by an unaffiliated third-party. See Note 1—Significant Accounting Policies for more information on
private placements.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Quantitative Information about Level 3
Fair Value Measurements
As of December 31, 2015
Fair Value
Valuation
Techniques
Unobservable
Input
Range
Weighted
Average
Collateralized debt obligations ............... $
70,382
Private placement fixed maturities .........
530,806
Equity securities .....................................
870
$
602,058
Discounted
cash flows
Discounted
cash flows
Third-party
pricing without
adjustment
Discount
rate
Credit
rating
Discount
rate
8.85 - 9.5%
9.4%
A+ to BB
BBB
3.13 - 7.47%
4.31%
N/A
N/A
N/A
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 placement fixed maturities are valued based on 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.
In
Level 1 ............ $ 17,252
Level 2 ............
Level 3 ............
49,744
—
2015
Out
Net
$ (49,744) $ (32,492) $ 36,468
In
(17,252)
32,492
—
—
—
—
2014
Out
Net
$
— $ 36,468
In
$ 19,416
2013
Out
Net
$
— $ 19,416
(36,468)
(36,468)
50,805
(19,416)
31,389
—
—
—
(50,805)
(50,805)
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. Transfers between levels are recognized as of the end of
the period of transfer.
Other-than-temporary impairments (OTTI): Based on the Company's evaluation of its fixed maturities in an unrealized
loss position in accordance with the OTTI policy as described in Note 1—Significant Accounting Policies, the Company
concluded that there were no other-than-temporary impairments during the three years ended December 31, 2015.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
As of year end 2015, previously written down securities remaining in the portfolio were carried at a fair value of $60
million, or less than 1% of the fair value of the fixed maturity portfolio. Torchmark is continuously monitoring the market
conditions impacting its portfolio, especially in the energy and basic materials sectors. While adverse market conditions
for an extended duration could lead to some ratings downgrades in these sectors, 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 any of its securities.
Unrealized gains/loss analysis: The following tables disclose gross unrealized investment losses by class and major
sector of investments at December 31, 2015 and December 31, 2014 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, 2015
Description of Securities
Fixed maturities available for sale:
Investment grade securities:
U.S. Government direct, guaranteed, and
government-sponsored enterprises ...................... $
States, municipalities and political subdivisions....
Foreign governments ............................................
Corporates, by sector: ..........................................
Financial ............................................................
Utilities ...............................................................
Energy ...............................................................
Metals and mining ..............................................
Other corporate sectors .....................................
Total corporates ....................................................
Redeemable preferred stocks, by sector:
Less than
Twelve Months
Twelve Months
or Longer
Total
Fair
Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
310,676
$
(13,196) $
14,731
$
(882) $
325,407
$
(14,078)
55,351
7,302
(1,611)
(163)
476,469
435,692
745,969
225,273
1,615,515
3,498,918
(18,599)
(28,267)
(146,157)
(50,857)
(113,185)
(357,065)
671
—
—
—
81,681
25,831
35,684
(42)
—
—
—
(41,412)
56,022
7,302
476,469
435,692
827,650
(1,653)
(163)
(18,599)
(28,267)
(187,569)
(11,552)
251,104
(62,409)
(6,661)
1,651,199
143,196
(59,625)
3,642,114
(119,846)
(416,690)
Utilities ............................................................
Total redeemable preferred stocks........................
7,763
7,763
(52)
(52)
—
—
—
—
7,763
7,763
(52)
(52)
Total investment grade securities ............................
3,880,010
(372,087)
158,598
(60,549)
4,038,608
(432,636)
Below investment grade securities:
States, municipalities and political subdivisions....
Corporates, by sector:
Financial ............................................................
Energy ...............................................................
Metals and mining ..............................................
Other corporate sectors .....................................
Total corporates ....................................................
Collateralized debt obligations ..............................
Redeemable preferred stocks, by sector:
Financial ..........................................................
Total redeemable preferred stocks........................
—
—
7,979
4,551
81,368
93,898
—
—
—
—
—
(1,854)
(5,414)
(12,492)
(19,760)
—
—
—
299
(255)
299
(255)
69,506
61,175
17,679
63,307
211,667
10,562
22,374
22,374
(36,282)
(29,678)
(22,247)
(8,503)
(96,710)
(9,438)
69,506
69,154
22,230
144,675
305,565
10,562
(36,282)
(31,532)
(27,661)
(20,995)
(116,470)
(9,438)
(4,781)
(4,781)
22,374
22,374
(4,781)
(4,781)
Total below investment grade securities ..................
93,898
(19,760)
244,902
(111,184)
338,800
(130,944)
Total fixed maturities .......................................... $ 3,973,908
$ (391,847) $
403,500
$ (171,733) $ 4,377,408
$ (563,580)
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES
At December 31, 2014
Description of Securities
Fixed maturities available for sale:
Investment grade securities:
Less than
Twelve Months
Twelve Months
or Longer
Total
Fair Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair Value
Unrealized
Loss
U.S. Government direct, guaranteed, and
government-sponsored enterprises ...................... $
States, municipalities and political subdivisions....
Foreign governments ............................................
Corporates, by sector: ..........................................
Financial ............................................................
Utilities ...............................................................
Energy ...............................................................
Metals and mining ..............................................
Other corporate sectors .....................................
Total corporates ....................................................
Redeemable preferred stocks, by sector:
Financial ............................................................
Utilities ...............................................................
Total redeemable preferred stocks........................
4,478
$
(7) $
149,238
$
(3,176) $
153,716
$
(3,183)
5,632
—
7,928
4,678
201,509
69,959
117,743
401,817
1,008
—
1,008
(206)
—
(25)
(41)
(12,423)
(3,592)
(1,006)
(17,087)
(1)
—
(1)
20,363
800
28,202
111,993
101,457
16,078
392,029
649,759
—
1,644
1,644
(348)
(1)
25,995
800
(372)
(2,904)
(9,218)
(943)
36,130
116,671
302,966
86,037
(12,255)
509,772
(25,692)
1,051,576
—
(23)
(23)
1,008
1,644
2,652
(554)
(1)
(397)
(2,945)
(21,641)
(4,535)
(13,261)
(42,779)
(1)
(23)
(24)
Total investment grade securities ............................
412,935
(17,301)
821,804
(29,240)
1,234,739
(46,541)
Below investment grade securities:
States, municipalities and political subdivisions....
Corporates, by sector:
Financial ............................................................
Other corporate sectors .....................................
Total corporates ....................................................
Collateralized debt obligations ..............................
Redeemable preferred stocks, by sector:
Financial ............................................................
Total redeemable preferred stocks........................
—
—
32,940
32,940
—
—
—
—
—
(404)
(404)
—
—
—
393
(164)
393
(164)
94,069
67,117
161,186
11,190
57,339
57,339
(11,739)
(5,958)
(17,697)
(8,809)
94,069
100,057
194,126
11,190
(5,007)
(5,007)
57,339
57,339
(11,739)
(6,362)
(18,101)
(8,809)
(5,007)
(5,007)
Total below investment grade securities ..................
32,940
(404)
230,108
(31,677)
263,048
(32,081)
Total fixed maturities ............................................. $
445,875
$
(17,705) $ 1,051,912
$
(60,917) $ 1,497,787
$
(78,622)
Gross unrealized losses rose from $79 million at year end 2014 to $564 million at year end 2015, an increased gross
unrealized loss of $485 million. During 2015, the increase in gross unrealized losses was partially attributable to rising
interest rates in the financial markets, but also resulted from deteriorating conditions in the energy and metals and
mining sectors. The energy sector accounted for $197 million of the 2015 increase in gross unrealized losses from
2014, while metals and mining contributed $86 million of additional gross unrealized losses. Financial sector
investments, our largest sector holdings at 25% of the portfolio at fair value at year end 2015, were also affected by
the poor economic environment, adding another $43 million of gross unrealized losses during 2015.
75
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:
Less than
Twelve
Months
Twelve
Months
or Longer
Total
Number of issues (CUSIP numbers) held:
As of December 31, 2015 .............................................................
As of December 31, 2014 .............................................................
480
80
75
173
555
253
Torchmark’s entire fixed-maturity and equity portfolio consisted of 1,568 issues at December 31, 2015 and 1,604 issues
at December 31, 2014. The weighted-average quality rating of all unrealized loss positions was BBB+ for both 2015
and 2014. The weighted-average quality ratings are based on amortized cost.
Other investment information:
Other long-term investments consist of the following:
Year Ended December 31,
2015
2014
Investment in limited partnerships ................................................................................ $
Low-income housing interests .....................................................................................
Other ............................................................................................................................
31,409 $
3,767
1,627
Total ....................................................................................................................... $
36,803 $
3,236
5,370
1,843
10,449
Torchmark did not have any invested assets that were non-income producing during the twelve months ended
December 31, 2015.
Concentrations of Credit Risk: Torchmark maintains a diversified investment portfolio with limited concentration in any
given issuer. At December 31, 2015, the investment portfolio, at fair value, consisted of the following:
Investment grade fixed maturities:
Corporate securities ....................................................................................................................................
Securities of state and municipal governments ...........................................................................................
Government-sponsored enterprises ............................................................................................................
Other ...........................................................................................................................................................
Below investment grade fixed maturities:
Corporate securities ....................................................................................................................................
Other ...........................................................................................................................................................
Policy loans, which are secured by the underlying insurance policy values ..................................................
Other investments .........................................................................................................................................
79%
10
2
1
3
1
3
1
100%
As of December 31, 2015, 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 2015, the state and municipal bond portfolio at fair
value was invested in securities issued within the following states: Texas (30%), Ohio (7%), Washington (7%), Illinois
(6%), and Alabama (5%). Otherwise, there was no significant concentration within any given state greater than 5%.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Corporate debt securities and redeemable preferred stocks represent 82% of Torchmark's investment portfolio. These
investments are spread across a wide range of industries. Below are the ten largest industry concentrations held in
the corporate portfolio of corporate debt securities and redeemable preferred stocks at December 31, 2015, based on
fair value:
Insurance ...................................................................................................................................
