Globe Life
Annual Report 2016

Plain-text 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, April 27, 2017 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 Email: tmkir@torchmarkcorp.com INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS Deloitte & Touche LLP 2200 Ross Avenue Suite 1600 Dallas, Texas 75201 TORCHMARK CORPORATION WEBSITE On the www.torchmarkcorp.com home page are links to the web pages of: Company Brands Careers Community Investors Contact The Investors page contains a menu with links to many topics of interest to investors and other interested third parties: Annual Reports, 10-K and Proxy Statements Calendar News Releases SEC Filings XBRL Financial Reports and Other 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. STOCK EXCHANGE LISTINGS New York Stock Exchange Symbol: TMK INDENTURE TRUSTEE FOR 9 1/4%, 77/8%, AND 3.8% SENIOR NOTES AND 6 1/8% 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 6/1 through Depository Trust Company under global certificates listed on the New York Stock Exchange (NYSE Symbol TMKPRC and TMKPRB, respectively.) 8// % debentures trade 8// % and 5 7/77 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 Financial Information • Code of Ethics for CEO and Senior Investor Contact Information Calls and Meetings • Management Presentations • Conference Calls on the Web • Conference Call Replays and Transcripts • Annual Meeting of Shareholders Stock Information • Stock Transfer Agent and Shareholder Assistance • Dividend Reinvestment • Automatic Deposit of Dividends Corporate Governance • Shareholders’ Rights Policy • Code of Business Conduct and Ethics • Corporate By-laws Financial Officers • Corporate Governance Guidelines • Related Party Policy • Employee Complaint Procedure 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 2016 IN FOCUS $ in thousands $3,137,034 Total Premium From Continuing Operations $549,360 Net Operating Income From Continuing Operations $2,262,736 Annualized Life Premium In Force $998,634 Annualized Health Premium In Force 2 | TORCHMARK CORPORATION | FINANCIAL HIGHLIGHTS $ in thousands, except per share amounts OPERATIONS 2016 2015 % CHANGE Total Premium From Continuing Operations $3,137,034 $2,998,720 Net Operating Income From Continuing Operations* 549,360 522,913 Annualized Life Premium In Force 2,262,736 2,150,498 Annualized Health Premium In Force 998,634 973,042 Diluted Average Shares Outstanding 122,368 126,757 Net Operating Income From All Operations as a Return on Average Common Equity* 14.6% 14.5% PER COMMON SHARE (ON A DILUTED BASIS) Net Operating Income From Continuing Operations* Shareholders‘ Equity (excluding unrealized gains and losses on fixed maturities) at Year End* $4.49 32.13 $4.13 30.09 4.6 5.1 5.2 2.6 3.5 8.7 6.8 * This is a non-GAAP measure that differs from the comparable GAAP financial data. Torchmark’s definitions of non-GAAP measures may differ from other companies’ definitions. Reconciliations to GAAP financial data are presented on pages 14-15. “ We are excited about the opportunities that lie ahead for Torchmark. Torchmark is uniquely positioned to capitalize on the needs of our marketplace and create sustainable long-term growth for our shareholders. ” LETTER TO SHAREHOLDERS* 2016 was a good year for Torchmark. Life premiums grew 5.6% (the highest rate of growth in more than 10 years) and return on equity, excluding net unrealized gains on fixed maturities, was 14.6%. While total life sales were flat in 2016 due to actions we took in response to challenges in our Direct Response unit, we once again saw an increase in life sales from our exclusive agencies. We are confident that actions taken in 2016 will stabilize Direct Response margins and create sales growth in the long run. As stated in previous years, we believe Torchmark’s long-term success is a function of our business model – a model that distinguishes Torchmark from other life insurers. Consistent execution of this model through the years has allowed the Company to thrive regardless of general economic conditions. The key components of the model are: MARKET in niche markets. This remains a vastly underserved marketplace with relatively little competition and great growth potential. DISTRIBUTION We approach the marketplace primarily through exclusive agencies and direct response. This enhances our ability to control costs and limit competitive pressure. PRODUCTS We focus on basic protection life and supplemental health insurance products designed to meet the primary insurance needs of middle-income families. MARGINS We have strong underwriting margins and aren’t required to rely on investment income to generate operating income. Contributing to the strong margins is effective cost control, which is essential to operating profitably in the middle-income marketplace. Torchmark has a long history of successfully controlling both acquisition and administrative costs. *Certain financial data differs 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. Torchmark’s definitions of non-GAAP measures may differ from other companies’ definitions. CASH FLOWS Torchmark consistently delivers substantial excess cash flow due to the profit margins and long-term revenue stream produced by our large block of in-force business. Policies sold in prior years generate nearly 90% of our yearly premium revenue. The persistency of the in-force block has been very predictable throughout Torchmark’s history, regardless of the macro environment. RETURN OF EXCESS CAPITAL TO SHAREHOLDERS We remain committed to returning excess capital to shareholders. As a result of the significant cash flows generated year after year, Torchmark has returned approximately 77% of its net income to shareholders through share repurchases and dividends since 1986. LETTER TO SHAREHOLDERS | TORCHMARK CORPORATION | 3 While the key to our success has been the tactical execution of our model, the method of execution has evolved through the years. We continually explore ways to enhance the process. It is critical to recognize the vast changes occurring in our society and to understand how those changes affect consumer and agent behavior and expectations. We are making significant investments designed to take advantage of technologies and analytics that help us better understand customer and agent needs and to deliver information and products to customers and agents in a manner that works best for them. We are also making investments to modernize our back-office infrastructure to help ensure that we continue to provide high quality service as efficiently as possible. These investments are necessary to support long-term sustainable growth. We are confident they will provide the desired returns and help secure Torchmark’s success well into the future. NET INCOME PER SHARE Compound Annual Growth Rate: 10 Year: 7.0%, 5 Year: 8.3% $4.49* $4.09 $3.60 $2.28 $2.14 $2.70 2006 2008 2010 2012 2014 2016 * Net income for 2016 reflects the impact of new accounting guidance implemented on a prospective basis at the beginning of 2016. Torchmark has consistently generated growth in earnings per share and book value per share as can be seen in the charts below. Please note that values prior to 2007 are not restated for the effect of Accounting Standards Update (ASU) 2010-26. BOOK VALUE PER SHARE (Excluding Net Unrealized Gains or Losses on Fixed Maturities) Compound Annual Growth Rate: 10 Year: 8.1%, 5 Year: 8.6% $32.13 $27.91 $23.49 $19.87 $14.78 $15.79 2006 2008 2010 2012 2014 2016 Note: Book value per share as presented above is a non-GAAP measure. Please see following chart for GAAP. BOOK VALUE PER SHARE (Including Net Unrealized Gains or Losses on Fixed Maturities) Compound Annual Growth Rate: 10 Year: 9.4%, 5 Year: 8.4% $37.76 $36.19 $30.56 $20.24 $10.04 2006 2008 2010 2012 2014 2016 2006 2008 2010 2012 2014 2016 $15.41 NET OPERATING INCOME PER SHARE Compound Annual Growth Rate: 10 Year: 8.5%, 5 Year: 9.1% $4.49* $3.92 $3.31 $2.27 $2.52 $1.99 * Net operating income for 2016 reflects the impact of new accounting guidance implemented on a prospective basis at the beginning of 2016. Note: Net operating income is a non-GAAP measure. Please see following chart for GAAP. 4 | TORCHMARK CORPORATION | LETTER TO SHAREHOLDERS Torchmark has also consistently generated a substantial return on equity as shown below. Please note that values prior to 2011 are not retroactively adjusted for the effect of ASU 2010-26. INSURANCE OPERATIONS  2016 COMPONENTS OF NET OPERATING INCOME ($ in millions, except per share data) RETURN ON EQUITY (Excluding Net Unrealized Gains or Losses on Fixed Maturities*) 15.8% 15.3% 15.5% Underwriting Income Excess Investment Income Tax and Parent Expenses Net Operating Income 14.9% 14.6% Discontinued Operations - Part D $598 224 (273) $549 9 13.8% Net Operating Income from All Operations $558 PER SHARE $4.89 1.83 (2.23) $4.49 0.07 $4.56 2006 2008 2010 2012 2014 2016 Note: Return on equity as presented is a non-GAAP measure. Please see following chart for GAAP. Underwriting income, a non-GAAP measure, reflects premiums less policy benefits, acquisition costs and administrative expenses, and produces a significant portion of our net operating income. In 2016, underwriting income was approximately 74% of pre-tax operating income. RETURN ON EQUITY (Including Net Unrealized Gains or Losses on Fixed Maturities) 15.6% 16.1% 13.4% 13.0% 12.5% 12.0% 2006 2008 2010 2012 2014 2016 COMPONENTS OF UNDERWRITING INCOME ($ in millions) Underwriting Margin Life Health Other Total Administrative Expenses Net of Other Income Underwriting Income $ $574 210 9 $793 (195) $598 AS % OF PREMIUM 26.2% 22.2% 25.3% 6.2% 19.1% LETTER TO SHAREHOLDERS | TORCHMARK CORPORATION | 5 DISTRIBUTION CHANNELS AMERICAN INCOME LIFE Torchmark utilizes several distribution channels, each serving a particular niche. The relative contributions of these channels are shown in the chart below. 2016 TOTAL UNDERWRITING MARGIN* 7% American Income Life 15% 19% Globe Life Direct Response 41% General Agency Liberty National 18% Family Heritage Life *Underwriting margin is a non-GAAP measure American Income is our largest, most profitable distribution channel. As can be seen in the chart below, life premiums have grown at a compound annual growth rate of 8.4% over the last 10 years. As a union company that has maintained strong relationships with organized labor for more than 50 years, American Income enjoys a protected niche position. While the affiliation with organized labor is the foundation of American Income’s operation and will continue to be a rich source of new business for years to come, American Income has expanded its market through referrals and other sources of new business in recent years. Despite shrinking union membership levels during the past 10 years, American Income’s agent count has grown at a compound annual growth rate of 11% to 6,870 agents at the end of 2016. We continue to use the vast amount of data provided by the digital agent presentations used in the field to identify areas of strength and weakness at all levels of the agency and improve training. We are currently adopting new technology to help agents interact more efficiently with customers. Our current goal is to grow the agency to 10,000 agents within the next four to five years and we see no reason why American Income couldn’t eventually grow well beyond that. Our unique competitive position, along with the growing need for protection insurance in our marketplace, provides an opportunity for American Income to have continued success for years to come. AMERICAN INCOME LIFE  LIFE PREMIUM ($ in millions) 10 Year Compound Annual Growth Rate: 8.4% $913 $766 $664 $561 $474 $409 2006 2008 2010 2012 2014 2016 6 | TORCHMARK CORPORATION | LETTER TO SHAREHOLDERS GLOBE LIFE DIRECT RESPONSE LIBERTY NATIONAL LIFE Direct Response is our second largest distribution channel. Life premiums have increased at a compound annual growth rate of 5.5% during the last 10 years. DIRECT RESPONSE  LIFE PREMIUM ($ in millions) 10 Year Compound Annual Growth Rate: 5.5% $783 $702 $630 $567 $511 $457 2006 2008 2010 2012 2014 2016 The Direct Response unit began operations more than 50 years ago, focusing solely on direct mail. Over time, insert media and electronic media were incorporated into the marketing mix. This three-pronged approach gives Globe Life numerous ways to monetize leads and reach consumers, providing a significant edge over our competitors. Direct Response contributes substantial value to Torchmark well beyond the direct response production itself. The expertise and resources of this unit are used to support recruiting and lead generation efforts in our agency operations as well. Due to higher than expected claims in certain blocks of policies within our direct response business that emerged in 2015, we pulled back on circulation in 2016 to improve profitability. While this action resulted in a decline in life sales in 2016, we are confident it will stabilize profit margins. We fully expect to grow sales in the long term through further use of analytics, segmentation, and marketing innovations. Through its direct sales and support of the agencies, Direct Response will continue to be an important driver of Torchmark’s success. Liberty National primarily markets life and supplemental health insurance through in-home and worksite channels. During the last several years, Liberty National has transformed from a high- overhead, fixed-cost home service agency with shrinking life premiums and little potential for expansion to an efficient, variable cost agency poised to generate sustainable, long-term geographic expansion and premium growth. In 2016, Liberty National’s life and health sales grew for the third year in a row. Since the beginning of the conversion to the variable cost model five years ago, agent count has grown from 1,345 to 1,758, a compound annual growth rate of 6%. We saw year-over-year life premium growth in both the first quarter and the fourth quarter in 2016. The last time that happened was in 2004. We expect to see consistent growth in life premium at Liberty National going forward. FAMILY HERITAGE LIFE Family Heritage’s exclusive agency force markets supplemental health products door-to-door in non-urban areas. Family Heritage’s primary product includes a return of premium feature that produces better persistency, higher margins, and more investment income than most health insurance products. Torchmark acquired Family Heritage late in 2012. The agent count has increased at a compound growth rate of 7% since the end of 2012, and health insurance sales have increased at a compound annual growth rate of 6% since the end of 2013. We believe Family Heritage’s product mix and distribution offers great opportunity for sustainable growth. UNITED AMERICAN United American primarily sells individual and group Medicare Supplement insurance through independent agency distribution. Unlike most of our other business, the Medicare Supplement market is very competitive and subject to considerable regulatory scrutiny that can impact product demand or pricing. While we want to take advantage of opportunities in the Medicare Supplement market when available, we won’t chase sales at the expense of profit margins. We can administer this business very efficiently and generate attractive margins when market conditions are favorable. The use of an independent agency distribution allows us to approach this business in the opportunistic manner we prefer. LETTER TO SHAREHOLDERS | TORCHMARK CORPORATION | 7 INVESTMENT OPERATIONS  2016 INVESTMENT PORTFOLIO COMPONENTS OF NET OPERATING INCOME ($ in millions, except per share data) INVESTMENT PORTFOLIO  DECEMBER 31, 2016 Invested Assets ($ in millions) $ AS % OF PREMIUM Fixed Maturities (at amortized cost) $14,188 96% Policy Loans Other Investments Total 508 125 3 1 $14,821 100% Over the years, Torchmark has maintained a prudent investment philosophy. Due to our significant underwriting margins, we do not have to invest aggressively to generate operating earnings. While we seek to maximize risk-adjusted returns, our primary investing criteria is preservation of capital. We invest primarily in long duration investment grade fixed maturities, as these meet our criteria and best match our long term fixed-rate liabilities. BELOW INVESTMENT GRADE BONDS As a Percent of Fixed Maturities* 7.5% 7.4% 8.3% 4.9% 4.4% 5.3% 2006 2008 2010 2012 2014 2016 * Excluding net unrealized gains and losses At the end of 2016, our below-investment grade (BIG) bonds were 5.3% of our fixed maturity portfolio at amortized cost at the end of 2016. This ratio is slightly higher than in past years due to downgrades of some of our energy holdings early in 2016. However, due to increases in underlying commodity prices, the market values of these bonds were significantly higher at the end of 2016 than at the time of the downgrades. Underwriting Income Excess Investment Income Tax and Parent Expenses Net Operating Income Discontinued Operations - Part D $598 224 (273) $549 9 Net Operating Income from All Operations $558 PER SHARE $4.89 1.83 (2.23) $4.49 0.07 $4.56 We use excess investment income as the measure to evaluate the performance of the investment segment. Excess investment income is net investment income less the required interest on the net policy liabilities and the interest on our debt. Approximately 28% of our pre-tax operating income was produced by excess investment income in 2016. EXCESS INVESTMENT INCOME ($ in millions) Net Investment Income Required Interest on Net Policy Liabilities Interest on Debt Excess Investment Income $807 (500) (83) $224 Low interest rates have hindered investment income growth. While excess investment income has grown during the last several years, it has not grown as fast as our invested assets. We are encouraged by the prospect of higher interest rates. Higher new-money rates will have a positive impact on operating income by driving up excess investment income. We are not concerned about potential unrealized losses on the balance sheet that are driven by higher market interest rates since we would not expect to realize them. We have the intent and more importantly, the ability to hold our investments to maturity. However, if rates do not rise, a continued low interest rate environment will hinder growth in investment income, but will not impact the balance sheet. Since we primarily sell non interest- sensitive protection products, we do not see a reasonable scenario that would require us to write off DAC or put up additional GAAP reserves due to interest rate fluctuations. In addition, we do not foresee a negative impact to our statutory balance sheet. While we would benefit from higher interest rates, Torchmark can continue to earn substantial excess investment income in an extended low interest rate environment. 8 | TORCHMARK CORPORATION | LETTER TO SHAREHOLDERS CAPITAL MANAGEMENT EXCESS CASH FLOW ($ in millions) $340 $343 $377 $355 $311 $325- 335 $269 2006 2008 2010 2012 2014 2016 2017 Estimate We define excess cash flow as the cash available to the parent company after fully funding the operating needs of our subsidiary insurance companies and after servicing debt, paying shareholder dividends, and incurring other limited operating expenses. Torchmark consistently produces outstanding excess cash flow. We expect to produce excess cash flow of approximately $325 million to $335 million in 2017. This level is slightly higher than 2016, but less than the level of prior years. Contributing to the lower levels in 2016 and 2017 are decreases in statutory net income caused by the high level of life sales in recent years. While the higher sales levels initially create capital strain, they will ultimately generate long-term growth in excess cash flow. LETTER TO SHAREHOLDERS | TORCHMARK CORPORATION | 9 SHARE REPURCHASES AVERAGE PRICE NO. OF SHARES (IN 000’S) TOTAL SPENT (IN MILLIONS) OPERATING P/E RATIO† NET INCOME P/E RATIO 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 $59.78 $56.99 $52.42 $43.48 $32.13 $27.78 $23.78 $10.12 $24.83 $29.06 5,208 6,292 7,155 8,280 11,219 28,347 8,560 4,613 17,185 13,837 $311 $359 $375 $360 $360 $788 $204 $47 $427 $402 13.3 13.8 13.4 11.9 9.7 9.5 9.4 4.4 10.9 13.3 13.3 13.7 12.8 11.5 8.9 9.2 8.8 4.9 11.6 12.6 † Ratios were calculated using net operating income We began our share repurchase program in 1986. Since that time, we’ve only had one year in which we did not repurchase stock, 1995, due to the acquisition of American Income Life. Through the years, we have spent $6.8 billion to repurchase 79% of the Company’s outstanding shares. Since 1986, we have returned approximately 77% of our net income to shareholders through the combination of share repurchases and dividends. That percentage has been 84% during the last 10 years. While we ended 2016 with price-to-book ratios at historical highs, we remain committed to returning excess capital to shareholders. As long as we believe the stock is not fully valued and can generate a risk-adjusted return on share buybacks that exceeds our cost of equity and other alternative uses, we will continue to repurchase shares. In the event we cannot do that, we will consider other ways to return excess capital to the shareholders. RETURN TO SHAREHOLDERS ($ in millions) SHARE REPURCHASES DIVIDENDS PAID (A) TOTAL CASH RETURNED (B) NET INCOME (A)/ (B) 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 $311 $359 $375 $360 $360 $788 $204 $47 $427 $402 $67 $67 $65 $61 $56 $49 $50 $47 $49 $50 $378 $426 $440 $421 $416 $837 $254 $94 $476 $452 $550 $527 $543 $528 $529 $497 $499 $383 $427 $497 10-Year Total $4,194 $4,980 69% 81% 81% 80% 79% 168% 51% 25% 111% 91% 84% 10 | TORCHMARK CORPORATION | LETTER TO SHAREHOLDERS CONCLUSION We are proud of the results the Company has achieved over the last several years and very appreciative of the hard work and dedication of our talented employees and agency force. The success of our business is dependent on their efforts. We are excited about the opportunities that lie ahead for Torchmark. While we live in a rapidly changing world, one thing is certain - the need for basic protection insurance among middle-income families has never been greater. We have financial products to meet that need and the distribution channels to penetrate that market in a cost-efficient manner. Torchmark is uniquely positioned to capitalize on the needs of our marketplace and create sustainable long-term growth for our shareholders. 