Electric utilities ...........................................................................................................................
Oil and natural gas pipelines ......................................................................................................
Banks .........................................................................................................................................
Transportation ............................................................................................................................
Chemicals ..................................................................................................................................
Oil and natural gas exploration and production ..........................................................................
Gas utilities .................................................................................................................................
Real estate investment trusts .....................................................................................................
Mining ........................................................................................................................................
18%
15
6
6
5
4
4
3
3
3
At year end 2015, 4% of invested assets at fair value were 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 $720 million, amortized cost was $640 million, and fair value was $533 million. While these
investments could be subject to additional credit risk, such risk should generally be reflected in their fair value.
Note 5—Deferred Acquisition Costs
An analysis of deferred acquisition costs is as follows:
Year Ended December 31,
2014
2013
2015
Balance at beginning of year ............................................................... $ 3,457,397 $ 3,325,433 $ 3,187,710
Additions:
Deferred during period:
Commissions ............................................................................
Other expenses ........................................................................
Total deferred .........................................................................
Value of insurance purchased during year ....................................
Adjustment attributable to unrealized investment losses(1)...........
Total additions ........................................................................
401,166
211,015
612,181
—
8,682
620,863
358,969
203,276
562,245
—
—
562,245
330,922
189,326
520,248
8,489
14,906
543,643
Deductions:
Amortized during period ................................................................
Foreign exchange adjustment .......................................................
Adjustment attributable to unrealized investment gains(1) ............
Total deductions .....................................................................
(400,869)
(5,051)
—
(405,920)
Balance at end of year ........................................................................ $ 3,617,135 $ 3,457,397 $ 3,325,433
(415,914)
(8,167)
(6,200)
(430,281)
(445,625)
(15,500)
—
(461,125)
(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—Discontinued Operations
At December 31, 2015, Torchmark met the criteria to account for its Medicare Part D business as a discontinued
operation and expects the business to be sold during 2016. Historically, the business was a reportable segment.
However, Torchmark no longer emphasizes its Medicare Part D business due to declining margins, increased risks,
higher drug costs, and increased administrative and compliance costs. Management believes this sale will allow the
Company to better focus on its core protection life and health insurance businesses as well as provide additional capital
to invest.
The net assets held for sale at December 31, 2015 and 2014 were as follows:
At December 31,
2015
2014
Assets:
Due premiums(1) ............................................................................................................. $
Risk sharing receivable(1) ...............................................................................................
Other receivables(2) ........................................................................................................
Deferred acquisition costs ..............................................................................................
Total assets held for sale ..........................................................................................
8,041 $
—
287,765
17,037
312,843
5,292
31,373
236,996
14,384
288,045
Liabilities:
Unearned and advance premiums .................................................................................
Policy claims and other benefits payable(2) ....................................................................
Risk sharing payable ......................................................................................................
Current and deferred income taxes payable ..................................................................
Other ..............................................................................................................................
Total liabilities held for sale ......................................................................................
806
12,309
23,837
13,604
479
51,035
572
15,517
—
11,195
11,592
38,876
Net assets ....................................................................................................................... $ 261,808 $ 249,169
(1) Previously included as a component of "Other receivables" on the Consolidated Balance Sheets.
(2) At December 31, 2015, receivables included $193 million from Centers for Medicare and Medicaid Services (CMS) and $95 million from drug
manufacturer rebates. At December 31, 2014, the comparable amounts were $179 million and $58 million, respectively. In 2014, the receivable
for drug manufacturer rebates was previously included as a component of "Policy claims and other benefits payable" on the Consolidated
Balance Sheets.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 6—Discontinued Operations (continued)
Income from discontinued operations for the three years ended December 31, 2015 is as follows:
Year Ended December 31,
2015
2014
2013
Revenue:
Health premium ............................................................................... $
260,657 $
373,280 $
302,592
Benefits and expenses:
Health policyholder benefits ............................................................
Amortization of deferred acquisition costs ......................................
Commissions, premium taxes, and non-deferred acquisition
expenses ........................................................................................
Other operating expense ................................................................
Total benefits and expenses ......................................................
213,114
3,506
20,909
6,502
244,031
315,816
2,858
26,613
5,123
350,410
250,080
2,520
14,027
3,247
269,874
Income before income taxes for discontinued operations .................
Income taxes .....................................................................................
Income from discontinued operations ............................................... $
16,626
(5,819)
22,870
(8,005)
32,718
(11,451)
10,807 $
14,865 $
21,267
Income taxes paid related to discontinued operations for the three years ended December 31, 2015 were as follows:
Year Ended December 31,
2014
2013
2015
Income taxes paid ....................................................................................... $
3,409 $
12,013 $
10,320
79
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:
Year Ended December 31,
2014
2013
2015
Balance at beginning of year ............................................................. $
Incurred related to:
128,265 $
116,559 $
124,999
Current year ..................................................................................
Prior years ....................................................................................
Total incurred ............................................................................
502,009
(7,845)
494,164
453,014
804
453,818
Paid related to:
Current year ..................................................................................
Prior years ....................................................................................
Total paid ..................................................................................
Balance at end of year ...................................................................... $
379,037
106,272
485,309
137,120 $
343,648
98,464
442,112
128,265 $
453,538
5,279
458,817
354,358
112,899
467,257
116,559
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.”
The liability for unpaid health claims is included with “Policy claims and other benefits payable” on the Consolidated
Balance Sheets.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 8—Income Taxes
As discussed in Note 1—Significant Accounting Policies under the caption "Low-Income Housing Tax Credit Interests"
the Company adopted ASU 2014-01 as of January 1, 2015. As a result of the adoption, amortization of the cost
component for certain investments in low-income affordable housing projects were reclassified from net investment
income to income taxes. The reclassification adjustment has been applied retrospectively to all periods presented.
The components of income taxes were as follows:
Income tax expense from continuing operations ...................................... $
Shareholders’ equity:
Year Ended December 31,
2014
256,603 $
2015
249,894 $
2013
248,110
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 ............................................
(411,646)
424,089
(386,752)
(17,577)
$ (179,329) $
(21,314)
(18,524)
662,168 $ (159,956)
Income tax expense from continuing operations consists of:
Year Ended December 31,
2014
2013
2015
Current income tax expense ..................................................................... $
Deferred income tax expense ...................................................................
174,284 $
169,319 $
190,406
75,610
87,284
57,704
$
249,894 $
256,603 $
248,110
In each of the years 2013 through 2015, 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:
Expected income taxes ............................................... $ 268,165
Increase (reduction) in income taxes resulting from: ...
35.0 $ 274,637
35.0 $ 264,360
35.0
Year Ended December 31,
2015
%
2014
%
2013
%
Tax-exempt investment income .................................
Low income housing investments .............................
Other .........................................................................
(19,031)
3,938
Income tax expense from continuing operations ......... $ 249,894
(3,178)
(0.4)
(2.5)
(3,233)
(17,541)
(0.4)
(2.2)
(3,107)
(16,227)
0.5
2,740
32.6 $ 256,603
0.4
3,084
32.8 $ 248,110
(0.4)
(2.1)
0.4
32.9
81
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 ..................................................................................
16,098 $
2,266
18,364
12,925
3,036
15,961
Deferred tax liabilities:
December 31,
2015
2014
Unrealized gains ........................................................................................................
Employee and agent compensation ...........................................................................
Deferred acquisition costs .........................................................................................
Future policy benefits, unearned and advance premiums, and policy claims ............
Other liabilities ...........................................................................................................
Total gross deferred tax liabilities ...............................................................................
522,219
74,088
874,817
331,408
4,732
1,807,264
Net deferred tax liability ............................................................................................... $ 1,473,377 $ 1,791,303
128,683
83,229
921,799
340,854
17,176
1,491,741
Torchmark and its subsidiaries, excluding Family Heritage Life Insurance Company (Family Heritage), file a life-nonlife
consolidated federal income tax return. Family Heritage files its federal income tax return on a separate company
basis. 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 2012 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 $6.3 million at December 31, 2015 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 as management believes 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 2013 through 2015, Torchmark did not have any uncertain tax positions which
resulted in unrecognized tax benefits.
Torchmark’s continuing practice is to recognize interest and penalties related to income tax matters in income tax
expense. The Company recognized interest income of $11 thousand, $465 thousand, and $0 thousand, net of federal
income tax benefits, in its Consolidated Statements of Operations for 2015, 2014, and 2013, respectively. The Company
had no accrued interest or penalties at December 31, 2015 or 2014.
82
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,
2015 .......................................... $
2014 ..........................................
2013 ..........................................
Defined
Contribution
Plans
Defined
Benefit
Pension
Plans
3,429 $
3,078
3,373
29,230
23,463
33,122
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 qualified and 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 $15.5 million in 2015, $14.6 million in 2014, and $10.3 million in 2013. Torchmark estimates as of
December 31, 2015 that it will contribute an amount not to exceed $20 million to these plans in 2016. 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 unqualified and 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 $10.1 million in 2015, $2.2 million in 2014, and $2.9 million in 2013. The cash
value of these policies at December 31, 2015 was $34 million and was $24 million a year earlier. Investments in the
investment account consist of ETFs. Deposits of $6 million in 2013 were added to the investment account in this trust.
There were no deposits in 2015 or 2014. As of December 31, 2015, the combined value of the insurance policies and
the trust investments was $79 million, compared with $74 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, 2015 was $67 million and was $71 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, 2015 and December 31, 2014. Pension cost
for both supplemental defined benefit plans is determined in the same manner as for the qualified defined benefit plans.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
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 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, 2015 and
2014.
Pension Assets by Component at December 31, 2015
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
49,391
$
$
$
Equity securities:
Financial ...................................... $
Consumer, Cyclical ......................
Technology ...................................
Industrial ......................................
Consumer, Non-Cyclical ...............
Other ............................................
Total equity securities .....................
Corporate bonds
Financial ......................................
Utilities .........................................
Energy .........................................
Other corporates ..........................
Total corporate bonds .....................
Other bonds ...................................
Guaranteed annuity contract(1) .......
Short-term investments ..................
Other ..............................................
24,264
19,871
15,176
12,216
2,502
123,420
—
15,593
4,842
8
8
36,266
43,229
25,890
40,996
146,381
270
17,082
49,391
24,264
19,871
15,176
12,216
2,510
—
123,428
36,266
43,229
25,890
40,996
—
146,381
270
17,082
15,593
4,842
16
8
6
5
4
1
40
12
14
8
13
47
—
6
5
2
Grand Total ..................................... $
143,855
$
163,741
$
— $
307,596
100
(1) This amount represents a guaranteed annuity contract issued by Torchmark's subsidiary, American Income Life Insurance Company, to fund the
obligations of the American Income Pension Plan.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
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 ..........................
Industrial ......................................
Other ............................................
45,790
$
$
$
26,542
16,965
11,665
10,192
9,322
6,377
715
45,790
26,542
16,965
11,665
10,192
9,322
6,377
715
Total equity securities .....................
127,568
—
—
127,568
Corporate bonds
Financial ......................................
Utilities .........................................
Energy .........................................
Other corporates ..........................
Total corporate bonds ..................
Other bonds ...................................
Guaranteed annuity contract(1) .......
Short-term investments ..................
Other ..............................................
40,889
48,510
30,936
46,490
166,825
284
15,027
—
9,038
4,156
40,889
48,510
30,936
46,490
—
166,825
284
15,027
9,038
4,156
14
8
5
4
3
3
2
—
39
13
15
10
14
52
—
5
3
1
Grand Total ..................................... $
140,762
$
182,136
$
— $
322,898
100
(1) This amount represents a guaranteed annuity contract issued by Torchmark's subsidiary, American Income Life Insurance Company, to fund the
obligations of the American Income Pension Plan.
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. 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). 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
contributions, and balance sheet liability. Equities include common and preferred stocks, securities convertible into
equities, mutual funds that invest in equities, and other equity-related investments. 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
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
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,
2015, there were no restricted investments contained in the portfolio. Plan contributions have been invested primarily
in fixed maturity and equity securities during the three years ended December 31, 2015.
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.
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:
Discount Rate ...............................................................................
Rate of Compensation Increase ...................................................
4.64%
4.33
4.23%
4.35
2015
2014
For Periodic Benefit Cost for the Year:
Discount Rate ...............................................................................
Expected Long-Term Returns .......................................................
Rate of Compensation Increase ...................................................
2015
2014
2013
4.23%
6.96
4.35
5.12%
6.97
4.35
4.18%
6.96
4.40
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 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,
2014
2013
2015
Service cost—benefits earned during the period ................................. $
Interest cost on projected benefit obligation ........................................
Expected return on assets ...................................................................
Net amortization ..................................................................................
Recognition of actuarial loss ...............................................................
Net periodic pension cost .................................................................. $
15,902 $
19,887
(21,204)
14,465
180
29,230 $
12,925 $
19,270
(19,031)
10,283
16
23,463 $
14,984
17,043
(17,429)
18,143
381
33,122
86
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:
Year Ended December 31,
2014
2015
(152,999) $
2013
(168,129)
Balance at January 1 ........................................................................... $
Amortization of:
Prior service cost ...............................................................................
Net actuarial (gain) loss(1) ..................................................................
Total amortization ................................................................................
Plan amendments ...............................................................................
Experience gain(loss) ..........................................................................
Balance at December 31 ..................................................................... $
377
14,209
14,586
(2,104)
(11,632)
(152,149) $
(97,467) $
2,113
8,172
10,285
—
(65,817)
(152,999) $
2,276
16,090
18,366
—
52,296
(97,467)
(1) Includes amortization of postretirement benefits other than pensions of $120 thousand in 2015, $2 thousand in 2014, and $224 thousand in
2013.
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
Year Ended December 31,
2015
2014
Changes in benefit obligation:
Obligation at beginning of year .................................................................................... $
Service cost .................................................................................................................
Interest cost .................................................................................................................
Plan amendments ........................................................................................................
Actuarial loss (gain) .....................................................................................................
Benefits paid ................................................................................................................
Obligation at end of year ..............................................................................................
477,426 $
15,902
19,887
2,104
(19,226)
(19,512)
476,581
383,859
12,925
19,270
—
78,487
(17,115)
477,426
Changes in plan assets:
Fair value at beginning of year .....................................................................................
Return on assets ..........................................................................................................
Contributions ................................................................................................................
Benefits paid ................................................................................................................
Fair value at end of year ..............................................................................................
Funded status at year end ......................................................................................... $
322,898
(11,333)
15,543
(19,512)
307,596
(168,985) $
291,753
33,641
14,619
(17,115)
322,898
(154,528)
Amounts recognized in accumulated other comprehensive income consist of:
Net loss (gain) .............................................................................................................. $
Prior service cost .........................................................................................................
Net amounts recognized at year end ......................................................................... $
145,623 $
5,088
150,711 $
146,571
3,362
149,933
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
The portion of other comprehensive income that is expected to be reflected in pension expense in 2016 is as follows:
Amortization of prior service cost .......................................................................................................... $
Amortization of net actuarial loss ..........................................................................................................
Total
............................................................................................................................................... $
477
9,695
10,172
The accumulated benefit obligation (ABO) for Torchmark’s funded defined benefit pension plans was $371 million and
$374 million at December 31, 2015 and 2014, respectively. In the unfunded plans, the ABO was $63 million at
December 31, 2015 and 2014.
Torchmark has estimated its expected pension benefits to be paid over the next ten years as of December 31, 2015.
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)
2016 .......................................................................................................................................................... $ 18,352
19,832
2017 ..........................................................................................................................................................
21,077
2018 ..........................................................................................................................................................
21,660
2019 ..........................................................................................................................................................
24,048
2020 ..........................................................................................................................................................
143,489
2021-2025 .................................................................................................................................................
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,
2014
2013
2015
Service cost ................................................................................................... $
Interest cost on benefit obligation ..................................................................
Expected return on plan assets ......................................................................
Net amortization .............................................................................................
Recognition of net actuarial (gain) loss ..........................................................
Net periodic postretirement benefit cost ......................................................... $
— $
1,075
—
120
367
1,562 $
— $
646
—
2
(256)
392 $
354
1,030
—
224
—
1,608
88
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
Year Ended December 31,
2015
2014
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 ..............................................................................................
Funded status at year end ......................................................................................... $
22,895 $
—
1,075
(1,133)
(358)
22,479
—
—
358
(358)
—
(22,479) $
20,860
—
646
1,700
(311)
22,895
—
—
311
(311)
—
(22,895)
Amounts recognized in accumulated other comprehensive income:
Net loss(1) ................................................................................................................... $
Net amounts recognized at year end ..................................................................... $
1,447 $
1,447 $
3,066
3,066
(1) 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 postretirement
benefit plans other than pensions.
Weighted Average Assumptions for Postretirement
Benefit Plans Other Than Pensions
For Benefit Obligations at December 31:
Discount Rate ......................................................................................
4.66%
4.23%
2015
2014
For Periodic Benefit Cost for the Year:
Discount Rate ......................................................................................
4.23%
5.12%
4.18%
2015
2014
2013
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
Estimated Future Payments for Post-Retirement Benefit Plans Other Than Pensions
For the year(s)
2016 ..................................................................................................................................................... $
2017 .....................................................................................................................................................
2018 .....................................................................................................................................................
2019 .....................................................................................................................................................
2020 .....................................................................................................................................................
2021-2025 ............................................................................................................................................
921
1,018
1,137
1,252
1,356
8,921
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:
Stock-based compensation not involving cash ........................................... $
Commitments for low-income housing interests .........................................
Capitalized investment income ...................................................................
28,664 $
68,949
—
32,203 $
75,706
—
25,642
42,525
806
The following table summarizes certain amounts paid during the period:
Year Ended December 31,
2014
2013
2015
Year Ended December 31,
2014
2013
2015
Interest paid ................................................................................................ $
Income taxes paid .......................................................................................
74,792 $
77,066 $
110,650
100,922
81,322
128,771
90
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.
Selected Information about Debt Issues
As of December 31,
2015
2014
Description
Notes, due 5/15/23(1,2) ...............
Senior Notes, due 6/15/16(1,3,7)..
Senior Notes, due 6/15/19(1,3)....
Senior Notes, due 9/15/22(1,3)....
Junior Subordinated
Debentures due 12/15/52(4,8).....
Junior Subordinated
Debentures due 3/15/36(4,5).......
Total funded debt ....................
Commercial Paper(7) .................
Total debt ...........................
Annual
Interest
Rate
7.875%
6.375%
9.250%
3.800%
Issue
Date
5/93
6/06
6/09
9/12
Periodic
Interest
Payments
Due
Outstanding
Principal
(Par Value)
Outstanding
Principal
(Book Value)
Outstanding
Principal
(Fair Value)
Outstanding
Principal
(Book Value)
5/15 & 11/15
$
165,612
$
163,920
$
204,470
$
163,758
6/15 & 12/15
6/15 & 12/15
3/15 & 9/15
250,000
292,647
150,000
249,753
291,002
147,913
255,354
353,978
148,843
249,236
290,618
147,648
5.875%
9/12
quarterly
125,000
120,898
129,000
120,870
3.812% (9)
(6)
quarterly
20,000
20,000
20,000
1,003,259
993,486
1,111,645
240,544
240,376
240,376
20,000
992,130
238,398
$ 1,243,803
$ 1,233,862
$ 1,352,021
$ 1,230,528
(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, September, and December.