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, 2016, 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 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 STEVEN K. GREER President FAMILY HERITAGE LIFE KENNETH J. MATSON President LARRY M. HUTCHISON Co-Chairman and Chief Executive Officer of Torchmark r ROBERT W. INGRAM Retired Ross-Culverhouse Professor of Accounting in Culverhouse College of Commerce, University of Alabama Gulf Breeze, Florida STEVEN P. JOHNSON Retired Partner, Deloitte and Touche, LLP Plano, Texas 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 Nondeferred commissions and amortization Nondeferred acquisition expense Underwriting margin Health: Premium Net policy obligations Nondeferred commissions and amortization Nondeferred 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 Pretax 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 from continuing operations on a diluted basis 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 Net gain from sale of Part D - discontinued operations Administrative settlements Non-operating fees NET INCOME EPS on a diluted basis Twelve months ended December 31, 2016 2015 % Increase or Decrease 6 1 2 3 6 1 4 2 1 5 9 5 8 $2,189,333 (897,650) (656,869) (61,052) 573,762 947,663 (539,343) (176,785) (21,479) 210,056 9,394 793,212 1,534 (196,598) 598,148 $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) 594,535 806,903 773,951 (702,340) 202,813 (83,345) 224,031 (8,587) 813,592 (265,773) 547,819 1,541 $549,360 $4.49 9,033 $558,393 $4.56 122,368 (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 $558,393 $533,720 (6,944) 1,156 (2,467) (359) $549,779 $4.49 (5,714) 0 (906) 0 $527,100 $4.16 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. *Reflects the impact of new accounting guidance implemented on a prospective basis at the beginning of 2016. 14 | TORCHMARK CORPORATION | OPERATING SUMMARY CONDENSED BALANCE SHEET Unaudited and $ in thousands except per share amounts Assets: Fixed maturities at amortized cost* Cash and short-term investments Other investments Deferred acquisition costs* Goodwill Other assets Assets related to discontinued operations Total assets* Liabilities and shareholders’ equity: Policy liabilities Current and deferred income taxes payable* Short-term debt Long-term debt Other liabilities Liabilities related to discontinued operations 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, 2016 2015 $14,188,050 148,203 561,827 3,793,439 441,591 1,127,915 127,532 $20,388,557 $13,286,412 1,377,354 264,475 1,133,165 413,760 27,424 3,885,967 $20,388,557 118,031 120,958 $32.13 14.6% $3,819,969 26.5% $13,251,871 116,149 530,900 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% Reconciliation of Torchmark management’s view of selected financial items to comparable GAAP measures*: Shareholders’ equity, excluding ASC 320+ Effect of ASC 320: Increase fixed maturities Decrease deferred acquisition costs Increase current and deferred income taxes payable Shareholders’ equity Other comparable GAAP measures: Fixed maturities at fair value Deferred acquisition costs Total assets Shareholders’ equity Current and deferred income taxes payable Book value (shareholders’ equity) per diluted share Net income as a return on average equity Average equity Debt to capital ratio $3,885,967 $3,731,667 1,057,811 (10,281) (366,636) $4,566,861 $15,245,861 3,783,158 21,436,087 4,566,861 1,743,990 37.76 12.0% $4,595,659 23.4% 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% *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. +ASC 320 includes guidance for treatment of unrealized gains and losses on available-for-sale fixed maturities previously included in 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, 2016 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 Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No Yes No 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. 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, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $7,409,307,020 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 17, 2017 117,761,153 shares DOCUMENTS INCORPORATED BY REFERENCE Document Proxy Statement for the Annual Meeting of Stockholders to be held April 27, 2017 (Proxy Statement) Parts Into Which Incorporated Part III TORCHMARK CORPORATION INDEX PART I. Item 1. Business ......................................................................................................................................... Item 1A. Risk Factors ................................................................................................................................... Item 1B. Unresolved Staff Comments ........................................................................................................... Item 2. Item 3. Item 4. Item 5. PART II. Properties ....................................................................................................................................... Legal Proceedings .......................................................................................................................... Mine Safety Disclosures ................................................................................................................. 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. Item 9. 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 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 ................................................................................................... Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........... Item 9A. Controls and Procedures ................................................................................................................ Item 9B. Other Information ........................................................................................................................... Page 1 6 12 12 12 12 13 15 16 49 50 52 53 54 55 56 57 57 67 68 70 79 80 81 84 86 94 95 97 98 104 111 113 114 114 114 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 ........................................................................................................................................... Item 13. Certain Relationships and Related Transactions and Director Independence ................................. Item 14. Principal Accountant Fees and Services ......................................................................................... 117 117 117 117 117 Item 15. Exhibits and Financial Statement Schedules .................................................................................. 118 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. Other information included in Torchmark's website is not incorporated into this filing. The following table presents Torchmark’s business by primary marketing distribution method. Primary Distribution Method American Income Exclusive Agency Company American Income Life Insurance Company Waco, Texas Products and Target Markets Individual life and supplemental health insurance marketed to working families. Distribution 6,870 producing agents in the U.S., Canada, and New Zealand. Globe Life Direct Response Globe Life And Accident Insurance Company McKinney, Texas Individual life and supplemental health insurance including juvenile and senior life coverage and Medicare Supplement to middle-income Americans. Nationwide distribution through direct-to-consumer channels; including direct mail, electronic media and insert media. Family Heritage Exclusive Agency Family Heritage Life Insurance Company of America Cleveland, Ohio Supplemental limited-benefit health insurance to middle- income families. 909 producing 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. 1,758 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. 4,144 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) 2015 2014 2016 Whole life: Traditional ............................................................................................. $ 1,471,054 $ 1,378,290 $ 1,296,403 54,490 Interest-sensitive .................................................................................. 619,782 Term ......................................................................................................... 73,870 Other ........................................................................................................ $ 2,262,736 $ 2,150,498 $ 2,044,545 50,808 642,599 78,801 47,358 657,797 86,527 The distribution methods for life insurance products include 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) 2015 757,518 $ 2016 782,222 $ 2014 721,261 American Income ................................................................................... Liberty National ...................................................................................... 966,990 288,005 880,021 284,597 807,935 285,201 Independent agents: United American ..................................................................................... Other ...................................................................................................... 13,292 212,227 15,831 214,317 $ 2,262,736 $ 2,150,498 $ 2,044,545 14,488 213,874 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 July 1, 2016, Torchmark sold its Medicare Part D business to an unaffiliated third party. Torchmark decided to exit its Medicare Part D business due to declining margins, increased risks, higher drug costs, and increased administrative and compliance costs. Management believes this sale allows 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, excluding the Medicare Part D business. 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, 2016 by product category. Annualized Premium in Force (Amounts in thousands) 2015 % of Total Amount % of Total 51 $ 49 100 $ 498,696 474,346 973,042 51 $ 49 100 $ 2016 Amount 502,691 495,943 998,634 2014 Amount 488,142 459,181 947,323 % of Total 52 48 100 Medicare Supplement .......... $ Limited-benefit plans ............ $ The following table presents supplemental health annualized premium in force for the three years ended December 31, 2016 by distribution method. Annualized Premium in Force (Amounts in thousands) 2015 2014 2016 Direct Response ....................................................................................... $ Exclusive agents: 74,261 $ 72,423 $ 72,659 Liberty National .................................................................................... American Income ................................................................................. Family Heritage .................................................................................... 210,260 78,947 249,857 216,139 74,058 234,120 226,599 71,942 217,742 Independent agents: United American ................................................................................... 385,309 998,634 $ 376,302 973,042 $ 358,381 947,323 $ Annuities Annuity products include single-premium and flexible-premium deferred annuities. Annuities in each of the three years ended December 31, 2016 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 accounting principles generally accepted in the United States of America (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, 2016. (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. 4 Holding Company. States have enacted legislation requiring registration and periodic reporting by insurance companies domiciled within their respective jurisdictions that control or are controlled by other corporations so as to constitute a holding company system. Torchmark and its subsidiaries have registered as a holding company system pursuant to such legislation in Indiana, Nebraska, Ohio, and New York. Insurance holding company system statutes and regulations impose various limitations on investments in subsidiaries, and may require prior regulatory approval for material transactions between insurers and affiliates and for the payment of certain dividends and other distributions. Personnel At the end of 2016, Torchmark had 3,128 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 public and private companies. 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 insurance sales are primarily made to individuals, rather than groups, and the face amounts of life policies sold are lower than those of policies sold in the higher income market, the development and maintenance of direct-to-consumer systems and development and retention of adequate numbers of producing agents to support sales growth 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 methods of reaching the consumer 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 adverse 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, or impairing our ability to raise capital to refinance maturing debt obligations, thereby potentially 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. 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 several life distribution channels that focus on distinct market niches, two of which are 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 direct response marketing initiatives could negatively affect this business. Health Insurance Marketplace Risks: The health insurance market is subject to substantial regulatory scrutiny. Regulatory 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 insurance 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 underprice 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. Obtaining timely and appropriate premium rate increases for certain health insurance policies is critical. 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 and thus our results of operations and financial condition. Information Security and Technology Risks: The failure to maintain effective and efficient information systems at the Company could compromise secure data thereby adversely affecting our financial condition and results of operations. Our business operations are highly dependent upon information technology systems to provide efficient and resilient business operations. Malicious actors, employee errors or disasters affecting these information systems could impair our business operations, regulatory compliance and financial condition. To the extent our information systems may be breached by malicious actors, employee malfeasance or technological attacks, an attacker could circumvent security measures in order to alter or delete customer or proprietary information from our systems. In addition, we may not become aware of sophisticated or advanced cyber attacks for some time after they occur, thereby increasing the Company's exposure. Employee errors in the handling of our information or technology systems may inadvertently result in unauthorized access to customer or proprietary information, or an inability to use our information technology systems to efficiently support business operations. In addition, an increasing number of states require that customers be notified of unauthorized access, use or disclosure of their confidential information. Any such breach of confidential information could damage our reputation in the 7 marketplace, deter potential customers from purchasing our products, result in the loss of existing customers, subject us to significant civil and criminal liability, or require us to incur significant technical, legal or 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. A disaster or natural catastrophe, an industrial accident, terror attack or war may make our information systems unavailable to support business operations for a period of time, affecting our systems, physical business operations, and financial condition. 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. 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. As discussed above in Information Security and Technology Risks, the Company could be subjected to adverse publicity as a result of a significant security breach. Investment Risks: Our investments are subject to market and credit risks. Significant downgrades, delinquencies and defaults in our investment portfolio could potentially result in lower net investment income and increased realized and unrealized investment losses. Our invested assets are subject to the customary risks of defaults, downgrades and changes in market values. Our investment portfolio consists, almost exclusively, 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, as 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 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. 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. Changes in interest rates could negatively affect income. Declines in interest rates expose insurance companies to the risk that they will fail to earn the level of interest on investments assumed in pricing products and in setting discount rates used to calculate the net policy liabilities. While we attempt to manage our investments to earn an 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. Increases in interest rates could cause the fair value of securities within our bond portfolio to decline. A rise in interest rates could also result in certain policyholders surrendering their annuity policies for cash thereby potentially requiring our insurance subsidiaries to liquidate bonds if other sources of liquidity are not available to meet their obligations. In such a case, realized losses could result from such sales and could adversely affect our statutory income and results of operations. 8 Liquidity Risks: Our ability 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 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 restricted based on regulations by their state of domicile. Accordingly, impairments in invested assets or a disruption in our insurance subsidiaries’ operations that reduces their capital or cash flow could limit or disallow payment of dividends to us, a principal source of our cash flow. We can give no assurance that more stringent restrictions will not be adopted from time to time by states in which our insurance subsidiaries are domiciled, which could, under certain circumstances, significantly reduce dividends or other amounts paid to us by our subsidiaries. Although we do not anticipate changes, changes in these laws could constrain the ability of our subsidiaries to pay dividends or to advance or repay funds to us in sufficient amounts and at times necessary to meet our debt obligations and corporate expenses. Additionally, if our insurance subsidiaries were unable to obtain approval of premium rate increases in a timely manner from state insurance regulatory authorities, their profitability, and their ability to declare and distribute dividends to us could be negatively impacted. 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 treasury rates increase or 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. In addition, 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 sources of liquidity do not satisfy our needs, we may have to seek additional financing or raise capital. The availability and cost 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 were to 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. If our internal sources of liquidity prove to be insufficient, 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. As a result, our results of operations, financial condition and cash flows could be materially negatively affected. 9 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 they 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 of 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 such 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 and/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. Such actions could 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 established a Federal Insurance Office (FIO) within the 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 GAAP and accounting practices as promulgated by the National Association of Insurance Commissioners’ statutory accounting practices (NAIC SAP), 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, many of which have the potential to negatively impact our profitability. 10 Non-compliance 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, could materially adversely affect our reputation and business operations. 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. 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. 11 As of December 31, 2016, Torchmark had no unresolved staff comments. Item 1B. Unresolved Staff Comments Item 2. Properties Torchmark, through its subsidiaries, owns or leases buildings that are used in the normal course of business. Torchmark owns and occupies a 300,000 square foot facility in McKinney, Texas. This facility is Torchmark’s corporate headquarters and also houses the operations of a subsidiary, United American, as well as many 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 of office space in Syracuse, New York. Liberty National, also in McKinney, Texas, leases a 24,000 square foot facility in Hoover, Alabama (a Birmingham suburb). An 8,000 square foot facility is leased for storage in Pelham, Alabama. Globe leases 34,000 square feet of office area in the Cotter 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 occupies two buildings located in Waco, Texas: 70,000 square foot building for corporate operations and a 43,000 square foot printing facility. American Income also leases 10,800 square feet in a building across the street from the main office building. American Income also leases office space throughout the United States to support its marketing operations. Family Heritage owns 50% of a partnership that owns a 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. See further discussion of litigation and unclaimed property audits in Note 15—Commitments and Contingencies. 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 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 2,808 shareholders of record on December 31, 2016, 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. Quarter 1 2 3 4 Year-end closing price $ 73.76 Quarter 1 2 3 4 Year-end closing price $ 57.16 $ $ 2016 Market Price High Low 57.01 $ 62.39 65.21 74.83 2015 Market Price High Low 55.66 $ 59.15 63.12 61.19 Dividends Per Share 48.58 $ 52.83 60.38 63.17 0.1350 0.1400 0.1400 0.1400 Dividends Per Share 50.07 $ 54.98 55.62 55.36 0.1267 0.1350 0.1350 0.1350 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 12/31/11 in stock or index, including reinvestment of dividends. Fiscal year ended December 31st. (Copyright © 2017 Standard & Poor's, a division of S&P Global. All rights reserved.) 13 Purchases of Certain Equity Securities by the Issuer and Others for the Fourth Quarter 2016 (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 (a) Total Number of Shares Purchased (b) Average Price Paid Per Share 411,933 $ 175,770 757,089 64.36 62.40 73.90 411,933 175,770 757,089 Period October 1-31, 2016 ................ November 1-30, 2016 ............ December 1-31, 2016 ............ On August 4, 2016, 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 number of 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: 2016 2015 2014 2013 2012 Life .......................................................................... $ 2,189,333 947,663 Health ...................................................................... 38 Other ....................................................................... 3,137,034 Total .................................................................... 806,903 Net investment income .............................................. (10,683) Realized investment gains (losses) ............................ 3,934,629 Total revenue ............................................................. Income from continuing operations, net of tax(1) ......... 539,590 10,189 Income from discontinued operations, net of tax ........ Net income(1) .............................................................. 549,779 Per common share: Basic earnings: Income from continuing operations .................... Income from discontinued operations................. Net income ..................................................... Diluted earnings:(1) Income from continuing operations .................... Income from discontinued operations................. Net income ..................................................... Cash dividends declared ........................................ Cash dividends paid ............................................... Basic average shares outstanding ............................. Diluted average shares outstanding(1) ........................ 4.50 0.08 4.58 4.41 0.08 4.49 0.56 0.56 120,001 122,368 2016 As of December 31, Cash and invested assets .......................................... $15,955,891 21,436,087 Total assets ................................................................ 264,475 Short-term debt .......................................................... 1,133,165 Long-term debt .......................................................... 4,566,861 Shareholders' equity .................................................. Per diluted share(1) ................................................. 37.76 Effect of fixed maturity revaluation on diluted equity per share(1,2) .................................................... Annualized premium in force: 5.63 $ 2,073,065 925,520 135 2,998,720 773,951 (8,791) 3,766,065 516,293 10,807 527,100 $ 1,966,300 869,440 400 2,836,140 758,286 23,548 3,620,095 528,074 14,865 542,939 $ 1,885,332 863,818 532 2,749,682 734,650 7,990 3,494,253 507,205 21,267 528,472 $ 1,808,524 730,019 559 2,539,102 716,132 37,833 3,294,644 509,297 20,027 529,324 4.13 0.08 4.21 4.07 0.09 4.16 0.54 0.53 125,095 126,757 4.04 0.11 4.15 3.98 0.11 4.09 0.51 0.49 130,722 132,640 3.68 0.16 3.84 3.63 0.16 3.79 0.45 0.44 137,647 139,564 3.51 0.14 3.65 3.47 0.13 3.60 0.40 0.38 144,921 146,848 2015 $14,405,073 19,853,213 490,129 743,733 4,055,552 32.71 2014 $15,058,996 20,272,259 238,398 992,130 4,697,466 36.19 2013 $13,456,944 18,217,757 229,070 990,865 3,776,342 27.66 2012 $14,155,919 18,810,132 319,043 989,686 4,361,786 30.56 2.62 8.28 1.81 7.07 Life ......................................................................... Health .................................................................... Total .................................................................... Basic shares outstanding ........................................... Diluted shares outstanding(1) ...................................... 2,262,736 998,634 3,261,370 118,031 120,958 2,150,498 973,042 3,123,540 122,370 123,996 2,044,545 947,323 2,991,868 127,930 129,812 1,955,401 887,444 2,842,845 134,252 136,537 1,895,017 902,753 2,797,770 141,353 142,707 (1) Certain current year amounts were prospectively adjusted to give effect to the adoption of ASU 2016-09 related to excess tax benefits from stock compensation as described in Note 1—Significant Accounting Policies under "Accounting Pronouncements Adopted in the Current Year." (2) There is accounting guidance (ASC 320-10-35-1, Investments- Debt and Equity Securities) requiring available-for-sale fixed maturities to be recorded 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, 2016. Additionally, this Note provides a summary of the profitability measures that demonstrate 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 Analysis of Profitability by Segment (Dollar amounts in thousands) 2016 2015 2014 2016 Change Life insurance underwriting margin ............................................ $ 573,762 Health insurance underwriting margin ....................................... 210,056 $ 569,402 $ 556,489 $ 4,360 204,377 199,319 Annuity underwriting margin ...................................................... 9,394 4,568 4,312 Excess investment income ........................................................ 224,031 219,504 224,364 Other insurance: 2015 Change $ 12,913 5,058 256 % 2 3 6 (4,860) (2) % 1 3 106 2 5,679 4,826 4,527 (11,359) 2,695 4,728 (1,418) 3,310 1 6 (7) 1 1 1 (4,058) (27) (748) — 1,519 4,410 — Other income ....................................................................... 1,534 2,379 2,354 (845) (36) 25 Administrative expense ........................................................ (196,598) (186,191) (174,832) (10,407) Corporate and adjustments ....................................................... (34,913) (37,667) (40,362) 2,754 Pre-tax total .................................................................... Applicable taxes(1) ..................................................................... Net operating income from continuing operations(2) ........ 787,266 776,372 771,644 10,894 (237,906) (253,459) (252,041) 15,553 549,360 522,913 519,603 26,447 Discontinued operations (after tax)(3) ......................................... 10,189 10,807 14,865 (618) Total ................................................................................ 559,549 533,720 534,468 25,829 6 (7) 1 (6) 5 (6) 5 Realized gains (losses)—investments (after tax) ....................... (6,944) (5,714) 15,306 (1,230) (21,020) Legal settlement expenses (after tax) ........................................ — — (1,519) — Administrative settlements (after tax) ........................................ (2,467) (906) (5,316) (1,561) Non-operating fees (after tax) .................................................... (359) Net income ...................................................................... $ 549,779 — — (359) $ 527,100 $ 542,939 $ 22,679 4 $ (15,839) (3) (1) Certain current year amounts were prospectively adjusted to give effect to the adoption of ASU 2016-09 related to excess tax benefits from stock compensation as described in Note 1—Significant Accounting Policies under "Accounting Pronouncements Adopted in the Current Year." (2) Net operating income from continuing operations is the consolidated total of segment profits after tax and as such is considered a Non-GAAP measure. See Note 14—Business Segments for reconciliation to the most directly comparable GAAP measure and for discussion of the usefulness and purpose of this measure. (3) 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: As shown in the above chart, net income was $550 million in 2016, compared with $527 million in 2015. Net income decreased in 2015 from $543 million in 2014. On a diluted per share basis, 2016 net income rose 8% to $4.49 after a 2% increase in 2015. Net income per diluted share in 2015 rose to $4.16 from $4.09 in 2014. The per share results have exceeded the growth in dollar amounts due to our share repurchase program. Each year’s per share net income was affected by realized investment gains (losses), which were $(0.06), $(0.05), and $0.12, in 2016, 2015 and 2014, respectively. More information concerning realized investment gains and losses can be found under the caption Realized Gains and Losses in this report. Net operating income from continuing operations rose each year over the prior year from $520 million in 2014 to $523 million in 2015 to $549 million in 2016. 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, net income was affected by certain significant and unusual non-operating items in each of the years 2014 through 2016. 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. 17 Effective July 1, 2016, Torchmark sold its Medicare Part D Prescription Drug Plan business to an unaffiliated third party. Torchmark decided to exit its Medicare Part D business due to declining margins, increased risks, higher drug costs, and increased administrative and compliance costs. This sale allows the Company to better focus on its core protection life and health insurance businesses and provides additional capital to invest. The financial results of this business are excluded from Torchmark's continuing operations including the Notes to the Consolidated Financial Statements, other than Note 2—Statutory Accounting and Note 6—Discontinued Operations. The life insurance segment is our strongest segment and is the largest contributor to earnings in each year presented. This segment contributed $4 million in 2016 and $13 million in 2015 to the growth in our underwriting margin. Also contributing to growth in income in both years was our health insurance segment, which provided $6 million of additional margin in 2016 and $5 million in 2015. Excess investment income, the measure of profitability of our investment segment, increased to $224 million or 2% from the prior year amount of $220 million. In 2015, excess investment income decreased 2%. Investment yields continue to be pressured by reinvesting proceeds from dispositions at lower rates relative to the fixed maturity assets being disposed of 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. Total revenues rose 4% in 2016 to $3.9 billion, or $169 million over the prior year total of $3.8 billion. Life premium rose 6% or $116 million in 2016 to $2.2 billion. Life premium increased $107 million in 2015 to $2.1 billion. Net investment income rose $16 million or 2% in 2015, and rose 4% or $33 million in 2016. Health premium increased 2% to $948 million in 2016 and contributed $22 million to 2016 revenue growth, after having gained 6% to $926 million in 2015. Health premium contributed $56 million to 2015 revenue growth. Life insurance premium and underwriting margins have grown steadily in each of the last three years ended December 31, 2016. 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 declined in 2016 to 26%, after decreasing from 28% to 27% from 2014 to 2015. These declines were due primarily to higher than expected Globe Life Direct Response policy obligations. Net life sales were flat in 2016 at $412 million after increasing 9% in 2015. The life insurance segment is discussed further in this report under the caption Life Insurance. Health insurance premium income increased 2% to $948 million in 2016. Health net sales fell 7% to $145 million during 2016, as a result of a 20% decrease in Medicare Supplement sales. The decrease in 2016 Medicare Supplement net sales was expected due to group sales returning to a more normal level after unusually high sales in 2014. Group sales vary significantly from period to period due to the impact of large groups that are sold from time to time. First- year collected health premium fell 11% to $140 million from the prior year total of $157 million as a result of a high level of group sales in the third and fourth quarters of 2014 that positively affected the 2015 first-year collected premium. Health margins were flat at 22%, with underwriting income increasing to $210 million for 2016 due to the growth in premium income. Underwriting income was $204 million for the same period in 2015 compared with $199 million in 2014. We do not currently market annuities. See the caption Annuities for discussion of the Annuity segment. 18 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 2016, net investment income rose 4%, compared with 2% in 2015. At the same time, our investment portfolio grew 6% in 2016 and 3%, on an amortized cost basis, in 2015. In recent years, net investment income has not grown as fast as the portfolio due primarily to new investments being made at yield rates lower than the yield rates earned on securities that matured or were otherwise disposed. The growth rate of net investment income is sometimes impacted by 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. In addition, Torchmark’s share repurchase program (described later under this caption) has diverted cash that could have otherwise been used to acquire investments and increase net investment income. Net investment income was negatively impacted during 2014 through 2016 by our Medicare Part D business. Under the program, we were required to cover certain 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 each year, resulting in reduced investment income. The interest required on net policy liabilities is deducted from net investment income, and generally grows in conjunction with the net policy liabilities that are supported by the invested assets. The lower new-money yields resulting from the low interest rate environment noted above have compressed excess investment income as required interest has continued to grow at approximately the same rate that net policy liabilities have grown. 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 2016 increased 9% to $83 million from $77 million in 2015. The additional interest expense resulted primarily from the issuance of our new 6.125% Junior Subordinated Debt security seventy days before the maturity and repayment of our 6.375% Senior Notes. 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 are fixed maturities, of which 95% were investment grade at December 31, 2016. The average quality rating of the portfolio was BBB+. The portfolio contains no securities backed by subprime 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 5.6% in 2016 when compared with the prior year period, and increased to 6.3% as a percentage of premium from 6.2% in 2015 and 2014. The increase in administrative expenses is primarily due to investments in information technology that will enhance our customer experience, improve our data analytic capabilities, improve our ability to adapt to future changes and bolster our information security programs. Stock compensation expense declined $2 million in 2016 to $26.3 million compared with a decrease of $4 million in 2015 to $28.7 million. The decline in stock compensation expense in 2016 and 2015 resulted primarily from lower expense associated with performance shares as well as lower option values on 2016 and 2015 option awards. 19 Share Purchases 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 excess cash flow at the Parent Company, general market conditions, and other alternative uses. The majority of these purchases are made from excess cash flow. Excess cash flow at the Parent Company is primarily comprised of dividends received from the insurance subsidiaries less interest expense paid on its debt, dividends paid to Torchmark shareholders, and other limited operating activities. 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 at the Parent Company ............ Shares Amount Shares Amount Shares Amount 5,208 $ 311,332 6,292 $ 358,552 7,155 $ 375,042 Option proceeds ................................................... 1,487 93,452 1,049 59,974 1,394 74,266 Total ................................................................. 6,695 $ 404,784 7,341 $ 418,526 8,549 $ 449,308 2016 2015 2014 Throughout the remainder of this discussion, share purchases refer only to those made from excess cash flow at the Parent Company and borrowings. A discussion of each of Torchmark’s segments follows. The following discussions are presented in the manner we view our operations, as described in Note 14—Business Segments in the Notes to the Consolidated Financial Statements. 20 Life Insurance Life insurance is our largest insurance segment, with 2016 life premium representing 70% of total premium. Life underwriting income before other income and administrative expense represented 72% of the total in 2016. Additionally, investments supporting the reserves for life products produce the majority of excess investment income attributable to the investment segment. 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 better indicator of the rate of premium growth as compared 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. Life insurance premium rose 6% to $2.2 billion in 2016 after having increased 5% in 2015 to $2.1 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) 2016 2015 2014 Amount % of Total Amount % of Total Amount % of Total American Income Exclusive Agency ............. $ 913,355 Globe Life Direct Response .......................... 782,765 Liberty National Exclusive Agency ................ Other Agencies ............................................. 270,476 222,737 42 $ 830,903 40 $ 766,458 36 12 10 746,693 271,113 224,356 36 13 11 702,023 272,265 225,554 39 36 14 11 $ 2,189,333 100 $ 2,073,065 100 $ 1,966,300 100 Annualized life premium in force was $2.26 billion at December 31, 2016, an increase of 5.2% over $2.15 billion a year earlier. Annualized life premium in force was $2.04 billion at December 31, 2014. 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) 2016 2015 2014 Amount % of Total Amount % of Total Amount % of Total American Income Exclusive Agency ............ $ 209,856 150,267 Globe Life Direct Response ......................... Liberty National Exclusive Agency ............... Other Agencies ............................................ 40,159 11,673 $ 411,955 51 $ 198,046 164,348 36 10 3 35,782 13,705 48 $ 172,271 158,089 40 9 3 34,402 13,492 45 42 9 4 100 $ 411,881 100 $ 378,254 100 21 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) 2016 2015 2014 Amount % of Total Amount % of Total Amount % of Total American Income Exclusive Agency............ $ 173,573 Globe Life Direct Response ......................... 98,496 Liberty National Exclusive Agency............... 29,103 Other Agencies ............................................ 11,458 $ 312,630 56 $ 156,206 106,417 31 27,554 9 12,036 4 52 $ 134,202 100,287 35 25,777 9 10,473 4 50 37 9 4 100 $ 302,213 100 $ 270,739 100 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. This agency is Torchmark’s largest contributor to life premium of any distribution channel at 42% of Torchmark’s 2016 total. This group produced premium income of $913 million, an increase of 10% over the prior year total of $831 million, after having risen 8% in 2015. First-year collected premium was $174 million compared to $156 million in 2015, an increase of 11%. First-year collected premium rose 16% in 2015. Net sales increased 6% to $210 million in 2016 over the 2015 total of $198 million. Net sales increased 15% in 2015 over the 2014 total of $172 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 2% to 6,671 for the year ended December 31, 2016 compared with 6,529 for the same period in 2015. The average producing agent count is based on the actual count at the end of each week during the period. The American Income Exclusive Agency has been focusing on growing and strengthening middle management to support sustainable growth of the agency force. To accomplish this, the agency has placed an increased emphasis on agent training programs and financial incentives that appropriately reward agents at all levels for helping develop and train its agents, including more home- office and webinar training programs. These programs are designed to provide each agent, from new recruits to top level managers, coaching and instruction specifically designed for their level of experience and responsibility. We are also making considerable investments in information technology in support of the agency, including the launching of a lead mapping and management tool to the agency force in 2017. We anticipate this tool will enhance overall productivity of agents and improve agent retention. The Globe Life Direct Response unit offers adult and juvenile life insurance through a variety of direct-to-consumer marketing approaches, which include direct mailings, insert media, and electronic media. These different approaches support and complement one another in the unit’s efforts to reach the consumer. The Globe Life Direct Response channel’s growth has been fueled by constant innovation. In recent years, electronic media production has grown rapidly as management has aggressively increased marketing activities related to internet and mobile technology, and has focused on driving traffic to the inbound call center. We continually introduce new initiatives in this unit in an attempt to increase response rates. While the juvenile market is an important source of sales, it also is a vehicle to reach the parents and grandparents of juvenile policyholders, who are more likely to respond favorably to a Globe Life Direct Response solicitation for life coverage on themselves than is the general adult population. Also, both juvenile policyholders and their parents are low acquisition-cost targets for sales of additional coverage over time. Globe Life Direct Response’s life premium income rose 5% to $783 million, representing 36% of Torchmark’s total life premium during 2016. Life premium in this channel increased 6% in 2015 to $747 million over the 2014 total of $702 million. Net sales of $150 million for this group decreased 9% from $164 million in 2015, after a 4% increase in 2015. The sales decline was expected as we have shifted our marketing efforts away from certain segments that no longer meet our profit objectives. First-year collected premium decreased 7% to $98 million in 2016 after having risen 6% in 2015. 22 The Liberty National Exclusive Agency markets individual and group life insurance to middle-income customers. Life premium income for this agency was $270 million in 2016, a slight decline from $271 million in 2015. Life premium income in 2014 totaled $272 million. Net sales increased 12% during 2016 to $40 million over the 2015 total of $36 million. Net sales in 2015 increased 4%. The increase in net sales during 2015 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 6% to $29 million during 2016 and increased 7% in 2015 to $28 million. The Liberty average producing agent count increased 12% to 1,715 for the year ended December 31, 2016 compared with 1,535 for the same period in 2015. We continue to execute our long term plan to grow this agency through expansion from small-town markets in the southeast to more densely populated areas with larger pools of potential agent recruits and customers. Expansion of this agency’s presence into more heavily populated, less-penetrated areas will help create long term agency growth. Additionally, the agency's 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 $223 million of life premium income, or 10% of Torchmark’s total in 2016, but contributed only 3% of net sales for the year. LIFE INSURANCE Summary of Results (Dollar amounts in thousands) 2016 % of 2015 % of 2014 % of Premium Amount Premium Amount Premium Amount Premium and policy charges.............. $2,189,333 100 $2,073,065 100 $1,966,300 100 Policy obligations ............................... Required interest on reserves ............ Net policy obligations ....................... Commissions, premium taxes, and non-deferred acquisition expenses .... Amortization of acquisition costs........ 1,475,477 (577,827) 897,650 164,476 553,445 Total expense................................... 1,615,571 Insurance underwriting margin before other income and administrative expenses ........................................... $ 573,762 67 (26) 41 1,374,608 (552,298) 822,310 8 25 74 154,811 526,542 1,503,663 67 (27) 40 1,293,384 (530,192) 763,192 8 25 73 143,174 503,445 1,409,811 26 $ 569,402 27 $ 556,489 66 (27) 39 7 26 72 28 Life insurance underwriting income before insurance administrative expense was $574 million in 2016 compared with $569 million in 2015 and $556 million in 2014. As a percentage of premium, underwriting margins declined to 26% in 2016 from 27% in 2015. The decrease in underwriting margin as a percentage of premium in 2016 and 2015 was due to higher Globe Life Direct Response net policy obligations. The higher than anticipated net policy obligations in the Globe Life Direct Response Unit primarily relate to policies issued in calendar years 2011 through 2015. The increase is primarily attributed to a spike in claims in certain blocks of policies as well as policies where additional prescription drug information was used in the underwriting process with an expectation of improved mortality. To date, improvements in actual mortality have been less than expected, causing higher than expected net policy obligations. 23 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 30% of our total premium in 2016, 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) 2016 2015 2014 Amount % of Total Amount % of Total Amount % of Total United American Independent Agency Limited-benefit plans .......................................... $ 12,704 Medicare Supplement ........................................ 342,311 355,015 38 Family Heritage Exclusive Agency Limited-benefit plans .......................................... 236,075 Medicare Supplement ........................................ — $ 15,260 330,070 345,330 221,091 — 37 $ 19,028 286,340 305,368 204,667 — 35 236,075 25 221,091 24 204,667 24 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 Limited-benefit plans .......................................... Medicare Supplement ........................................ 142,026 59,772 201,798 84,064 318 84,382 552 69,841 70,393 142,130 67,020 143,722 78,295 21 209,150 23 222,017 25 79,984 355 78,244 478 80,339 9 78,722 9 9 7 869 68,741 69,610 805 57,861 58,666 446,466 422,974 $869,440 7 51 49 100 7 50 50 100 475,421 472,242 $947,663 50 50 100 459,334 466,186 $925,520 24 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) 2016 2015 2014 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 558 55,451 56,009 51,349 — 51,349 39 $ 734 70,891 71,625 50,266 — 46 $ 873 82,971 83,844 47,102 — 46 35 50,266 32 47,102 26 Limited-benefit plans .......................................... 19,513 Medicare Supplement ........................................ 9 18,021 41 17,084 299 19,522 13 18,062 12 17,383 10 American Income Exclusive Agency Limited-benefit plans .......................................... Medicare Supplement ........................................ Direct Response Limited-benefit plans .......................................... Medicare Supplement ........................................ Total Net Sales Limited-benefit plans .......................................... Medicare Supplement ........................................ 9,162 — 9,162 5 6 23,099 23,105 13 41 59 100 12,666 — 12,666 — 5,560 5,560 9 4 11,501 — 11,501 — 5,003 5,003 7 3 84,086 61,020 $145,106 58 42 100 80,522 75,935 $156,457 51 49 100 74,227 106,369 $180,596 25 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) 2016 2015 2014 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 547 64,848 65,395 40,822 — 40,822 $ 660 76,575 77,235 47 $ 710 49,519 50,229 49 42 39,196 — 36,392 — 29 39,196 25 36,392 31 Limited-benefit plans .......................................... 16,103 Medicare Supplement ........................................ 6 14,690 168 13,132 306 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 ........................................ 16,109 11 14,858 9 13,438 11 13,710 — 13,710 — 4,457 4,457 71,182 69,311 12,041 — 10 12,041 8 (2) 13,843 13,841 66,585 90,586 9 42 58 3 51 49 9,500 — 9,500 143 9,196 9,339 59,877 59,021 8 8 50 50 $140,493 100 $157,171 100 $118,898 100 Health premium increased 2% to $948 million in 2016 compared with $926 million in 2015 after an increase of 6% in 2015 over the 2014 total of $869 million. Medicare Supplement premium increased 1% to $472 million in 2016 compared with $466 million in 2015. Medicare Supplement premium totaled $423 million in 2014. Other limited-benefit health premium increased 4% to $475 million over the prior year total of $459 million. Other limited-benefit premium totaled $446 million in 2014. Health net sales declined 7% to $145 million in 2016 from $156 million in 2015. Health net sales in 2014 totaled $181 million. Medicare Supplement net sales decreased 20% to $61 million in 2016, after declining 29% to $76 million in 2015. Limited-benefit net sales increased 4% to $84 million in 2016 compared with an increase of 8% in 2015 to $81 million. Health first-year collected premium fell 11% to $140 million. Health first-year collected premium rose 32% during 2015. First year Medicare Supplement premium was down 23% in 2016 to $69 million from the prior year total of $91 million compared with an increase of $32 million or 53% in 2015 over 2014 total of $59 million. First year limited-benefit premium increased 7% to $71 million in 2016 compared with an increase of 11% in 2015 over the 2014 total of $60 million. 26 The decline in Medicare Supplement net sales and first-year premium was primarily due to group sales returning to a normal level after unusually high sales in late 2014 that positively affected the 2015 first-year collected premium. Group sales vary significantly from period to period due to the impact of large groups that are sold from time to time which in turn impact premium income. First year limited-benefit premium increased 7% to $71 million in 2016 compared with an increase of 11% in 2015 over the 2014 total of $60 million. Health care reform activity is not expected to have a significant impact on our operations, and we are continuing to monitor future developments. 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 $621 thousand, $1.2 million and $1.8 million in 2016, 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 2016, premium income was $355 million, representing 38% of Torchmark’s total health premium. Net sales were $56 million, or 39% of Torchmark’s health sales. This agency is also Torchmark’s largest producer of Medicare Supplement insurance, with Medicare Supplement premium income of $342 million. The UA Independent Agency represents 72% of all Torchmark Medicare Supplement premium and 91% of Medicare Supplement net sales. Medicare Supplement premium in this agency rose 4% in 2016. Total health premium increased 3% in 2016 and 13% in 2015. Medicare Supplement net sales decreased 22% in 2016 from the prior year, primarily due to a decline in group sales. As noted earlier, Group Medicare Supplement sales have historically fluctuated 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 $51 million in net sales in 2016, compared with $50 million in 2015 and $47 million in 2014. Health premium income was $236 million in 2016, representing 25% of Torchmark’s health premium. This compared with $221 million or 24% of health premium in 2015 and $205 million or 24% in 2014. The average producing agent count was 923 for the year ended December 31, 2016, compared with 882 for the same period in 2015, an increase of 5%. The Liberty National Exclusive Agency represented 21% of all Torchmark health premium income at $202 million in 2016. 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 2016, health premium income in the Agency declined 4% from prior year premium of $209 million after declining 6% during 2015. Liberty’s health premium decline has been due primarily to its declining Medicare Supplement block. Liberty's first-year collected premium increased 8% to $16 million in 2016 compared with an increase of 11% to $15 million in 2015, reflecting the steady increase in net sales of limited-benefit plans in the agency. 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 2016 and 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 $6 million of Medicare Supplement net sales in 2016 compared with $5 million in 2015 and $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. 27 As presented in the following table, Torchmark’s health insurance underwriting income before other income and administrative expense increased 3% to $210 million in 2016, after an increase of 3% to $204 million in 2015. As a percentage of health premium, margins were flat at 22% in 2016 and were down slightly to 22% in 2015 from 23% in 2014. HEALTH INSURANCE Summary of Results (Dollar amounts in thousands) Premium ...................................................... $ 947,663 100 $ 925,520 100 $ 869,440 2016 2015 2014 Amount % of Premium Amount % of Premium Amount Policy obligations ......................................... Required interest on reserves...................... Net policy obligations................................. 612,725 (73,382) 539,343 Commissions, premium taxes, and non- deferred acquisition expenses ..................... Amortization of acquisition costs ................. Total expense ............................................ Insurance underwriting income before other income and administrative expense ............ $ 210,056 113,445 737,607 84,819 65 (8) 57 9 12 78 602,610 (69,057) 533,553 81,489 106,101 721,143 65 (7) 58 9 11 78 559,817 (64,401) 495,416 79,475 95,230 670,121 22 $ 204,377 22 $ 199,319 % of Premium 100 64 (7) 57 9 11 77 23 Annuities. Our fixed annuity balances at the end of 2016, 2015, and 2014 were $1.24 billion, $1.32 billion, and $1.36 billion, respectively. Underwriting income was $9.4 million, $4.6 million, and $4.3 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. The significant increase in underwriting income in 2016 was primarily due to a slowdown in amortization as assumptions were adjusted to reflect longer retention of the annuity block than previously estimated as a result of the continuing low interest rate environment. 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. 28 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, 2016. Operating Expenses Selected Information (Dollar amounts in thousands) 2016 2015 2014 Amount % of Premium Amount % of Premium Amount % of Premium Insurance administrative expenses: Salaries ........................................................ $ 91,415 Non-salary employee costs ......................... 29,852 Information technology costs ....................... 23,303 Other administrative expense ...................... 43,727 Legal expense—insurance .......................... 8,301 196,598 Total insurance administrative expenses ... Parent company expense .............................. Stock compensation expense ........................ Litigation settlements ..................................... Non-operating fees ........................................ 8,587 26,326 — 553 Total operating expenses, per Consolidated Statements of Operations ........................................... $232,064 2.9 1.0 0.5 1.5 0.3 6.2 2.9 1.0 0.7 1.4 0.3 6.3 $ 87,262 30,683 17,307 43,694 7,245 186,191 9,003 28,664 — — 2.9 1.0 0.6 1.4 0.3 6.2 $ 81,227 27,471 14,465 41,704 9,965 174,832 8,159 32,203 2,337 — $223,858 $217,531 Insurance administrative expenses: Increase (decrease) over prior year ............. 5.6% Total operating expenses: Increase (decrease) over prior year ............. 3.7% 6.5% 2.9% (0.5)% 2.9 % Insurance administrative expenses were up 5.6% in 2016 when compared with the prior year after increasing 6.5% during 2015. As a percentage of total premium, insurance administrative expenses increased to 6.3% in 2016 from 6.2% in 2015 and 2014. Total operating expenses increased 3.7% in 2016, after increasing 2.9% in 2015. The primary reason for the increase in administrative expenses are higher information technology costs. The decline in stock compensation expense is primarily due to lower expense associated with performance share awards and lower option values on the 2016 and 2015 grants. 29 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 $6.8 billion of excess cash flow at the Parent Company 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 ........................................................................ $ Interest on net insurance policy liabilities: 2016 806,903 2015 773,951 $ 2014 758,286 $ Interest on reserves ....................................................................... (702,340) (674,650) (649,848) Interest on deferred acquisition costs ............................................ 202,813 196,845 192,052 Net required interest ................................................................ (499,527) (477,805) (457,796) Financing costs .................................................................................... Excess investment income ................................................................... $ (83,345) 224,031 Excess investment income per diluted share(1) .................................... $ 1.83 (76,642) 219,504 1.73 $ $ $ $ (76,126) 224,364 1.69 Mean invested assets (at amortized cost) ............................................ $14,461,502 Average net insurance policy liabilities(2) .............................................. 8,945,850 Average debt and preferred securities (at amortized cost)................... 1,379,933 $13,697,129 $13,278,028 8,574,699 1,343,663 8,240,435 1,287,740 (1) Certain current year amounts were prospectively adjusted to give effect to the adoption of ASU 2016-09 related to excess tax benefits from stock compensation as described in Note 1—Significant Accounting Policies under "Accounting Pronouncements Adopted in the Current Year." (2) Net of deferred acquisition costs, excluding the associated unrealized gains and losses thereon. Excess investment income increased $5 million or 2% in 2016 over the prior year. Excess investment income decreased $5 million or 2% in 2015. On a per diluted share basis, excess investment income increased 6% to $1.83 in 2016. Excess investment income increased 2% to $1.73 per share in 2015, after having increased 8% in the prior year. The higher percentage increase in the excess investment income per diluted share amount over the percentage increase in the dollar amount of excess investment income for those same periods is a result of our share repurchase program. 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) ...................... 