(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.
Contractual Debt Obligations: The following table presents expected scheduled principal payments under our
contractual debt obligations:
Debt obligations ............................. $ 490,544 $
— $
2016
2017
2018
2019
— $ 292,647 $
2020
Thereafter
— $ 460,612
Year Ended December 31,
Funded debt: As of January 1, 2013, Torchmark had outstanding 7.375% Notes with a principal balance of $94
million. These notes were repaid with interest on August 1, 2013.
Torchmark's 6.375% Senior Notes, in the principal amount of $250 million, will mature on June 15, 2016. The Company
plans to refinance these notes in 2016.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 11—Debt (continued)
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 prior to the termination date of July 16,
2019. In accordance with the agreement, Torchmark is subject to certain covenants regarding capitalization, as was
the case with the previous credit facility. As of December 31, 2015, and throughout the three-year period ended
December 31, 2015, 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.
Short-Term Borrowings
Balance at end of period (at par value) ........................................................................ $
Annualized interest rate ...............................................................................................
Letters of credit outstanding ......................................................................................... $
Remaining amount available under credit line .............................................................
At December 31,
2015
240,544
0.55%
177,000
332,456
$
$
2014
238,450
0.32%
198,000
313,550
Year Ended December 31,
2014
296,246
2015
350,851
$
$
2013
274,435
0.43%
0.26%
458,110
$
343,000
$
0.33%
340,140
Average balance outstanding during period ........................................ $
Daily-weighted average interest rate (annualized) ..............................
Maximum daily amount outstanding during period .............................. $
92
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.
Preferred Stock
Common Stock
Issued
Treasury
Stock
Issued
Treasury
Stock
2013:
Balance at January 1, 2013 ............................................................
—
—
158,718,183
(17,364,729)
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 ...........................................................
76,415
(37,359)
3,917,757
11,190
(11,069,076)
(7,500,000)
7,500,000
Balance at December 31, 2013 ..................................................
—
—
151,218,183
(16,965,802)
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 ...........................................................
19,041
(2,700)
2,210,349
(8,548,795)
(17,000,000)
17,000,000
Balance at December 31, 2014 ..................................................
—
—
134,218,183
(6,287,907)
2015:
Grants of restricted stock ................................................................
Forfeitures of restricted stock ..........................................................
Vesting of performance shares ........................................................
Issuance of common stock due to exercise of stock options ...........
Treasury stock acquired ..................................................................
Retirement of treasury stock ...........................................................
6,648
(13,950)
211,287
1,576,485
(7,340,794)
(4,000,000)
4,000,000
Balance at December 31, 2015 ..................................................
—
—
130,218,183
(7,848,231)
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 6.3 million shares at a cost of $359 million in 2015, 7.2 million
shares at a cost of $375 million in 2014, and 8.3 million shares at a cost of $360 million in 2013. 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 1.0 million shares
at a cost of $60 million in 2015, 1.4 million shares at a cost of $74 million in 2014, and 2.8 million shares at a cost of
$122 million in 2013.
Retirement of Treasury Stock: Torchmark retired 4.0 million shares of treasury stock in 2015, 17.0 million in 2014, and
7.5 million in 2013.
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
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12—Shareholders’ Equity (continued)
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 $466 million in 2015, $479 million in 2014, and $488 million in 2013. As of December 31,
2015, dividends and transfers from insurance subsidiaries to parent available to be paid in 2016 were limited to the
amount of $337 million without regulatory approval, such that $916 million was considered restricted net assets of the
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, 2015 were restricted by lenders’ covenants which require the Company
to maintain and not distribute $2.9 billion from its total consolidated retained earnings of $3.6 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 ...................................... 125,094,628
1,662,607
Weighted average dilutive options outstanding ..................................
Diluted weighted average shares outstanding.................................... 126,757,235
2015
Year Ended December 31,
2014
130,721,738
1,918,506
132,640,244
2013
137,646,885
1,916,900
139,563,785
There were no anti-dilutive shares as of December 31, 2015, 2014, or 2013. Income available to common shareholders
for basic earnings per share is equivalent to income available to common 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:
Contract period
Vesting period
Grants vest in the following periods under the Torchmark Corporation 2011 Incentive Plan:
Directors ...............................
Employees: ...........................
1/2 in 2 years
6 months
7 years
7 years
1/2 in 3 years
10 years
1/4 in 2 years
1/4 in each of the next 3 years
Contract period
Vesting period
Grants vest in the following periods under previous compensation plans:
Directors ...............................
Employees ............................
1/2 in 2 years
6 months
7 years
7 years
1/2 in 3 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.
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Stock-Based Compensation (continued)
During 2014, shareholders approved an amendment to the 2011 Incentive Plan allowing for an additional 6.3 million
shares available for grant.
An analysis of shares available for grant is as follows:
Balance at January 1 ..............................................................................
2011 Plan amendment ............................................................................
Options expired and forfeited during year(1) ............................................
Restricted stock expired and forfeited during year(2) ...............................
Options granted during year(1) .................................................................
Restricted stock, restricted stock units, and performance shares
granted under the Torchmark Corporation 2011 Incentive Plan(2)............
Balance at December 31 .........................................................................
2015
8,458,593
—
90,371
89,745
(1,334,514)
Available for Grant
2014
4,368,753
6,300,000
3,488
31,620
(1,523,982)
2013
6,804,452
—
128,109
9,625
(1,626,863)
(431,913)
6,872,282
(721,286)
8,458,593
(946,570)
4,368,753
(1) Plan allows for grant of options such that each grant reduces shares available for grant in a range from 0.85 share to 1 share.
(2) Plan allows for grant of restricted stock such that each stock grant reduces shares available for grant in a range from 3.1 shares to 3.88 shares.
A summary of stock compensation activity for each of the three years ended December 31, 2015 is presented below:
Stock-based compensation expense recognized(1)................................... $
Tax benefit recognized ..............................................................................
28,664 $
10,033
32,203 $
11,271
25,642
8,975
2015
2014
2013
(1) No stock-based compensation expense was capitalized in any period.
Additional stock compensation information is as follows at December 31:
Unrecognized compensation(1) ....................................................................................... $
Weighted average period of expected recognition (in years)(1) .......................................
2015
2014
33,977
$
38,809
0.85
0.91
(1) Includes restricted stock and performance shares.
Options:
The following table summarizes information about stock options outstanding at December 31, 2015.
Range of
Exercise Prices
$10.44 - $29.59
30.32 - 32.48
37.40 - 43.06
50.69 - 51.62
53.61 - 54.16
$10.44 - $54.16
Options Outstanding
Weighted-
Average
Remaining
Contractual
Life (Years)
Weighted-
Average
Exercise
Price
2.07 $
3.66
4.48
5.64
6.68
4.32 $
26.05
30.58
37.61
50.70
53.62
38.84
95
Number
Outstanding
2,197,238
1,145,648
1,438,565
1,481,681
1,471,709
7,734,841
Options Exercisable
Number
Exercisable
2,130,205 $
986,823
624,655
14,044
18,334
3,774,061 $
Weighted-
Average
Exercise
Price
25.94
30.62
37.88
51.04
54.16
29.37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Stock-Based Compensation (continued)
No equity awards were cash settled during the three years ended December 31, 2015.
An analysis of option activity for each of the three years ended December 31, 2015 is as follows:
2015
2014
2013
Outstanding-beginning of year......
Granted:
7-year term .................................
10-year term ...............................
Exercised ......................................
Expired and forfeited ....................
Adjustment due to 7/1/14 stock
split ...............................................
Outstanding-end of year ...............
Exercisable at end of year ............
Weighted
Average
Exercise
Price
Options
7,889,321 $
1,220,751
296,875
(1,576,485)
(95,621)
—
7,734,841 $
3,774,061 $
32.91
53.62
53.61
22.81
48.85
—
38.84
29.37
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Options
27.84
10,998,206 $
25.43
Options
8,579,202 $
1,226,270
297,712
(2,210,348)
(3,488)
(27)
7,889,321 $
3,809,415 $
50.70
50.69
25.47
40.05
—
32.91
24.58
1,361,700
265,162
(3,917,757)
(128,109)
—
8,579,202 $
4,395,552 $
37.62
37.40
24.97
32.33
—
27.84
22.95
Additional information about Torchmark’s stock option activity as of December 31, 2015 and 2014 is as follows:
Outstanding options:
Weighted-average remaining contractual term (in years) ..........................................
Aggregate intrinsic value ........................................................................................... $
4.32
141,728 $
4.34
167,713
2015
2014
Exercisable options:
Weighted-average remaining contractual term (in years) ..........................................
Aggregate intrinsic value ........................................................................................... $
2.74
104,885 $
2.72
112,724
Selected stock option activity for the three years ended December 31, 2015 is presented below:
Weighted-average grant-date fair value of options granted
(per share) ........................................................................................... $
Intrinsic value of options exercised .....................................................
Cash received from options exercised ................................................
Actual tax benefit received ..................................................................
2015
2014
2013
11.97 $
14.77 $
54,854
35,958
24,470
61,229
56,294
23,232
12.37
72,793
97,815
27,972
Additional information concerning Torchmark’s unvested options is as follows at December 31:
Number of shares outstanding ............................................................
Weighted-average exercise price (per share) ..................................... $
Weighted-average remaining contractual term (in years) ....................
Aggregate intrinsic value ..................................................................... $
2015
3,960,780
47.86 $
5.82
36,843 $
2014
4,079,906
40.69
5.85
54,989
Torchmark expects that substantially all unvested options will vest.