4.3% 5.6% 2.1% 3.2% 3.2% 3.4% 2016 2015 2014 30 The largest component of excess investment income is net investment income, which rose 4% to $807 million in 2016. It increased 2% to $774 million in 2015 from $758 million in 2014. In 2016, fixed maturity yields averaged 5.78% on a tax-equivalent and effective-yield basis, compared with 5.84% in 2015 and 5.91% in 2014.Growth in net investment income has been slower than the growth in mean invested assets in recent years as a result of the decline in the average yields. The decrease in the overall portfolio yield from 2014 to 2016 was due primarily to reinvesting proceeds from calls and maturities at yield rates lower than the bonds earned before it was called or matured. Net investment income has also been negatively affected in the calendar years 2014 through 2016 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 higher overall drug costs, we have incurred extensive upfront costs that are not reimbursed by CMS until late in the following respective year. We also experience delays from the time certain claims are paid until related drug rebates are received from various pharmaceutical companies. These delays in reimbursements cause a lag in the timing of investable cash flows that result in lower investment income than would have been earned absent the delays. We estimate the delays resulted in a loss of approximately $5 million, $8 million and $9 million of pre-tax net investment income in 2014, 2015 and 2016, respectively. As we have exited this business, the negative impact is expected to be approximately $2 million to $3 million in 2017 and negligible in 2018. 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 approximately 2% of fixed maturities on average are expected to run off each year over the next five years. 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. Should interest rates rise, especially long-term rates, Torchmark's net investment income would benefit due to higher interest rates on new purchases. We could withstand an increase in interest rates of approximately 60 to 65 basis points before the net unrealized gains on our fixed maturity portfolio as of December 31, 2016 would be eliminated (assuming there were no credit related valuation declines). Should interest rates increase further than that, we would not be concerned with potential interest rate driven unrealized losses in our fixed maturity portfolio because we have the intent and, more importantly, the ability to hold our fixed maturities to maturity. 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. 31 Information about interest on net 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 2016 Life and Health ............................................................................. $ Annuity ......................................................................................... Total ............................................................................................. $ Increase in 2016 .......................................................................... 442,021 57,506 499,527 $ 7,658,639 1,287,211 $ 8,945,850 4.55% 4.33% 2015 Life and Health ............................................................................. $ Annuity ......................................................................................... Total ............................................................................................. $ Increase in 2015 .......................................................................... 418,432 59,373 477,805 $ 7,256,732 1,317,967 $ 8,574,699 4.37% 4.06% 2014 Life and Health ............................................................................. $ Annuity ......................................................................................... Total ............................................................................................. $ Increase in 2014 .......................................................................... 396,658 61,138 457,796 $ 6,901,566 1,338,869 $ 8,240,435 4.99% 4.95% 5.77% 4.47 5.58 5.77% 4.50 5.57 5.75% 4.57 5.56 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 term loan ........................................................................... Interest on short-term debt .................................................................. Other ................................................................................................... Financing costs ............................................................................... $ 75,988 $ 993 6,360 4 83,345 $ 71,180 $ — 5,457 5 76,642 $ 71,072 — 5,013 41 76,126 2016 2015 2014 Financing costs increased $7 million or 9% from 2015 to 2016. The additional interest expense on our funded debt resulted from the issuance of our new 6.125% Junior Subordinated Debt security seventy days before the maturity and repayment of our 6.375% Senior Notes. In 2016, interest on short-term debt increased because of the increase in the weighted-average interest rate. Financing costs also increased slightly from 2014 to 2015. 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. 32 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 2014 through 2016, 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, 2015 2014 2016 Cost of acquisitions: (1) Investment-grade corporate securities ............................................. $ 1,505,135 Taxable municipal securities ............................................................ 13,023 Other investment-grade securities ................................................... 14,727 Total fixed maturity acquisitions ............................................. $ 1,532,885 $ 1,026,520 $ 696,264 29,092 15,296 — 8,729 $ 1,070,908 $ 704,993 Effective annual yield (one year compounded) (2)............................... Average life (in years, to next call) ..................................................... Average life (in years to maturity) ....................................................... Average rating .................................................................................... 4.67% 24.6 25.4 BBB+ 4.79% 27.2 27.9 BBB+ 4.77% 22.9 23.4 BBB+ (1) Includes unsettled trades of $3 million for 2016. (2) 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 2014 through 2016, 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 with an additional investment in the partnership of $19 million in 2016. 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. 33 New cash flow available for investment has been primarily provided through our insurance operations and interest 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. 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 $182 million in 2016, $178 million in 2015, and $160 million in 2014. Portfolio Composition. The composition of the investment portfolio at book value on December 31, 2016 was as follows: Invested Assets (Dollar amounts in thousands) 2016 2015 Amount % of Total Amount % of Total Fixed maturities (at amortized cost) .................................... $ 14,188,050 Policy loans ......................................................................... 507,975 Other long-term investments(1) ............................................ Short-term investments ....................................................... 72,040 Total ................................................................................ $ 14,821,420 53,355 96 $ 13,251,871 3 — 1 492,462 37,579 38,438 100 $ 13,820,350 96 4 — — 100 (1) Includes equities available for sale at amortized cost. Approximately 96% of our investments at book value are in a diversified fixed maturity portfolio. Policy loans, which are secured by policy cash values, make up 3% of our investments. We also have insignificant investments in equity securities and other long-term investments. Because fixed maturities represent such a significant portion of our investment portfolio, the remainder of the discussion of portfolio composition will focus on fixed maturities. 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, 2015 2016 5.74% 5.83% 17.6 19.8 10.4 11.3 17.8 20.3 10.2 11.2 (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. 34 Credit Risk Sensitivity. The following tables summarize certain information about the major corporate sectors and security types held in our fixed maturity portfolio at December 31, 2016 and 2015. Fixed Maturities by Sector At December 31, 2016 (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 ............. $ 58,400 $ 1,760 $ (4,003) $ 56,157 $ 2,030,188 $ 217,377 $ (16,783) $ 2,230,782 41,558 74,955 512 — (7,218) (18,589) 34,852 56,366 681,422 623,836 71,828 39,215 (11,692) 741,558 (24,628) 638,423 Total financial............ 174,913 2,272 (29,810) 147,375 3,335,446 328,420 (53,103) 3,610,763 Utilities Electric......................... 21,300 Gas and water ............. Total utilities Industrial - Energy Pipelines ...................... Exploration and production.................... Oil field services .......... Refiner ......................... Driller ........................... Total energy Industrial - Basic materials — 21,300 45,394 28,954 33,880 — 54,642 162,870 Chemicals.................... — Metals and mining ....... 107,102 Forestry products and paper ........................... Total basic materials. — 107,102 486 — 486 87 182 — — 322 591 — 491 — 491 — — — 21,786 1,433,742 219,154 (9,384) 1,643,512 — 470,804 31,345 (3,464) 498,685 21,786 1,904,546 250,499 (12,848) 2,142,197 (3,297) (744) 42,184 28,392 (6,483) 27,397 — — (14,597) 40,367 809,300 531,754 83,753 62,977 54,642 67,313 43,009 7,624 9,721 322 (11,431) 865,182 (11,806) 562,957 (6,483) (7) (14,597) 84,894 72,691 40,367 (25,121) 138,340 1,542,426 127,989 (44,324) 1,626,091 — — (2,195) 105,398 — — 481,127 389,908 112,702 21,538 25,247 10,270 (10,204) 492,461 (2,613) 412,542 (415) 122,557 (2,195) 105,398 983,737 57,055 (13,232) 1,027,560 15 5 4 24 10 3 13 6 4 1 — — 11 3 3 1 7 15 5 4 24 11 3 14 6 4 1 — — 11 3 3 1 7 Industrial - Consumer, non-cyclical..................... — Other industrials ............. 80,311 — 4,066 — — 1,629,706 101,254 (31,938) 1,699,022 11 11 (1,327) 83,050 1,282,000 115,119 (14,412) 1,382,707 26,675 116,696 689,867 1,076 8,982 — (2,918) 23,757 494,527 (6,063) 111,709 1,211,166 59,067 91,526 (4,709) 548,885 (20,256) 1,282,436 (67,434) 631,415 12,383,554 1,130,929 (194,822) 13,319,661 88 88 9 4 9 9 4 8 551 — (194) 357 1,686,021 129,064 (10,539) 1,804,546 60,726 13,062 (10,285) 63,503 60,726 13,062 (10,285) 63,503 — — — — — — — — 53,786 3,963 530 210 (337) 53,979 (1) 4,172 12 — — — 12 — — — Total fixed maturities. $ 751,144 $ 22,044 $ (77,913) $ 695,275 $14,188,050 $1,273,795 $ (215,984) $15,245,861 100 100 (1) Includes GNMA's 35 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) ..................... 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) 665,755 (32,086) 661,616 Total financial............ 175,094 2,862 (41,063) 136,893 3,143,069 347,550 (59,662) 3,430,957 1,003 — 1,003 — — — 10,649 1,571,784 194,932 (20,000) 1,746,716 — 438,101 29,334 (8,319) 459,116 10,649 2,009,885 224,266 (28,319) 2,205,832 — — — — — — — — — — (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 29,638 15,975 4,226 3,937 — (124,357) 735,471 (61,838) 486,562 (11,455) (1,162) (20,289) 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 (21,339) 488,549 4,389 8,386 (90,070) 316,864 (2,952) 109,033 (27,661) 22,230 999,778 29,029 (114,361) 914,446 1,106 1,195 — 14,605 1,158,828 (5,704) 71,948 979,187 — (7,953) 18,818 571,474 (7,339) 117,887 1,051,925 86,401 64,579 44,720 69,297 (26,917) 1,218,312 (36,555) 1,007,211 (26,702) 589,492 (26,376) 1,094,846 1,337 7,503 (121,251) 462,186 11,482,538 919,618 (537,993) 11,864,163 87 86 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 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) ..................... 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 — — — — — — — — 16,078 4,747 550 290 — (1) 16,628 5,036 13 — — — 13 1 — — Total fixed maturities. $ 640,150 $ 23,661 $ (130,944) $ 532,867 $13,251,871 $1,069,733 $ (563,580) $13,758,024 100 100 (1) Includes GNMA's At December 31, 2016, fixed maturities had a fair value of $15.2 billion, compared with $13.8 billion at December 31, 2015. The net unrealized gain position in the fixed maturity portfolio increased from $506 million at December 31, 2015 to $1.1 billion at December 31, 2016, primarily as a result of a decrease in market interest rates. The December 31, 2016 net unrealized gain consisted of gross unrealized gains of $1.3 billion offset by $216 million of gross unrealized losses, compared with the December 31, 2015 net unrealized gain which consisted of a gross unrealized gain of $1.1 billion and a gross unrealized loss of $564 million. 36 Corporate securities, which consist of bonds and redeemable preferred stocks, were the largest component of the fixed maturity portfolio, representing 88% at both amortized cost and fair value. The remainder of the portfolio is invested primarily in securities issued by the U.S. government and U.S. municipalities. The Company holds insignificant amounts in foreign government bonds, collateralized debt obligations, asset-backed securities, and agency mortgage-backed securities. Corporate securities are diversified over a variety of industry sectors and issuers. As shown in the chart above, financial, utility, and energy sectors represented approximately 50% of the portfolio. Corporate securities are diversified over a variety of industry sectors and issuers. At December 31, 2016, the total fixed maturity portfolio consists of 588 issuers, with 208 issuers within the financial, utility, and energy sectors. The net unrealized gain of the fixed maturity portfolio increased $552 million from December 31, 2015. The utility, energy, and basic materials sectors experienced increases of $42 million, $249 million, and $129 million respectively, in net unrealized gains from December 31, 2015 to December 31, 2016, while the financial industry decreased $13 million. The fair value of the entire portfolio increased 11% for the period. Over the past year, oil and many other commodity prices have increased meaningfully to the benefit of our holdings in the energy and basic materials sectors. While a sustained period of low prices might lead to some downgrades in ratings, we do not currently anticipate any losses from defaults or write-downs in the foreseeable future. For more information about our fixed maturity portfolio by component at December 31, 2016 and 2015, 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, 2016 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. The composite quality rating is created using a methodology developed by Torchmark Corporation using ratings from the various rating agencies noted above. The composite quality rating is not a Standard & Poor's credit rating. Standard & Poor's does not sponsor, endorse or promote the composite quality rating and shall not be liable for any use of the composite quality rating. Included in the chart below are private placement fixed maturity holdings of $565 million at amortized cost ($574 million at fair value) for which the ratings were assigned by the third party managers. Fixed Maturities by Rating At December 31, 2016 (Dollar amounts in thousands) Amortized Cost % Fair Value % Investment grade: AAA ...................................................................................... $ AA ......................................................................................... A ........................................................................................... BBB+ .................................................................................... BBB ...................................................................................... BBB- ..................................................................................... Investment grade ........................................................... 674,277 1,357,026 3,729,598 3,359,101 2,825,950 1,490,954 13,436,906 5 $ 10 26 24 20 10 95 690,104 1,493,478 4,232,327 3,617,922 2,961,864 1,554,891 14,550,586 Below investment grade: BB ........................................................................................ B ........................................................................................... Below B ................................................................................ Below investment grade ................................................. 365,495 253,982 131,667 751,144 $ 14,188,050 2 2 1 5 347,919 210,905 136,451 695,275 100 $ 15,245,861 4 10 28 24 19 10 95 2 2 1 5 100 Of the $14.2 billion of fixed maturities at amortized cost as of December 31, 2016, $13.4 billion or 95% were investment grade with an average rating of A-. Below-investment-grade bonds were $751 million with an average rating of B+. Below-investment-grade bonds at amortized cost were 19% of our shareholders’ equity, excluding the effect of 37 unrealized gains and losses on fixed maturities as of December 31, 2016. Overall, the total portfolio had a weighted average quality rating of BBB+ based on amortized cost, a decline from A- at the end of 2015. An analysis of changes in our portfolio of below-investment grade fixed maturities at amortized cost is as follows: Below-Investment Grade Fixed Maturities (Dollar amounts in thousands) Year Ended December 31, 2016 2015 Balance at beginning of year ................................................................................. $ Downgrades by rating agencies ...................................................................... Upgrades by rating agencies .......................................................................... Disposals ........................................................................................................ Amortization .................................................................................................... Balance at end of year ........................................................................................... $ 640,150 $ 179,077 (58,626) (13,860) 4,403 560,890 164,968 (38,821) (51,322) 4,435 751,144 $ 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. We have no direct investments in commercial or 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, 2016. Our exposure to Puerto Rican obligations is insignificant. On June 23, 2016, the United Kingdom voted to depart the European Union (EU) under the referendum commonly referred to as "Brexit." Although the formal separation from the EU will take time, the nature and extent of the effects on interest rates and economic performance are uncertain at this time. We do not expect an increase in other-than-temporary impairments on our limited exposure related to this event. 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 rising and increases in interest rates cause the fair value to decline. 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. 38 The following table illustrates the market risk sensitivity of our interest-rate sensitive fixed maturity portfolio at December 31, 2016 and 2015. This table measures the effect of a parallel shift 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, 2016 19,126,303 $ 17,030,458 15,245,861 13,716,023 12,395,635 2015 17,184,975 15,337,923 13,758,025 12,397,872 11,219,241 (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. 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. 39 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, 2016. Analysis of Realized Gains (Losses), Net of Tax (Dollar amounts in thousands, except for per share data) 2016 Year Ended December 31, 2015 2014 Amount Per Share(1) Amount Per Share Amount Per Share Fixed maturities: Sales ........................................... $ (17,209) $ Called or tendered....................... Loss on redemption of debt ............... Other ................................................. 10,290 — (25) (0.14) $ (10,813) $ 0.08 — — 4,652 — 447 (0.09) $ 10,209 $ 0.04 — — 4,851 (168) 414 Total ...................................... $ (6,944) $ (0.06) $ (5,714) $ (0.05) $ 15,306 $ 0.08 0.04 — — 0.12 (1) Certain current year amounts were prospectively adjusted to give effect to the adoption of ASU 2016-09 related to excess tax benefits from stock compensation as described in Note 1—Significant Accounting Policies under "Accounting Pronouncements Adopted in the Current Year." 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 2014 through 2016. 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 2016, the Parent received $438 million of cash dividends from its subsidiaries, compared with $466 million in 2015 and $479 million in 2014. Including transfers from other subsidiaries and after paying debt obligations, shareholder dividends, and other expenses (but before share repurchases), the Parent Company had excess cash flow in 2016 of approximately $311 million, compared with $358 million in 2015 and $377 million in 2014. 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 2017, it is expected that the Parent Company will receive approximately $450 million in dividends and transfers from subsidiaries and that approximately $325 to $335 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. 