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Stock-Based Compensation (continued)
Restricted Stock:
Restricted stock grants consist of time-vested grants, restricted stock units, and performance shares. Time-vested
restricted stock is available to both senior executives and directors. The employee grants generally vest over five years
and the director grants vest over six months. Restricted stock units are available only to directors. They vest over six
months and are not converted to shares until the directors’ retirement, death, or disability. Director restricted stock and
restricted stock units are generally granted on the first work day of the year. Performance shares are granted to a
limited number of senior executives. Performance shares have a three year contract life and are not settled in shares
until the termination of the three-year contract period. While the grant specifies a stated target number of shares, 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 2015 grants, 0 to 359 thousand shares for the 2014 grants, and 0 to 295 thousand
shares for the 2013 grants. Certain executive restricted stock and performance share grants contain terms related to
age that could accelerate vesting.
A summary of restricted stock grants for each of the years in the three-year period ended December 31, 2015 is
presented in the table below.
2015
2014
2013
Executives restricted stock:
Shares ....................................................................................................
Price per share ....................................................................................... $
Aggregate value ..................................................................................... $
Percent vested as of 12/31/15 ................................................................
—
— $
— $
—%
12,000
50.69
608
—%
Directors restricted stock:
Shares ....................................................................................................
Price per share ....................................................................................... $
Aggregate value ..................................................................................... $
Percent vested as of 12/31/15 ................................................................
Directors restricted stock units (including dividend equivalents):
Shares ....................................................................................................
Price per share ....................................................................................... $
Aggregate value ..................................................................................... $
Percent vested as of 12/31/15 ................................................................
6,648
54.16
360
100%
7,640
54.44
416
100%
Performance shares:
Target shares ..........................................................................................
Target price per share ............................................................................. $
Assumed adjustment for performance objectives ...................................
Aggregate value ..................................................................................... $
Percent vested as of 12/31/15 ................................................................
179,500
53.61
(58,056)
9,623
7,041
51.62
363
100%
12,322
51.69
637
100%
179,250
51.41
22,060
9,215
$
$
$
$
$
$
58,695
40.09
2,353
—%
15,045
35.45
533
100%
16,998
35.99
612
100%
147,750
37.40
94,800
5,526
$
$
$
$
$
$
$
$
—%
—%
—%
Time-vested restricted stock holders, both employees and directors, are entitled to dividend payments on the unvested
stock. Restricted stock unit holders are entitled to dividend equivalents. These equivalents are granted in the form of
additional restricted stock units and vest immediately upon grant. Dividend equivalents are applicable only to restricted
stock units. Performance shareholders are not entitled to dividend equivalents and are not entitled to dividend payments
until the shares are vested and settled.
97
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
15,045
16,998
2013:
Balance at January 1, 2013 .........................
Grants ..........................................................
Additional performance shares(1)..................
467,550
58,695
120,000
147,750
94,800
Restriction lapses .........................................
Forfeitures ....................................................
Balance at December 31, 2013 .................
(150,750)
(31,050)
344,445
(15,045)
362,550
—
2014:
Grants ..........................................................
Additional performance shares(1)..................
Restriction lapses .........................................
Forfeitures ....................................................
Balance at December 31, 2014 .................
2015:
Grants ..........................................................
Additional performance shares(1)..................
Restriction lapses .........................................
Forfeitures ....................................................
Balance at December 31, 2015 .................
12,000
(90,315)
(2,700)
263,430
—
(61,815)
(13,950)
187,665
179,250
22,060
(7,500)
556,360
179,500
(58,056)
(211,287)
(7,500)
459,017
7,041
(7,041)
—
6,648
(6,648)
—
(1) Estimated additional share grants expected due to achievement of performance criteria.
Total
587,550
238,488
(16,998)
94,800
(182,793)
(31,050)
— 706,995
12,322
(12,322)
210,613
22,060
(109,678)
(10,200)
— 819,790
7,640
(7,640)
193,788
(58,056)
(287,390)
(21,450)
— 646,682
Restricted stock units outstanding at each of the year ends 2015, 2014, and 2013 were 105,679, 98,039, and 85,717,
respectively. All restricted stock units were fully vested at the end of each year of grant.
A final determination for the 2012 performance share grants was made as of December 31, 2014 to be 211 thousand
shares, as those shares were settled on January 27, 2015. Likewise, a final settlement was determined for the 2013
grants as of December 31, 2015 to be 159 thousand shares, and the shares were settled on February 24, 2016.
An analysis of the weighted-average grant-date fair values of unvested restricted stock is as follows for the year 2015:
Executive
Restricted
Stock
Executive
Performance
Shares
Directors
Restricted
Stock
Directors
Restricted
Stock Units
Grant-date fair value per share at January 1, 2015 ..................... $
Grants .........................................................................................
Estimated additional performance shares ...................................
Restriction lapses ........................................................................
Forfeitures ...................................................................................
Grant-date fair value per share at December 31, 2015 ...............
31.85 $
—
(29.26)
28.97
32.92
40.07
53.61 $
55.49
(32.63)
44.66
46.77
54.16 $
54.16
(54.16)
(54.16)
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments
Torchmark’s reportable segments are based on the insurance product lines it markets and administers: life insurance,
health insurance, and annuities. These major product lines are set out as reportable segments because of the common
characteristics of products within these categories, comparability of margins, and the similarity in regulatory environment
and management techniques. 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 makers
evaluate the overall performance of the operations of the Company in accordance with these segments.
Life insurance products include traditional and interest-sensitive whole life insurance as well as term life insurance.
Health insurance products are generally guaranteed-renewable and include Medicare Supplement, critical illness,
accident, long-term care, and limited-benefit supplemental hospital and surgical coverages. 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
Life
Health
Annuity
Total
For the Year 2015
Distribution Channel
Amount
United American Independent ......................................... $
15,036
Liberty National Exclusive ...............................................
American Income Exclusive ............................................
Family Heritage Exclusive ...............................................
Globe Life Direct Response ............................................
Other ...............................................................................
271,113
830,903
2,334
746,693
206,986
% of
Total
1
13
40
Amount
$345,330
209,150
80,339
— 221,091
69,610
36
10
% of
Total
Amount
% of
Total
$
135
100
37
23
9
24
7
$2,073,065
100
$925,520
100
$
135
100
Amount
$ 360,501
480,263
911,242
223,425
816,303
206,986
$2,998,720
% of
Total
12
16
30
8
27
7
100
Distribution Channel
For the Year 2014
Life
Health
Annuity
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent ......................................... $
16,582
1
$305,368
Liberty National Exclusive ...............................................
American Income Exclusive ............................................
272,265
766,458
14
39
222,017
78,722
Family Heritage Exclusive ...............................................
1,595
— 204,667
Globe Life Direct Response ............................................
Other ...............................................................................
702,023
207,377
36
10
58,666
35
25
9
24
7
$
400
100
$ 322,350
494,282
845,180
206,262
760,689
207,377
11
18
30
7
27
7
$1,966,300
100
$869,440
100
$
400
100
$2,836,140
100
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
Distribution Channel
For the Year 2013
Life
Health
Annuity
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent ......................................... $
19,742
1
$298,298
Liberty National Exclusive ...............................................
American Income Exclusive ............................................
275,980
715,366
15
38
241,264
79,435
Family Heritage Exclusive ...............................................
1,006
— 190,923
Globe Life Direct Response ............................................
Other ...............................................................................
663,544
209,694
35
11
53,898
35
28
9
22
6
$
532
100
$ 318,572
517,244
794,801
191,929
717,442
209,694
11
19
29
7
26
8
$1,885,332
100
$863,818
100
$
532
100
$2,749,682
100
Due to 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 makers 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, 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.
In 2015, Torchmark recorded $1.4 million in administrative settlements ($906 thousand after tax) related to a post
closing adjustment on the sale of a former subsidiary. These administrative settlements were included in "Commissions,
premium taxes, and non-deferred acquisition costs" in the Consolidated Statements of Operations in 2015.
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.
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
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 2013, (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 2013 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.
The following tables set forth a reconciliation of Torchmark’s revenues and operations by segment to its major income
statement line items. See Note 1—Significant Accounting Policies for additional information concerning reconciling
items of segment profits to pretax income.
For the year 2015
Revenue:
Premium .................................................. $2,073,065
$925,520
$
135
$
2,998,720
Life
Health
Annuity
Investment
Other
Corporate
Adjustments
Consolidated
Net investment income............................
Other income...........................................
$
773,951
$
2,379
$
Total revenue ..........................
2,073,065
925,520
135
773,951
2,379
(2)
(194)
(194)
Expenses:
Policy benefits .........................................
1,374,608
602,610
38,994
Required interest on: ...............................
Policy reserves................................
(552,298)
(69,057)
(53,295)
674,650
Deferred acquisition costs...............
172,947
22,760
Amortization of acquisition costs .............
353,595
83,341
1,138
8,689
(196,845)
Commissions, premium taxes, and non-
deferred acquisition costs .......................
Insurance administrative expense (1)........
Parent expense .......................................
Stock-based compensation expense ......
Interest expense......................................
154,811
81,489
41
1,200 (2,3)
186,191
$
9,003
28,664
76,642
Total expenses........................
1,503,663
721,143
(4,433)
554,447
186,191
37,667
Subtotal ......................................................
569,402
204,377
4,568
219,504
(183,812)
(37,667)
Non-operating items .............................
Measure of segment profitability
(pretax).............................................. $ 569,402
$204,377
$
4,568
$
219,504
$(183,812) $ (37,667) $
—
Deduct applicable income taxes ...........................................................................................................................................................................
Segment profits after tax ..........................................................................................................................................................................
Add back income taxes applicable to segment profitability ...................................................................................................................................
Add (deduct) realized investment gains (losses) and impairments .......................................................................................................................
Deduct administrative settlements (3) ....................................................................................................................................................................
1,200
(1,394)
1,394 (3)
773,951
2,185
3,774,856
2,016,212
—
—
445,625
237,541
186,191
9,003
28,664
76,642
2,999,878
774,978
1,394
776,372
(253,459)
522,913
253,459
(8,791)
(1,394)
Pretax income per Consolidated Statement of Operations ......................................................................................................................
$
766,187
(1) Administrative expense is not allocated to insurance segments.
(2) Elimination of intersegment commission.
(3) Administrative settlements.
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
For the year 2014
Life
Health
Annuity
Investment
Other
Corporate
Adjustments
Consolidated
Revenue:
Premium ...................................................... $1,966,300
Net investment income (5) ............................
$869,440
$
400
$
758,286
Other income ...............................................
$
2,354
Total revenue...............................
1,966,300
869,440
400
758,286
2,354
$
2,836,140
758,286
2,121
3,596,547
$
(233)
(2)
(233)
Expenses:
Policy benefits..............................................
1,293,384
559,817
42,005
8,178
(4)
1,903,384
Required interest on:
Policy reserves ....................................
(530,192)
(64,401)
(55,255)
649,848
Deferred acquisition costs ...................
Amortization of acquisition costs .................
Commissions, premium taxes, and non-
deferred acquisition costs ............................
Insurance administrative expense (1) ............
Parent expense............................................
Stock-based compensation expense ...........
Interest expense ..........................................
168,100
335,345
22,499
72,731
1,453
7,838
(192,052)
143,174
79,475
47
76,126
174,832
$
8,159
32,203
(233)
2,422
(85)
(2)
(3)
(3)
Total expenses.............................
1,409,811
670,121
(3,912)
533,922
174,832
40,362
10,282
Subtotal...........................................................
556,489
199,319
4,312
224,364
(172,478)
(40,362)
(10,515)
Non-operating items .................................
Measure of segment profitability
(pretax) .................................................. $ 556,489
$199,319
$
4,312
$
224,364
$(172,478) $
(40,362) $
—
10,515 (3,4)
Deduct applicable income taxes ..........................................................................................................................................................................
Segment profits after tax ........................................................................................................................................................................
Add back income taxes applicable to segment profitability .................................................................................................................................
Add (deduct) realized investment gains (losses) and impairments .....................................................................................................................
Deduct legal settlement expenses (3) ...................................................................................................................................................................
Deduct administrative settlements (4) ...................................................................................................................................................................
—
—
415,914
222,463
177,254
8,074
32,203
76,126
2,835,418
761,129
10,515
771,644
(252,041)
519,603
252,041
23,548
(2,337)
(8,178)
Pretax income per Consolidated Statement of Operations ..............................................................................................................................
$
784,677
(1) Administrative expense is not allocated to insurance segments.
(2) Elimination of intersegment commission.
(3) Legal settlement expenses.
(4) Administrative settlements.
(5) Retrospectively adjusted to give effect to the adoption of ASU 2014-01 as described in Note 1—Significant Accounting Policies.
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
For the Year 2013
Life
Health
Annuity
Investment
Other
Corporate
Adjustments
Consolidated
Revenue:
Premium ..................................................... $1,885,332
Net investment income (6)............................
$863,818
$
532
$
734,650
Other income ..............................................
$
2,208
Total revenue.......................................
1,885,332
863,818
532
734,650
2,208
$
(277) (2)
(277)
Expenses:
$
2,749,682
734,650
1,931
3,486,263
Policy benefits.............................................
1,227,857
558,982
43,302
8,625 (4)
1,838,766
Required interest on:
Policy reserves ......................................
(508,236)
(59,858)
(57,294)
625,388
Deferred acquisition costs .....................
Amortization of acquisition costs ................
Commissions, premium taxes, and non-
deferred acquisition costs ...........................
Insurance administrative expense (1) ...........
Parent expense...........................................
Stock-based compensation expense ..........
Interest expense .........................................
164,981
323,950
22,568
69,724
1,811
8,714
(189,360)
131,721
75,895
60
175,651
$
8,495
25,642
80,461
(1,519) (5)
(277) (2)
1,155 (3)
500 (4)
Total expenses............................
1,340,273
667,311
(3,407)
516,489
175,651
34,137
8,484
Subtotal..........................................................
545,059
196,507
3,939
218,161
(173,443)
(34,137)
Non-operating items ................................
Measure of segment profitability
(pretax) ................................................. $ 545,059
$196,507
$
3,939
$
218,161
$ (173,443) $
(34,137) $
—
Deduct applicable income taxes ..........................................................................................................................................................................
Segment profits after tax .........................................................................................................................................................................
Add back income taxes applicable to segment profitability ..................................................................................................................................
Add (deduct) realized investment gains (losses) and impairments ......................................................................................................................
Deduct Guaranty Fund Assessment (3) .................................................................................................................................................................
Deduct legal settlement expenses (4) ...................................................................................................................................................................
Add Family Heritage Life acquisition adjustments (5) ............................................................................................................................................
(8,761)
8,761 (3,4,5)
—
—
400,869
207,399
176,806
8,995
25,642
80,461
2,738,938
747,325
8,761
756,086
(246,686)
509,400
246,686
7,990
(1,155)
(9,125)
1,519
Pretax income per Consolidated Statement of Operations ..............................................................................................................................
$
755,315
(1) Administrative expense is not allocated to insurance segments.
(2) Elimination of intersegment commission.
(3) Guaranty Fund Assessment.
(4) Legal settlement expenses.
(5) Family Heritage Life acquisition adjustments.
(6) Retrospectively adjusted to give effect to the adoption of ASU 2014-01 as described in Note 1—Significant Accounting Policies.
103
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.
%
2
1
9
3
7
—
18
2
2
2
1
6
(7)
1
1
1
146
819
(6,225)
15,558
(5,355)
10,203
1
3,801
11,341
(522)
4,412
751
(5,316)
Analysis of Profitability by Segment
2015
2014
2013
2015
Change
Life insurance underwriting margin ............................................. $ 569,402
$ 556,489
$ 545,059
$ 12,913
Health insurance underwriting margin ........................................
204,377
199,319
196,507
Annuity underwriting margin .......................................................
4,568
4,312
3,939
5,058
256
%
2
3
6
Excess investment income .........................................................
219,504
224,364
218,161
(4,860)
(2)
2014
Change
$ 11,430
2,812
373
6,203
Other insurance:
Other income ......................................................................
2,379
2,354
2,208
25
Administrative expense ......................................................
(186,191)
(174,832)
(175,651)
(11,359)
Corporate and adjustments ........................................................
(37,667)
(40,362)
(34,137)
Pre-tax total ................................................................
776,372
771,644
756,086
2,695
4,728
Applicable taxes .........................................................................
(253,459)
(252,041)
(246,686)
(1,418)
After-tax total, before discontinued operations ...........
Discontinued operations (after tax)(1) ..........................................
522,913
519,603
509,400
3,310
10,807
14,865
21,267
(4,058)
(27)
(6,402)
(30)
Total ............................................................................
533,720
534,468
530,667
(748) —
Realized gains (losses)—investments (after tax) ........................
(5,714)
15,306
3,965
(21,020)
Family Heritage acquisition finalization adjustments (after tax) ..
Legal settlement expenses (after tax) .........................................
Guaranty Fund assessment (after tax) .......................................
—
—
—
Administrative settlements (after tax) .........................................
(906)
Net income ................................................................. $ 527,100
—
522
—
(1,519)
(5,931)
1,519
—
(5,316)
(751)
—
—
4,410
$ 542,939
$ 528,472
$ (15,839)
(3) $ 14,467
3
(1) Income from discontinued operations (after tax) is included for purposes of reconciling to net income.
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
At December 31, 2015
Life
Health
Annuity
Investment
Other
Consolidated
Cash and invested assets ..............................
Accrued investment income ...........................
$ 14,405,073
209,915
Deferred acquisition costs .............................. $ 3,098,656
$
502,535
$
15,944
Goodwill .........................................................
309,609
131,982
Other assets ..................................................
$ 1,179,499
$
14,405,073
209,915
3,617,135
441,591
1,179,499
Total assets .................................................... $ 3,408,265
$
634,517
$
15,944
$ 14,614,988
$ 1,179,499
$
19,853,213
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
At December 31, 2014
Life
Health
Annuity
Investment
Other
Consolidated
Cash and invested assets ..............................
Accrued investment income ...........................
$ 15,058,996
204,879
Deferred acquisition costs .............................. $ 2,946,995
$
493,880
$
16,522
Goodwill .........................................................
309,609
131,982
Other assets ..................................................
$ 1,109,396
$
15,058,996
204,879
3,457,397
441,591
1,109,396
Total assets .................................................... $ 3,256,604
$
625,862
$
16,522
$ 15,263,875
$ 1,109,396
$
20,272,259
Liabilities for each segment are reported also on a specific identification basis similar to the assets. The insurance
segments' liabilities contain future policy benefits, unearned and advance premiums, and policy claims and other
benefits payable. Other policyholders' funds are included in Other. Debt represents both short and long term.
Current and deferred income taxes payable is also included in Other.
Other Balances by Segment
At December 31, 2015
Future policy benefits ................................................... $
9,327,561
$
1,600,240
$
1,318,010
$
12,245,811
Life
Health
Annuity
Investment
Consolidated
Unearned and advance premiums ...............................
Policy claims and other benefits payable .....................
17,381
135,778
49,640
137,120
Debt .............................................................................