40 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, which could be extended up to $1 billion. While Torchmark can request the extension, it is not guaranteed. In May 2016, Torchmark amended the facility to extend the maturity date to May 2021. The amendment also allowed for an additional $100 million term loan as discussed under the caption Credit Facility in Note 11—Debt in the Notes to Consolidated Financial Statements. The facility is further designated as a back-up line of credit for a commercial paper program as well as the stand-by letters of credit as discussed below. As of December 31, 2016, we had available $310 million of additional borrowing capacity under this facility, compared with $332 million a year earlier. There have been no difficulties in accessing the commercial paper market during the three years ended December 31, 2016. In summary, Torchmark expects to have readily available funds for 2017 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 continuing operations were $1.2 billion in 2016, compared with $1.1 billion in 2015 and $1.0 billion in 2014. In addition to cash inflows from operations, our companies received proceeds from maturities, calls, and repayments of fixed maturities in the amount of $236 million in 2016, compared with $376 million in 2015 and $273 million in 2014. Our cash and short-term investments were $148 million at year-end 2016 and $116 million at year-end 2015. Additionally, we have a portfolio of marketable fixed securities that are available for sale in the event of an unexpected need. These securities had a fair value of $15.2 billion at December 31, 2016. 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, 2016 and 2015. 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, 2016, 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. 41 Postretirement obligations(3) ................... Future insurance obligations(4) ................... The following table presents information about future payments under our contractual obligations for the selected periods as of December 31, 2016. Contractual Obligations (Amounts in thousands) Actual Liability Total Payments Less than One Year One to Three Years Three to Five Years More than Five Years Fixed and determinable: Debt—principal(1)............ $ 1,397,640 $ 1,416,109 $ 264,725 $ Debt—interest(2) ............. 6,487 Capital leases ................ 1,202,063 74,472 — — — Operating leases ............ Purchase obligations...... — 56,818 35,807 56,818 8,182 34,162 303,897 $ 140,312 86,875 $ 92,658 760,612 894,621 — 10,301 21,314 — 9,523 1,140 — 7,801 202 222,372 281,429 20,853 46,094 52,600 161,882 42,468,011 Total........................... $14,509,154 $ 52,786,301 $ 1,897,208 $ 3,462,796 $ 3,133,168 $ 44,293,129 49,794,075 12,825,837 2,940,878 2,890,372 1,494,814 (1) Debt is itemized in Note 11—Debt in the Notes to Consolidated Financial Statements. (2) Interest on debt is based on our fixed contractual obligations. (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, 2016, these pension obligations were $528 million, but there were also assets of $329 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 $24 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, 2016. 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 $12.8 billion at December 31, 2016, 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. Debt: The carrying value of the funded debt was $1.1 billion at December 31, 2016, compared with $993 million a year earlier. On April 5, 2016, Torchmark completed the issuance and sale of $300 million aggregate principal amount of Torchmark’s 6.125% Junior Subordinated Debentures due 2056. The debentures were sold pursuant to Torchmark’s shelf registration statement on Form S-3, filed September 25, 2015. The net proceeds from the sale of the debentures were $290 million, after giving effect to the underwriting discount and estimated expenses of the offering of the debentures. Torchmark used the net proceeds from the offering of the debentures to repay the $250 million outstanding principal amount plus accrued interest of $8 million on its 6.375% Senior Notes that were due June 15, 2016. The remaining proceeds were used for general corporate purposes. Subsidiary Capital: Our insurance subsidiaries target a capital ratio of approximately 325% of Company action level regulatory capital under Risk-Based Capital (RBC), a formula designed by insurance regulatory authorities to monitor the adequacy of capital. The 325% target is considered sufficient for the subsidiaries because of their strong reliable cash flows, the relatively low risk of their product mix, and because that ratio is in line with rating agency expectations for Torchmark. At December 31, 2016, our insurance subsidiaries had an aggregate RBC ratio of approximately 324%. Should we experience impairments and/or ratings downgrades within our fixed maturity portfolio in the future, the ratio could fall below targeted levels. In such a case, management believes more than sufficient liquidity exists at the Parent Company to make additional contributions as necessary to maintain the targeted ratio. 42 Shareholder's Equity: As noted under the caption Summary of Operations in this report, we have an ongoing share repurchase program. Under this program, we acquired 5 million shares at a cost of $311 million in 2016, 6 million shares at a cost of $359 million in 2015, and 7 million shares for $375 million in 2014. The majority of purchased shares are retired each year. Please refer to the description of our share repurchase program under the caption Summary of Operations in this report. Torchmark has continually increased the quarterly dividend on its common shares over the past three years. In the first quarter of 2014, it was increased to $0.1267 per share from $0.1133 per share. In the first quarter of 2015, it was raised to $0.135 per share. Finally, in the first quarter of 2016, dividends were raised to $0.14 per share. Shareholders’ equity was $4.6 billion at December 31, 2016, compared with $4.1 billion at December 31, 2015. During the twelve months since December 31, 2015, shareholders’ equity was reduced by the $311 million in share purchases under the repurchase program and $93 million to offset the dilution from stock option exercises. However, it was increased by $550 million of net income and $357 million of after-tax unrealized gains in the fixed maturity portfolio. 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 securities, or repayment of short-term debt. We will determine the best use of excess cash after ensuring that targeted 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. 43 The following tables present selected data related to our capital resources. Additionally, the tables present the effect of this accounting guidance on relevant line items, so that investors and other financial statement users may determine its impact on Torchmark’s capital structure. Selected Financial Data (Amounts in thousands except per share and percentage data) At December 31, 2016 At December 31, 2015 At December 31, 2014 Effect of Accounting Rule Requiring Revaluation (1) GAAP GAAP Effect of Accounting Rule Requiring Revaluation (1) Effect of Accounting Rule Requiring Revaluation (1) GAAP Fixed maturities ........................ $15,245,861 Deferred acquisition costs (2) ..... 3,783,158 Total assets ............................... 21,436,087 Short-term debt ......................... 264,475 Long-term debt ......................... Shareholders’ equity(3) .............. 1,133,165 4,566,861 Book value per diluted share(3).. Debt to capitalization (4) ............. Diluted shares outstanding(3)..... Actual shares outstanding ......... 37.76 23.4% 120,958 118,031 $ 1,057,811 $13,758,024 $ 506,153 $14,493,060 $ 1,669,448 (10,281) 3,617,135 (7,869) 3,457,397 (16,551) 1,047,530 19,853,213 498,284 20,272,259 1,652,897 — — 490,129 743,733 — — 238,398 992,130 — — 680,894 4,055,552 323,885 4,697,466 1,074,383 5.63 (3.1)% 32.71 23.3% 123,996 122,370 2.62 (1.5)% 36.19 20.8% 129,812 127,930 8.28 (4.6)% Includes the value of insurance purchased. (1) Amount added to (deducted from) comprehensive income to produce the stated GAAP item. (2) (3) Due to the adoption of ASU 2016-09 as described in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial Statements under "Accounting Pronouncements Adopted in Current Year", certain current year balances related to excess tax benefits from stock compensation were adjusted prospectively. (4) Torchmark’s debt covenants require that the effect of the accounting guidance requiring revaluation be removed to determine this ratio. This ratio is computed by dividing total debt by the sum of debt and shareholders’ equity. FASB guidance provides for an option which, if elected, would permit us to value our interest-bearing policy liabilities and debt at fair value in our Consolidated Balance Sheets. However, unlike the accounting rule which permits us to account for changes in our available-for-sale bond portfolio through other comprehensive income, the guidance requires such changes to be recorded in earnings. Because 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 10.3 times in 2016, compared with 11.0 times in 2015 and 11.3 times in 2014 based on continuing operations. This times-interest- earned ratio is computed by dividing interest expense into the sum of pre-tax income from continuing operations and interest expense. A discussion of our interest expense is included in the discussion of financing costs under the caption Investments in this report. Financial Strength Ratings. The financial strength of our major insurance subsidiaries is rated by Standard & Poor’s and A. M. Best. The following chart presents these ratings for our five largest insurance subsidiaries at December 31, 2016. Liberty ............................................................................................................ Globe ............................................................................................................. United American ............................................................................................. American Income ........................................................................................... Family Heritage .............................................................................................. 44 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. During the fourth quarter of 2016, S&P reviewed our operations and financial outlook. Based on their review, they 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. 45 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 86% of our liabilities for future policy benefits at December 31, 2016 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, 2016. 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, 2016 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, 2016. 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, 2016. 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. 46 Valuation of Fixed Maturities: We hold a substantial investment in high-quality fixed maturities to provide for the funding of our future policy contractual obligations over long periods of time. While these securities are generally expected to be held to maturity, they are classified as available for sale and are sold from time to time, primarily to manage risk. We report this portfolio at fair value. Fair value is the price that we would expect to receive upon sale of the asset in an orderly transaction. The fair value of the fixed maturity portfolio is primarily affected by changes in interest rates in financial markets, having a greater impact on longer-term maturities. Because of the size of our fixed maturity portfolio, small changes in rates can have a significant effect on the portfolio and the reported financial position of the Company. This impact 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, 2016, our gross liability under these plans was $528 million, but was offset by assets of $329 million. 47 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 2016 and projected benefit obligation as of December 31, 2016. Assumption Discount Rate: (1) % Change Impact on Expense Impact on Projected Benefit Obligation (Dollars in Thousands) Increase ....................................................................................... Decrease ..................................................................................... 0.25 $ (0.25) (2,575) $ 2,712 (19,884) 21,084 Expected Return: (2) Increase ....................................................................................... Decrease ..................................................................................... 0.25 (0.25) (842) 842 (1) The discount rate was 4.64% for 2016 expense and 4.27% for the projected benefit obligation at December 31, 2016. (2) The expected return rate assumed was 7.19%. 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. 48 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; (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. 49 Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm .......................................................................... Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 2016 and 2015 ............................................................. Consolidated Statements of Operations for each of the three years in the period ended December 31, 2016 ......................................................................................................................................................... Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2016 ................................................................................................................................. Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2016 ................................................................................................................................. Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2016 ......................................................................................................................................................... Notes to Consolidated Financial Statements ........................................................................................... Page 51 52 53 54 55 56 57 50 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, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, 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, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2017 expressed an unqualified opinion on Torchmark’s internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP Dallas, Texas February 27, 2017 51 TORCHMARK CORPORATION CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands except per share data) December 31, 2016 2015 Assets: Investments: Fixed maturities-available for sale, at fair value (amortized cost: 2016—$14,188,050; 2015—$13,251,871) Policy loans .......................................................................................................................... ............................................................................................................. $ 15,245,861 507,975 Other long-term investments ................................................................................................. Short-term investments ......................................................................................................... 53,852 72,040 $ 13,758,024 492,462 38,438 54,766 Total investments ........................................................................................................... 15,879,728 14,343,690 Cash ....................................................................................................................................... Accrued investment income .................................................................................................... Other receivables .................................................................................................................... 76,163 223,148 384,454 61,383 209,915 344,552 Deferred acquisition costs ....................................................................................................... 3,783,158 3,617,135 Goodwill .................................................................................................................................. Other assets ........................................................................................................................... 441,591 520,313 Assets related to discontinued operations ............................................................................... 127,532 Total assets ................................................................................................................... $ 21,436,087 Liabilities: Future policy benefits .............................................................................................................. $ 12,825,837 Unearned and advance premiums .......................................................................................... 64,017 Policy claims and other benefits payable ................................................................................ Other policyholders' funds ....................................................................................................... 299,565 96,993 441,591 522,104 312,843 $ 19,853,213 $ 12,245,811 67,021 272,898 95,988 Total policy liabilities ...................................................................................................... 13,286,412 12,681,718 Current and deferred income taxes payable ............................................................................ 1,743,990 1,450,888 Other liabilities ........................................................................................................................ Short-term debt ....................................................................................................................... Long-term debt (estimated fair value: 2016—$1,233,019; 2015—$856,291) .......................... Liabilities related to discontinued operations ........................................................................... 413,760 264,475 1,133,165 27,424 380,158 490,129 743,733 51,035 Total liabilities ................................................................................................................ 16,869,226 15,797,661 Commitments and Contingencies (Note 15) Shareholders' equity: Preferred stock, par value $1 per share—Authorized 5,000,000 shares; outstanding: 0 in 2016 and 2015 ........................................................................................................................ Common stock, par value $1 per share—Authorized 320,000,000 shares; outstanding: (2016—127,218,183 issued, less 9,187,075 held in treasury and 2015—130,218,183 issued, less 7,848,231 held in treasury) .................................................. Additional paid-in capital ......................................................................................................... Accumulated other comprehensive income (loss) ................................................................... — — 127,218 490,421 577,574 130,218 482,284 231,947 Retained earnings ................................................................................................................... 3,890,798 3,614,369 Treasury stock ........................................................................................................................ (519,150) (403,266) Total shareholders' equity .............................................................................................. 4,566,861 Total liabilities and shareholders' equity ......................................................................... $ 21,436,087 4,055,552 $ 19,853,213 See accompanying Notes to Consolidated Financial Statements. 52 TORCHMARK CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share data) Year Ended December 31, 2016 2015 2014 Revenue: Life premium ................................................................................................ $ Health premium ........................................................................................... Other premium ............................................................................................. 2,189,333 $ 2,073,065 $ 1,966,300 947,663 38 925,520 135 869,440 400 Total premium .................................................................................. 3,137,034 2,998,720 2,836,140 Net investment income ................................................................................ Realized investment gains (losses) .............................................................. Other income ............................................................................................... 