Total ............................................................................. $
9,480,720
$
1,787,000
$
1,318,010
67,021
272,898
$
$
1,233,862
1,233,862
1,233,862
$
13,819,592
At December 31, 2014
Future policy benefits ................................................... $
8,900,344
$
1,489,963
$
1,360,188
$
11,750,495
Life
Health
Annuity
Investment
Consolidated
Unearned and advance premium .................................
Policy claims and other benefits payable .....................
17,238
125,884
54,465
128,265
Debt .............................................................................
Total ............................................................................. $
9,043,466
$
1,672,693
$
1,360,188
71,703
254,149
$
$
1,230,528
1,230,528
1,230,528
$
13,306,875
105
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
0.4% of total life insurance in force at December 31, 2015. Insurance ceded on life and accident and health products
represented 0.3% of premium income for 2015. 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 2.1% of
life insurance in force at December 31, 2015 and reinsurance assumed on life and accident and health products
represented 0.8% of premium income for 2015.
Leases: Torchmark leases office space, office equipment, and aviation equipment under a variety of operating lease
arrangements.
Rental expense for operating leases for each of the three years ended December 31, 2015 is as follows:
Year Ended December 31,
2015
2014
2013
Rental expense ............................................................................................................ $ 6,722 $ 4,200 $ 4,100
Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in
excess of one year at December 31, 2015 were as follows:
Operating lease commitments.............................. $ 8,304 $ 7,888 $ 4,738 $ 4,531 $ 4,372 $
11,122
Year Ended December 31,
2016
2017
2018
2019
2020
Thereafter
Low-Income Housing Tax Credit Interests: As described in Note 1—Significant Accounting Policies, Torchmark had
$306 million invested in entities which provide certain tax benefits at December 31, 2015. As of December 31, 2015,
Torchmark remained obligated under these commitments as follows:
Year Ended December 31,
2016
2017
2018
Thereafter
Low-Income housing commitments ....................................................... $36,702 $26,592 $ 4,500 $
1,154
Investments: As of December 31, 2015, Torchmark had committed to purchase $16 million of private placement
fixed maturities managed by a third party.
Guarantees: At December 31, 2015, Torchmark had in place four 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, 2015, 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—Debt. 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. The Torchmark parent company would be liable to the extent that
TMK Re, Ltd. does not pay the reinsured party. At December 31, 2015, $177 million of letters of credit were
outstanding, compared with $198 million a year earlier.
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 15—Commitments and Contingencies (continued)
Equipment leases: Torchmark has guaranteed performance of certain subsidiaries as lessees under three
leasing arrangements which include two for aviation equipment and one for computer software, furniture, and
equipment. One aviation lease expires in August 2022 and the second expires in September 2024. The office
equipment lease expires in December 2017. At December 31, 2015, total remaining undiscounted payments
under the leases were approximately $19 million. The 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 various states
through their respective Departments of Revenue, and have not resulted in any financial assessment from any state
nor indicated any liability. The audits are wide-ranging and seek large amounts of data regarding claims handling,
procedures, and payments of contract benefits arising from unreported death claims. No estimate of range can be
made at this time for loss contingencies related to possible administrative penalties or amounts that could be payable
to the states for the escheatment of abandoned property.
Sanction: During the third quarter of 2015, Centers for Medicare & Medicaid Services (CMS) placed United American
Life Insurance Company (UA) and First United American Life Insurance Company (FUA) on Enrollment Sanction.
During this time, Torchmark is not permitted to enroll new individuals or groups into our Medicare Part D program.
Torchmark is permitted to re-enroll existing individual members into our 2016 plans, as well as enroll new members of
groups that were policyholders at the time the sanction was initiated. Torchmark has submitted a remediation plan that
has been accepted by CMS, and Torchmark is proceeding with this plan in an effort to have the sanction lifted as soon
as possible. As discussed in Note 6—Discontinued Operations, the Medicare Part D business is held for sale and
reflected in discontinued operations.
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 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.
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.
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 16—Selected Quarterly Data (Unaudited)
The following is an unaudited summary of quarterly results for the two years ended December 31, 2015. The information
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
2015:
Premium income ................................................ $
Net investment income.......................................
Realized investment gains (losses)....................
Total revenue .....................................................
Policyholder benefits ..........................................
Amortization of deferred acquisition costs..........
Pretax income from continuing operations .........
Income from continuing operations ....................
Income from discontinued operations ................
Net income .........................................................
Basic net income per common share .................
Continuing operations ......................................
Discontinued operations ..................................
Total basic net income per share ...................
Diluted net income per common share...............
Continuing operations ......................................
Discontinued operations ..................................
Total diluted net income per share .................
2014(1):
Premium income ................................................ $
Net investment income.......................................
Realized investment gains (losses)....................
Total revenue .....................................................
Policyholder benefits ..........................................
Amortization of deferred acquisition costs..........
Pretax income from continuing operations .........
Income from continuing operations ....................
Income from discontinued operations ................
Net income .........................................................
Basic net income per common share
Continuing operations ......................................
Discontinued operations ..................................
Total basic net income per share ...................
Diluted net income per common share
Continuing operations ......................................
Discontinued operations ..................................
Total diluted net income per share .................
742,056 $
191,596
119
934,440
497,775
110,660
194,477
130,778
(9,130)
121,648
752,484 $
194,823
2,613
950,611
508,316
111,738
196,723
132,527
(5,417)
127,110
1.03
(0.07)
0.96
1.02
(0.07)
0.95
1.05
(0.04)
1.01
1.04
(0.04)
1.00
748,109
193,213
5,140
947,154
501,156
111,643
199,009
133,858
11,528
145,386
1.08
0.09
1.17
1.06
0.09
1.15
708,592 $
188,051
16,619
913,743
472,585
104,028
209,037
140,330
(7,474)
132,856
707,173 $
189,930
577
898,343
473,007
103,889
191,922
129,695
1,228
130,923
702,061 $
189,588
(1,483)
890,834
473,098
103,084
184,709
124,390
8,022
132,412
1.05
(0.05)
1.00
1.04
(0.06)
0.98
0.99
0.01
1.00
0.97
0.01
0.98
0.96
0.06
1.02
0.94
0.06
1.00
756,071
194,319
(16,663)
933,860
508,965
111,584
175,978
119,130
13,826
132,956
0.97
0.11
1.08
0.96
0.11
1.07
718,314
190,717
7,835
917,175
484,694
104,913
199,009
133,659
13,089
146,748
1.04
0.10
1.14
1.03
0.10
1.13
(1) Certain balances were adjusted to give effect to discontinued operations and the adoption of new accounting guidance as described in Note 1
—Significant Accounting Policies.
108
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, 2015, 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, 2015, 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
109
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, 2015. 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 26, 2016
110
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, 2015, 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 included obtaining
an understanding of 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.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal 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 reporting and the preparation 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 the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally 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.
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, 2015, 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, 2015 of Torchmark and our report dated February 26, 2016 expressed an unqualified opinion on those financial
statements and financial statement schedules.
/s/ Deloitte & Touche LLP
Dallas, Texas
February 26, 2016
111
Item 10. Directors, Executive Officers and Corporate Governance
PART III
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
May 12, 2016 (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”, “2015 Grants of Plan-based
Awards”, “Outstanding Equity Awards at Fiscal Year End 2015”, “Option Exercises and Stock Vested during Fiscal Year
Ended December 31, 2015”, “Pension Benefits at December 31, 2015”, “Potential Payments upon Termination or
Change in Control”, “2015 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, 2015
Plan Category
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved by
security holders
Total
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
7,734,841 $
0
7,734,841 $
38.84
0
38.84
6,872,282
0
6,872,282
(b)
Security ownership of certain beneficial owners:
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.
112
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, 2015 and 2014 ..........................................................
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 2015 ..............................................................................................................................
Consolidated Statements of Comprehensive Income for each of the three years in the period ended
December 31, 2015 .............................................................................................................................
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended
December 31, 2015 .............................................................................................................................
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2015 ..............................................................................................................................
Notes to Consolidated Financial Statements ........................................................................................
Schedules Supporting Financial Statements for each of the three years in the period ended
December 31, 2015:
II. Condensed Financial Information of Registrant (Parent Company) ....................................................
IV. Reinsurance (Consolidated) ..............................................................................................................
Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X.
49
50
51
52
53
54
55
121
125
113
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 Corporation and
The Bank of New York defining the rights of the 7 3/4% Junior 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)*
114
Page of
this
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 Generally Effective as of
January 1, 2014*
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)*
10.16
The Torchmark Corporation Savings and Investment Plan (amended and restated as of January 1,
2014)*
10.17
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)*
115
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Report
10.18
10.19
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)*
10.20
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)*
10.21
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)*
10.22
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)*
10.23
Payments to Directors*
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
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)*
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)*
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)*
116
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Report
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
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)*
10.48
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)*
10.49
10.50
10.51
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)*
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)*
10.52
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)*
10.53
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)
117
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Report
10.54
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)
10.55
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)*
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
10.64
10.65
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 to Torchmark Corporation 2011 Incentive Plan (incorporated by reference from
Exhibit 10.1 to Form 8-K dated April 29, 2014)*
10.66 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)*
10.67 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)*
10.68 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)*
10.71 Amendment to Restricted Stock Award Agreement of April 28, 2011 between Torchmark
Corporation and Mark S. McAndrew (incorporated by reference from Exhibit 10.4 to Form 8-K
dated May 31, 2013)*
10.72 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)
*
10.73 First Amendment to Amended and Restated Credit Agreement dated as of June 30, 2015 among
Torchmark Corporation, TMK Re, Ltd., the Lenders listed therein and Wells Fargo Bank, National
Association ( incorporated by reference from Exhibit 10.1 to Form 8-K dated July 2, 2015)
118
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120
10.74 Amendment Five to the Torchmark Corporation Supplemental Executive Retirement Plan
( incorporated by reference to Exhibit 10.1 to Form 8-K dated May 5, 2015)
10.75 Form of Seven Year Stock Option Grant Agreement under Torchmark Corporation 2011 Incentive
Plan, as amended with Non-Compete, Non-Solicit and Confidentiality Provisions (incorporated by
reference from Exhibit 10.1 to Form 8-K dated March 3, 2015)*
10.76 Form of Ten Year Stock Option Grant Agreement under Torchmark Corporation 2011 Incentive
Plan, as amended with Non-Compete, Non-Solicit and Confidentiality Provisions (incorporated by
reference from Exhibit 10.2 to Form 8-K dated March 3, 2015)*
10.77 Form of Performance Share Award Certificate torchmark Corporation 2011 Incentive Plan, as
amended with Non-Compete, Non-Solicit and Confidentiality Provisions (incorporated by reference
from Exhibit 10.3 to Form 8-K dated March 3, 2015)*
12 Statement re computation of ratios
20 Proxy Statement for Annual Meeting of Stockholders to be held May 12, 2016**
21 Subsidiaries of the registrant
23 Consent of Deloitte & Touche LLP
24 Powers of attorney
31.1 Rule 13a-14(a)/15d-14(a) Certification by Gary L. Coleman
31.2 Rule 13a-14(a)/15d-14(a) Certification by Larry M. Hutchison
31.3 Rule 13a-14(a)/15d-14(a) Certification by Frank M. Svoboda
32.1 Section 1350 Certification by Gary L. Coleman, Larry M. Hutchison and Frank M. Svoboda
101 Interactive Data File
* Compensatory plan or arrangement.
** To be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2015.
119
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
Nebraska
Name Under Which
Company Does
Business
American Income Life
Insurance Company
Globe Life And Accident
Insurance Company
Liberty National Life
Insurance Company
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” in this report. Exhibits not referred to have been omitted as inapplicable or not required.
120
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Amounts in thousands)
December 31,
2015
2014
Assets:
Investments:
Long-term investments .............................................................................................. $
Short-term investments .............................................................................................
Total investments ...........................................................................................................
Cash ..............................................................................................................................
Investment in affiliates ...................................................................................................
Due from affiliates .........................................................................................................
Taxes receivable from affiliates .....................................................................................
Other assets ..................................................................................................................
38,910
5,686
44,596
—
6,023,666
50,766
76,050
64,092
Total assets ........................................................................................................... $ 5,698,547 $ 6,259,170
35,498 $
—
35,498
—
5,438,749
50,765
79,599
93,936
Liabilities and shareholders’ equity:
Liabilities:
Short-term debt ......................................................................................................... $
Long-term debt ..........................................................................................................
Due to affiliates .........................................................................................................
Other liabilities ..........................................................................................................
Total liabilities ........................................................................................................
490,129 $
893,417
57,157
202,292
1,642,995
238,398
1,141,773
652
180,881
1,561,704
Shareholders’ equity:
351
Preferred stock ..........................................................................................................
134,218
Common stock ..........................................................................................................
808,124
Additional paid-in capital ...........................................................................................
997,452
Accumulated other comprehensive income ..............................................................
3,376,846
Retained earnings .....................................................................................................
(619,525)
Treasury stock ...........................................................................................................
Total shareholders’ equity .....................................................................................
4,697,466
Total liabilities and shareholders’ equity ................................................................ $ 5,698,547 $ 6,259,170
351
130,218
832,795
231,947
3,614,369
(754,128)
4,055,552
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 OPERATIONS
(Amounts in thousands)
Year Ended December 31,
2014
2013
2015
Net investment income ............................................................................. $
Realized investment gains (losses) ..........................................................
Total revenue ......................................................................................
23,715 $
8
23,723
22,259 $
4,767
27,026
24,268
—
24,268
General operating expenses .....................................................................
Reimbursements from affiliates ................................................................
Interest expense .......................................................................................
Total expenses ...................................................................................
Operating income (loss) before income taxes and equity in earnings of
affiliates ....................................................................................................
Income taxes ............................................................................................
Net operating loss before equity in earnings of affiliates...........................
Equity in earnings of affiliates ...................................................................
Net income .........................................................................................
54,100
(53,436)
79,677
80,341
(56,618)
15,542
(41,076)
568,176
527,100
53,235
(53,040)
79,366
79,561
(52,535)
13,335
(39,200)
582,139
542,939
53,255
(46,855)
84,273
90,673
(66,405)
17,390
(49,015)
577,487
528,472
Other comprehensive income (loss):
Attributable to Parent Company .............................................................
Attributable to affiliates ...........................................................................
38,557
(752,851)
Comprehensive income (loss) ............................................................ $ (238,405) $ 1,329,410 $ (185,822)
(3,539)
(761,966)
(28,680)
815,151
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
122
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(continued)
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
2015
2014
2013
Cash provided from (used for) operations before dividends from
subsidiaries .................................................................................................... $ (20,705) $ (21,358) $ (54,213)
488,376
Cash dividends from subsidiaries ................................................................
478,840
466,416
Cash provided from operations ......................................................................
445,711
457,482
434,163
Cash provided from (used for) investing activities:
Disposition of investments ...........................................................................
Net decrease (increase) in short-term investments .....................................
Investment in other subsidiaries ..................................................................
Additions to properties ................................................................................
—
17,338
(2)
(468)
5,064
2,729
—
—
Loaned money to affiliates ...........................................................................
(282,508)
(81,000)
Repayments from affiliates ..........................................................................
Cash provided from (used for) investing activities ..........................................
282,508
16,868
81,000
7,793
514
(6,805)
—
—
—
—
(6,291)
Cash provided from (used for) financing activities:
Repayment of 7.375% Notes .......................................................................
Net issuance (repayment) of commercial paper ..........................................
Issuance of stock .........................................................................................
—
1,978
35,958
—
(94,050)
9,328
56,294
3,983
97,677
Acquisitions of treasury stock ......................................................................
(418,526)
(449,309)
(482,264)
Borrowed money from affiliate .....................................................................
15,000
168,000
Repayments to affiliates ...............................................................................
(15,000)
(168,000)
—
—
Net borrowings (to)/from affiliates ................................................................
Excess tax benefit on stock option exercises ...............................................
—
8,180
—
120,000
6,688
10,963
Payment of dividends ..................................................................................
(90,169)
(88,276)
(84,181)
Cash provided from (used for) financing activities .........................................
(462,579)
(465,275)
(427,872)
Net increase (decrease) in cash ....................................................................
Cash balance at beginning of period ..............................................................
Cash balance at end of period ....................................................................... $
—
—
—
—
— $
— $
—
—
—
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
123
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
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 ...................................................................... $
Note B—Supplemental Disclosures of Cash Flow Information
Year Ended December 31,
2014
478,840 $
2015
466,416 $
2013
488,376
The following table summarizes noncash transactions, which are not reflected on the Condensed Statements of Cash
Flows:
Year Ended December 31,
2014
2013
2015
Stock-based compensation not involving cash ......................................... $
Dividend of subsidiary to Parent ...............................................................
Dividend of subsidiary applied to loan balance .........................................
Borrowed money from affiliate(1) ...............................................................
Investment in subsidiaries ........................................................................
Purchase of agent debit balances ............................................................
28,664 $
—
—
56,503
39,206
17,297
32,203 $
25,642
— 1,246,557
72,000
—
—
—
—
—
—
—
(1) Balance was repaid on January 8, 2016.
The following table summarizes certain amounts paid (received) during the period:
Year Ended December 31,
2014
2013
2015
Interest paid .............................................................................................. $
Income taxes received ..............................................................................
77,920 $
(22,009)
77,663 $
(25,581)
85,443
(27,820)
Note C—Preferred Stock
As of December 31, 2015, 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.
124
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,
2015
Life insurance in force ....................... $ 167,677,206 $
Premiums:(2)
729,739 $
3,498,826 $ 170,446,293
Life insurance .................................. $
Health insurance .............................
2,034,373 $
4,484 $
24,007 $
2,053,896
928,659
3,139
—
925,520
Total premium ............................. $
2,963,032 $
7,623 $
24,007 $
2,979,416
For the Year Ended December 31,
2014
Life insurance in force ....................... $ 160,455,963 $
Premiums:(2) ......................................
795,192 $
3,658,511 $ 163,319,282
Life insurance .................................. $
Health insurance(3) ..........................
1,924,605 $
4,614 $
25,774 $
1,945,765
872,391
2,951
—
869,440
Total premium ............................. $
2,796,996 $
7,565 $
25,774 $
2,815,205
For the Year Ended December 31,
2013
Life insurance in force ....................... $ 154,488,511 $
Premiums:(2)
782,125 $
3,882,237 $ 157,588,623
Life insurance .................................. $
Health insurance(3) ..........................
1,841,425 $
4,645 $
26,960 $
1,863,740
866,942
3,124
—
863,818
Total premium ............................. $
2,708,367 $
7,769 $
26,960 $
2,727,558
2.1
1.2
—
0.8
2.2
1.3
—
0.9
2.5
1.4
—
1.0
(1) No amounts have been netted against ceded premium.
(2) Excludes policy charges of $19.3 million, $20.9 million, and $22.1 million in each of the years 2015, 2014, and 2013, respectively.
(3) Certain balances were adjusted to give effect to discontinued operations as described in Note 1—Significant Accounting Policies in the Notes
to the Consolidated Financial Statements.
See accompanying Report of Independent Registered Public Accounting Firm.
125
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 26, 2016
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 26, 2016
*By:
/s/ FRANK M. SVOBODA
Frank M. Svoboda
Attorney-in-fact
126
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[THIS PAGE INTENTIONALLY LEFT BLANK]
3700 S. Stonebridge Drive
McKinney, Texas 75070
www.torchmarkcorp.com