806,903 (10,683) 1,375 773,951 (8,791) 2,185 758,286 23,548 2,121 Total revenue ................................................................................... 3,934,629 3,766,065 3,620,095 Benefits and expenses: Life policyholder benefits .............................................................................. 1,479,272 1,374,608 1,301,562 Health policyholder benefits ......................................................................... Other policyholder benefits .......................................................................... 612,725 36,751 602,610 38,994 559,817 42,005 Total policyholder benefits ................................................................ 2,128,748 2,016,212 1,903,384 Amortization of deferred acquisition costs .................................................... Commissions, premium taxes, and non-deferred acquisition expenses ....... Other operating expense .............................................................................. Interest expense .......................................................................................... 469,063 249,174 232,064 83,345 445,625 237,541 223,858 76,642 415,914 222,463 217,531 76,126 Total benefits and expenses ............................................................. 3,162,394 2,999,878 2,835,418 Income before income taxes .......................................................................... Income taxes(1) Income from continuing operations ................................................................. ............................................................................................... 772,235 (232,645) 539,590 766,187 (249,894) 516,293 784,677 (256,603) 528,074 Discontinued operations: Income from discontinued operations, net of tax .......................................... 10,189 10,807 14,865 Net income ...................................................................................... $ 549,779 $ 527,100 $ 542,939 Basic net income per common share: Continuing operations .................................................................................. $ Discontinued operations .............................................................................. Total basic net income per common share ....................................... $ Diluted net income per common share:(1) Continuing operations .................................................................................. $ Discontinued operations .............................................................................. Total diluted net income per common share ..................................... $ 4.50 0.08 4.58 4.41 0.08 4.49 $ $ $ $ 4.13 0.08 4.21 4.07 0.09 4.16 $ $ $ $ 4.04 0.11 4.15 3.98 0.11 4.09 (1) Certain current year amounts were prospectively adjusted to give effect to the adoption of ASU 2016-09 related to excess tax benefits from stock compensation as described in Note 1—Significant Accounting Policies under "Accounting Pronouncements Adopted in the Current Year." See accompanying Notes to Consolidated Financial Statements. 53 TORCHMARK CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands) Net income ...................................................................................................... $ 549,779 $ 527,100 $ 542,939 Year Ended December 31, 2016 2015 2014 Other comprehensive income (loss): Unrealized investment gains (losses): Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period ............................. 544,886 (1,163,417) 1,312,548 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............. 10,645 (4,185) 312 9,478 (6,346) (3,010) (23,170) (8,621) (1,567) Unrealized gains (losses) on securities .......................................................... 551,658 (1,163,295) 1,279,190 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 ............................................. 2,503 (360) 2,143 (1,635) (1,102) (2,737) 4,473 (601) 3,872 Total unrealized investment gains (losses) ................................................... 553,801 (1,166,032) 1,283,062 Less applicable (taxes) benefits ................................................................. (193,820) 408,092 (448,985) Unrealized gains (losses) on investments, net of tax ...................................... 359,981 (757,940) 834,077 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 ..................................................................... (2,412) 845 (1,567) 2,178 (838) 1,340 10,168 — (31,902) (21,734) 7,607 (14,127) 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) 10,285 — (65,817) (55,532) 19,436 (36,096) Other comprehensive income (loss) ................................................................. 345,627 (765,505) 786,471 Comprehensive income (loss) ................................................................ $ 895,406 $ (238,405) $ 1,329,410 See accompanying Notes to Consolidated Financial Statements. 54 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 — $ 151,218 $ 462,058 $ 210,981 $ 3,495,533 $ (543,448) $ 3,776,342 786,471 542,939 1,329,410 Year Ended December 31, 2014 Balance at January 1, 2014 ............. $ Comprehensive income (loss) ......... Common dividends declared ($.51 per share) ............................... Acquisition of treasury stock ............ Stock-based compensation.............. Exercise of stock options ................. 31,315 18,524 (65,998) (449,308) 362 526 (22,641) 78,934 (573,349) 644,633 (65,998) (449,308) 32,203 74,817 — Retirement of treasury stock ............ (17,000) (54,284) Balance at December 31, 2014..... — 134,218 457,613 997,452 3,376,846 (268,663) 4,697,466 Year Ended December 31, 2015 Comprehensive income (loss) ......... Common dividends declared ($.54 per share) ............................... Acquisition of treasury stock ............ Stock-based compensation.............. Exercise of stock options ................. Retirement of treasury stock ............ (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 Year Ended December 31, 2016 Comprehensive income (loss) ......... Common dividends declared ($.56 per share) ............................... Acquisition of treasury stock ............ Stock-based compensation.............. Exercise of stock options(1) .............. Retirement of treasury stock ............ 345,627 549,779 (66,968) (404,784) (2,224) 8,891 (53,845) 115,174 (150,313) 164,835 895,406 (66,968) (404,784) 26,326 61,329 — 19,659 (3,000) (11,522) Balance at December 31, 2016..... $ — $ 127,218 $ 490,421 $ 577,574 $ 3,890,798 $ (519,150) $ 4,566,861 (1) Certain current year amounts were prospectively adjusted to give effect to the adoption of ASU 2016-09 related to excess tax benefits from stock compensation as described in Note 1—Significant Accounting Policies under "Accounting Pronouncements Adopted in the Current Year." See accompanying Notes to Consolidated Financial Statements. 55 TORCHMARK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Net income .............................................................................................................................. $ 549,779 $ 527,100 $ 542,939 Year Ended December 31, 2016 2015 2014 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(1) .................................................................... 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) operating activities ............................................................. Cash provided from (used for) investing activities: Investments sold or matured: Fixed maturities available for sale—sold ............................................................................. Fixed maturities available for sale—matured, called, and repaid ......................................... Other long-term investments ............................................................................................... Total investments sold or matured ....................................................................................... Acquisition of investments: Fixed maturities—available for sale ..................................................................................... Other long-term investments ............................................................................................... Total investments acquired ............................................................................................... Net increase in policy loans ................................................................................................... Net (increase) decrease in short-term investments ................................................................ Additions to properties ........................................................................................................... Sales of properties ................................................................................................................. Investments in low-income housing interests ......................................................................... Cash provided from (used for) investing activities .............................................................. Cash provided from (used for) financing activities: Issuance of common stock ..................................................................................................... Cash dividends paid to shareholders ..................................................................................... Repayment of debt ................................................................................................................. Proceeds from issuance of debt ............................................................................................. Payment for debt issuance costs ........................................................................................... Net borrowing (repayment) of commercial paper ................................................................... Excess tax benefit from stock option exercises(1) ................................................................... 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 ..................................................................................................... (10,189) 645,844 24,668 (635,318) 469,063 152,210 10,683 20,079 1,226,819 171,889 1,398,708 340,434 236,353 1,217 578,004 (1,530,053) (20,444) (1,550,497) (15,513) (17,274) (25,162) 90 (32,084) (1,062,436) 61,329 (66,931) (250,000) 400,000 (9,638) 22,224 — (404,784) (71,991) (319,791) (1,701) 14,780 Cash at beginning of year ......................................................................................................... Cash at end of year .................................................................................................................. $ 61,383 76,163 $ (10,807) 631,202 14,609 (612,181) 445,625 103,558 8,791 13,985 1,121,882 (1,832) 1,120,050 226,792 376,158 3,740 606,690 (1,070,908) (31,707) (1,102,615) (20,353) (38,884) (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 61,383 $ (14,865) 585,632 12,521 (562,245) 415,914 102,720 (23,548) (38,354) 1,020,714 (156,006) 864,708 109,024 273,223 1,495 383,742 (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 66,019 (1) Certain current year amounts were prospectively adjusted to give effect to the adoption of ASU 2016-09 related to excess tax benefits from stock compensation as described in Note 1—Significant Accounting Policies under "Accounting Pronouncements Adopted in the Current Year." See accompanying Notes to Consolidated Financial Statements. 56 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 wholly-owned subsidiaries provides a variety of life and health insurance products and annuities to a broad base of customers. Torchmark is organized into four reportable segments: life insurance, health insurance, annuity, and investment. 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 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. Discontinued Operations: When a component of Torchmark’s business is sold or 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 are segregated and recorded in the Consolidated Balance Sheets as "Assets and Liabilities related to discontinued operations" 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 discontinued component 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 sold one of its operating segments, Medicare Part D during 2016. The financial results of this business are excluded from Torchmark's continuing operations including the Notes to the Consolidated Financial Statements, other than Note 2—Statutory Accounting and Note 6— Discontinued Operations. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 1—Significant Accounting Policies (continued) 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. Policy loans are carried at unpaid principal balances. Other long-term investments include equity securities, real estate, and limited partnerships. 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. Investments in real estate are reported at cost less allowances for depreciation. Depreciation is calculated on the straight-line method. Investments in limited partnerships 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. Fair Value Measurements, Investments in Securities: Torchmark measures the fair value of its fixed maturities 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, 2016, 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, 2016 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. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 1—Significant Accounting Policies (continued) 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 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. Torchmark invests in a portfolio of private placement bonds which are not actively traded. This portfolio is managed by third parties and was $565 million at amortized cost and $574 million at fair value on December 31, 2016, compared with $542 million at amortized cost and $546 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 they cannot be corroborated, the fair values are classified as Level 3. As of December 31, 2016, fair values of $15 million were classified as Level 2, while the remaining balance of $559 million was 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. 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 and Note 9—Postretirement Benefits under the caption Pension Plans. 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, 2016, they were classified as Level 2 in the valuation hierarchy. The fair value for each debt instrument as of December 31, 2016 is disclosed in Note 11—Debt. As described in Note 9—Postretirement Benefits, Torchmark maintains a nonqualified 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. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 1—Significant Accounting Policies (continued) 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 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: • • • • • • • • • 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 Default on a required payment Issuer bankruptcy filings While all available information is taken into account, it is difficult to predict the ultimate 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. 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 1—Significant Accounting Policies (continued) 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. Cash: Cash consists of balances on hand and on deposit in banks and financial institutions. Accrued investment income: Accrued investment income consists of interest income or dividends earned on the investment portfolio, but are yet to be received as of the balance sheet date. 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 associated with the advanced commissions are collected by the Company and the agents' commissions on such premiums are retained. The balance was $353 million and $334 million at December 31, 2016 and 2015, 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. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 1—Significant Accounting Policies (continued) 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 $9 million, $10 million, and $8 million in 2016, 2015, and 2014, respectively. Capitalized advertising costs included within deferred acquisition costs were $1.25 billion at December 31, 2016 and $1.21 billion at December 31, 2015. Goodwill: The excess cost of a business acquired over the fair value of net assets acquired is reported as goodwill. Goodwill is subject to impairment testing in accordance with GAAP on an annual basis, or whenever potential impairment triggers occur. The Company may perform a qualitative analysis under certain circumstances, or perform a two-step quantitative analysis. In the qualitative analysis, the Company determines if it is more likely than not that the fair value of a reporting unit is less than its carrying amount by assessing current events and circumstances. If there are factors present indicating potential impairment, the company should proceed to the two-step quantitative analysis as described as follows. In the two-step quantitative analysis, the Company utilizes two approaches, income and market, to determine the fair value of each reporting unit. In the income approach, 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 as management believes this to be appropriate for the risk associated with the cash flow expectations. In the market approach, the Company utilizes the share price and a control premium based on businesses with similar assets to determine a fair value. In both cases, the fair value of each reporting unit is then measured against that reporting unit’s corresponding carrying value. In the event the fair value is less than the carrying value, further testing is required under the accounting guidance to determine the amount of impairment, if any. If there is an impairment in the goodwill of any reporting unit, it is written down and charged to earnings in the period of the test. Torchmark tested its goodwill annually as of June 30th in each of the years 2014 through 2016. 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 $280 million and $306 million at December 31, 2016 and 2015, respectively. At December 31, 2016, $280 million associated with the federal interests was included in "Other assets" on the Consolidated Balance Sheets. At December 31, 2015, $302 million associated with the federal interests was included in "Other assets" with the remaining $4 million state-related interests included in "Other long-term investments". As of December 31, 2016, Torchmark was obligated under future commitments of $57 million, which is included in the above carrying value. For guaranteed investments acquired prior to January 1, 2015, the Company utilizes the effective- yield method of amortization while the proportional method of amortization is utilized for all non-guaranteed as well as guaranteed investments acquired on or after January 1, 2015. All amortization expense is recorded in “Income tax expense” on the Consolidated Statements of Operations. 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 $196 million at December 31, 2016 and $175 million at December 31, 2015. 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 1—Significant Accounting Policies (continued) Accumulated depreciation was $99 million at year end 2016 and $92 million at the end of 2015. Depreciation expense was $9.8 million in 2016, $8.0 million in 2015, and $7.4 million in 2014. Future Policy Benefits: The liability for future policy benefits for annuity and universal life-type products is represented by policy account value. The liability for future policy benefits for all other life and health products, approximately 86% 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 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. 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. 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. 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. 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 1—Significant Accounting Policies (continued) 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. 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 $18 million, $19 million, and $21 million for the years ended December 31, 2016, 2015, and 2014, respectively. Other premium consists of annuity policy charges in each year. For most insurance products, 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 revenue recognition period. For limited-payment life insurance products, the profits are recognized over the contract 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 2014 through 2016 is as follows: Volatility factor ................................................................................................ Dividend yield ................................................................................................. Expected term (in years) ................................................................................ Risk-free rate ................................................................................................. 19.2% 1.1% 5.78 1.3% 23.6% 0.9% 5.66 1.6% 30.9% 0.9% 5.65 1.9% 2016 2015 2014 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. 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 1—Significant Accounting Policies (continued) 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. Due to the prospective adoption of ASU 2016-09, as further discussed below, an adjustment was made to the weighted average diluted shares outstanding in 2016 to exclude excess tax benefits from the assumed proceeds in the diluted shares calculation. For more information on earnings per share, see Note 12—Shareholders’ Equity. Accounting Pronouncements Adopted in the Current Year: Going Concern: In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40). This accounting standard requires management to perform interim and annual assessments of the entity's ability to continue its business operations within one year of the date of issuance of its financial statements. The Company must then provide certain disclosure if there is substantial doubt about its ability to continue as a going concern. As of January 1, 2016, the Company adopted this standard with no impact to the financial statements. 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 provide additional insight into an insurance entity’s ability to underwrite claims. Torchmark's disclosures under ASU 2015-09 are effective for the 2016 annual consolidated financial statements. The guidance consists only of new disclosures and did not impact the accounting for short-duration contracts. See Note 7—Liability for Unpaid Claims. Excess Tax Benefits: In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation— Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting to simplify certain aspects of accounting for share-based payment award transactions including: (a) income tax consequences; (b) classification in the statement of cash flows; and (c) accounting for forfeitures. Torchmark elected to early adopt this standard as of January 1, 2016, as permitted. This new accounting standard primarily causes excess tax benefits to be recognized through earnings affecting Torchmark's computations of net income, diluted shares outstanding, and earnings per share. While the intent of the adoption of this guidance is simplification, inherent changes in future share prices and volume of stock option exercises are expected to result in increased volatility in net income and earnings per share in future periods. As provided by the new standard, the adoption is prospective and thus will impact only 2016 and future periods. Below is a listing of the effects of the prospective adoption of this guidance due to the change in accounting of excess tax benefits: • Consolidated statement of operations: For the year ended 2016, the Company recorded $20 million in excess tax benefits as a component of income taxes, which resulted in an increase in net income as compared with 2015 and 2014 when the excess tax benefits of $18 million and $19 million, respectively, were recorded as a component of additional paid-in capital on the balance sheet. • Weighted average diluted shares: The weighted average diluted shares outstanding were adjusted to exclude excess tax benefits from the assumed proceeds in the diluted shares calculation. This change resulted in diluted weighted average shares outstanding of 122.4 million for 2016, as compared with 121.5 million previous guidance. • Earnings per share: The adoption resulted in a $0.13 increase in earnings per share for the year ended December 31, 2016. 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 1—Significant Accounting Policies (continued) • Consolidated statement of cash flows: The excess tax benefits related to share-based payments of $20 million were presented as a component of operating activities in the same manner as other cash flows related to income taxes. In 2015 and 2014, the excess tax benefits of $18 million and $19 million, respectively, were presented within financing activities. Accounting Pronouncements Not Yet Adopted: Leases: In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842), which requires all lessees to report a right-of-use asset and a lease liability for most leases. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. The standard will become effective for the Company beginning January 1, 2019 and will require recognizing and measuring leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted. The Company does not expect the adoption to have a significant impact on the financial statements. Refer to Note 15—Commitments and Contingencies for consideration of five year operating lease commitments. Investment Impairment: In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments as well as to change the loss impairment methodology for available-for-sale debt securities. This standard will become effective on January 1, 2020. The applicable section of the standard related to debt securities requires a prospective transition. The Company does not expect the adoption to have a significant impact on the financial statements. Cash Flows: In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This guidance was issued to provide uniformity in the classification of cash receipts and payments recorded in the statement of cash flows, including debt prepayment or extinguishment costs, settlements of zero-coupon bonds, and proceeds from the settlement of insurance claims. This standard will become effective on January 1, 2018. The Company is currently evaluating the standard to determine its impact. Income Taxes: In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes: Intra- Entity Transfer of Assets Other Than Inventory. This guidance was issued to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory by allowing the immediate recognition of the current and deferred income tax effects. Current guidance prohibits the recognition of current and deferred income taxes for an intra-entity transfer until the asset has been sold to an outside party. This new guidance should be applied on a modified retrospective approach and will become effective on January 1, 2018. The Company does not expect the adoption to have a significant impact on the financial statements. Goodwill: In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment. This guidance was issued to simplify the subsequent measurement of goodwill through the elimination of Step 2 from the goodwill impairment test. It will become effective on January 1, 2020 and should be applied on a prospective basis. The Company does not expect the adoption to have a significant impact on the financial statements. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) 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, 2016 429,563 $ 2015 2014 2016 2015 393,466 $ 446,439 $ 1,335,070 $ 1,253,007 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 $477 million at December 31, 2016. 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. While all states have adopted the National Association of Insurance Commissioners’ (NAIC) statutory accounting practices (NAIC SAP) as the basis for statutory accounting, certain states have retained prescribed practices of their respective insurance code or administrative code which can differ from NAIC SAP. For Torchmark’s life insurance companies, there are no significant differences between NAIC SAP and the accounting practices prescribed by the states of domicile. 67 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 2014 through 2016. Components of Accumulated Other Comprehensive Income For the 12 months ended December 31, 2014: Available for Sale Assets Deferred Acquisition Costs Foreign Exchange Pension Adjustments Total Balance at January 1, 2014 ................................ $ 256,196 $ Other comprehensive income (loss) before reclassifications, net of tax ................................. 855,132 (6,728) $ 24,866 $ (63,353) $ 210,981 (4,030) (7,480) (42,781) 800,841 Reclassifications, net of tax ................................ Other comprehensive income (loss) ................... (21,055) 834,077 — — 6,685 (14,370) (4,030) (7,480) (36,096) 786,471 Balance at December 31, 2014 .......................... 1,090,273 (10,758) 17,386 (99,449) 997,452 For the 12 months ended December 31, 2015: Other comprehensive income (loss) before reclassifications, net of tax ................................. (759,976) 5,643 (13,759) (8,930) (777,022) Reclassifications, net of tax ................................ Other comprehensive income (loss) ................... Balance at December 31, 2015 .......................... 2,036 (757,940) 332,333 — 5,643 (5,115) — 9,481 11,517 (13,759) 3,627 551 (98,898) (765,505) 231,947 For the 12 months ended December 31, 2016: Other comprehensive income (loss) before reclassifications, net of tax ................................. Reclassifications, net of tax ................................ 356,016 3,965 (1,567) 1,340 (20,736) 335,053 — — 6,609 10,574 Other comprehensive income (loss) ................... Balance at December 31, 2016 .......................... $ 692,314 $ 359,981 (1,567) 1,340 (14,127) 345,627 (6,682) $ 4,967 $ (113,025) $ 577,574 68 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 2014 through 2016. Reclassification Adjustments Component Line Item Unrealized gains (losses) on available for sale assets: Year Ended December 31, 2016 2015 2014 Affected line items in the Statement of Operations Realized (gains) losses ................................ $ 10,285 $ 9,478 $ (23,771) Realized investment gains (losses) Amortization of (discount) premium .............. Total before tax .................................................... Tax ............................................................... Total after tax ....................................................... Pension adjustments: Amortization of prior service cost .................. Amortization of actuarial (gain) loss .............. Total before tax .................................................... Tax ............................................................... Total after tax ....................................................... (4,185) 6,100 (2,135) 3,965 477 9,691 10,168 (3,559) 6,609 (6,346) 3,132 (1,096) (8,621) Net investment income (32,392) 11,337 Income taxes 2,036 (21,055) 377 2,113 Other operating expenses 14,209 14,586 (5,105) 9,481 8,172 Other operating expenses 10,285 (3,600) Income taxes 6,685 Total reclassifications (after tax) ........................... $ 10,574 $ 11,517 $ (14,370) 69 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 by cost or amortized cost and estimated fair value at December 31, 2016 and 2015 is as follows: 2016: 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: 381,054 $ 895 $ (9,151) $ 372,798 1,284,605 21,701 126,850 1,438 (1,327) (62) 1,410,128 23,077 Financial .............................................................. Utilities ................................................................. Energy ................................................................. Other corporate sectors ....................................... 2,963,584 1,875,946 1,542,426 5,601,136 Total corporates ................................................. 11,983,092 Collateralized debt obligations .................................. Other asset-backed securities .................................. 60,726 56,410 285,037 249,701 127,989 424,021 1,086,748 13,062 621 (45,885) (12,604) (44,324) (84,547) (187,360) (10,285) (337) 3,202,736 2,113,043 1,626,091 5,940,610 12,882,480 63,503 56,694 Redeemable preferred stocks, by sector: Financial .............................................................. Utilities ................................................................. Total redeemable preferred stocks .................... 371,862 28,600 43,383 798 (7,218) (244) 408,027 29,154 400,462 Total fixed maturities ................................................... $14,188,050 44,181 $ 1,273,795 (7,462) 437,181 $ (215,984) $ 15,245,861 3 9 — 21 14 11 39 85 — — 3 — 3 100 (1) Amount reported in the balance sheet. (2) At fair value. 70 3 10 — 22 16 10 35 83 1 — 3 — 3 100 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 4—Investments (continued) 2015: 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: 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 ................................. Other asset-backed securities ................................. 63,662 18,963 Redeemable preferred stocks, by sector: 368,718 $ 404 $ (14,078) $ 355,044 131,516 1,369 301,624 223,535 53,776 294,026 872,961 16,158 668 (1,908) (163) 1,426,004 22,800 (54,881) (28,267) (219,101) (230,911) (533,160) (9,438) — 3,007,295 2,176,509 1,403,067 4,824,307 11,411,178 70,382 19,631 Financial ............................................................. Utilities ................................................................ Total redeemable preferred stocks ................... 382,517 28,644 45,926 731 (4,781) (52) 423,662 29,323 411,161 Total fixed maturities .................................................. $13,251,871 46,657 $ 1,069,733 (4,833) 452,985 $ (563,580) $ 13,758,024 (1) Amount reported in the balance sheet. (2) At fair value. Securities held on deposits with various state and federal regulatory authorities had a carrying value of $600 million and $555 million at December 31, 2016 and 2015, respectively. A schedule of fixed maturities by contractual maturity at December 31, 2016 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 .......................................................... 23,969 $ 24,573 688,509 1,337,752 4,746,466 8,326,907 121,654 $ 14,188,050 $ 15,245,861 640,903 1,228,081 4,278,896 7,897,726 118,475 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 4—Investments (continued) Analysis of investment operations: Year Ended December 31, 2015 2014 2016 Net investment income is summarized as follows: Fixed maturities ............................................................................ $ 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 ............................................................................ $ Other investments ......................................................................... Loss on redemption on debt ......................................................... Applicable tax ............................................................................... 778,912 $ 747,663 $ 38,436 2,786 447 820,581 (13,678) 806,903 $ 36,763 2,021 95 786,542 (12,591) 773,951 $ 732,925 35,015 1,516 75 769,531 (11,245) 758,286 (10,645) $ (9,479) $ 23,170 (38) — (10,683) 3,739 688 — (8,791) 3,077 636 (258) 23,548 (8,242) Realized gains (losses) from investments, net of tax.................. $ (6,944) $ (5,714) $ 15,306 An analysis of the net change in unrealized investment gains (losses) is as follows: Fixed maturities ............................................................................ $ Other investments ......................................................................... Net change in unrealized gains (losses) ....................................... $ Additional information about securities sold is as follows: 551,658 $ (1,163,295) $ 1,279,190 3,872 553,801 $ (1,166,032) $ 1,283,062 (2,737) 2,143 Fixed maturities: Proceeds from sales(1) .................................................................. $ Gross realized gains ..................................................................... Gross realized losses .................................................................... 358,285 $ 6,133 (32,608) 226,792 $ 259 (16,894) 109,024 17,583 (1,879) (1) Includes unsettled sales of $18 million at December 31, 2016. At December 31, 2015 2014 2016 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 4—Investments (continued) Fair value measurements: The following tables represent the fair value of fixed maturities measured on a recurring basis at December 31, 2016 and 2015: Description Fixed maturities available for sale: Fair Value Measurements at December 31, 2016 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 ...................... — $ 372,798 $ — $ 372,798 45,302 — — — — — — — — — — — 1,364,826 23,077 3,141,611 1,959,143 1,598,976 5,623,150 12,322,880 — 56,694 408,027 29,154 437,181 — — 1,410,128 23,077 61,125 153,900 27,115 317,460 559,600 63,503 — — — — 3,202,736 2,113,043 1,626,091 5,940,610 12,882,480 63,503 56,694 408,027 29,154 437,181 Total fixed maturities ....................................... $ Percentage of total ....................................... 45,302 $ 14,577,456 $ 623,103 $15,245,861 0.3% 95.6% 4.1% 100.0% 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 ...................... — $ 355,044 $ — $ 355,044 — — — 22,189 — — 22,189 — — 10,124 — 10,124 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 — — 1,426,004 22,800 62,247 134,052 25,206 309,301 530,806 70,382 — 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 Total fixed maturities ....................................... $ Percentage of total ......................................... 32,313 $ 13,124,523 $ 601,188 $13,758,024 0.2% 95.4% 4.4% 100.0% 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 4—Investments (continued) The following table represents changes in fixed maturities 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) Collateralized debt Obligations Corporates Balance at January 1, 2014 ............................................................. $ 58,205 $ 300,300 $ 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 ...................................................... 15,924 3,323 — (16,049) 5,519 (3,690) — 1 27,864 186,366 (1) 13 (1,829) — Total 358,505 15,925 31,187 186,366 (16,050) 5,532 (5,519) — Balance at December 31, 2014 ........................................................ 63,232 512,714 575,946 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 ...................................................... — 11,365 — — 5,536 (9,751) — 1,182 (11,925) 38,600 — 17 1,182 (560) 38,600 — 5,553 (9,782) (19,533) — — Balance at December 31, 2015 ........................................................ 70,382 530,806 601,188 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, 2016 ........................................................ $ — (3,943) — — 5,186 788 6,403 33,662 — 17 788 2,460 33,662 — 5,203 (8,122) — 63,503 $ (12,076) — 559,600 $ (20,198) — 623,103 (1) Includes foreign exchange adjustments and principal repayments. Acquisitions of Level 3 investments in each of the years 2014 through 2016 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. 74 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, 2016 Collateralized debt obligations ............... $ Fair Value 63,503 Private placement fixed maturities ......... 559,600 $ 623,103 Valuation Techniques Discounted cash flows Unobservable Input Discount rate Range 9.3 - 10.45% Weighted Average 10.3% Determination of credit spread Discounted cash flows Credit rating Discount rate A+ to B BBB 2.82 - 6.55% 4.17% 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. 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 ............ $ 45,344 Level 2 ............ Level 3 ............ — — 2016 Out Net $ — $ 45,344 In $ 17,252 2015 Out Net $ (49,744) $ (32,492) $ 36,468 In (45,344) (45,344) 49,744 (17,252) 32,492 — — — — — — — 2014 Out Net $ — $ 36,468 (36,468) (36,468) — — 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, 2016. As of year end 2016, previously written down securities remaining in the portfolio were carried at a fair value of $54 million, or less than 0.4% of the fair value of the fixed maturity portfolio. Torchmark is continuously monitoring the market conditions impacting its portfolio. While adverse market conditions for an extended duration could lead to some 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 4—Investments (continued) ratings downgrades in certain sectors, Torchmark has the ability and intent to hold these investments to recovery, and does not intend to sell or expect to be required to sell any of its securities in such a position. Unrealized gains/loss analysis: The following tables disclose gross unrealized investment losses by class and major sector of investments at December 31, 2016 and December 31, 2015 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, 2016 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 .............................................. Less than Twelve Months Twelve Months or Longer Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss 321,133 $ (8,553) $ 1,404 $ (598) $ 322,537 $ (9,151) 32,178 4,416 479,669 290,732 83,064 5,936 (1,114) (62) 683 — (19) — 32,861 4,416 (18,666) (11,000) 64,335 16,977 (4,627) (1,604) (1,076) 154,908 (18,127) 544,004 307,709 237,972 (231) (187) 11,725 5,789 68,968 (1,133) (62) (23,293) (12,604) (19,203) (418) Other corporate sectors ..................................... 1,564,273 (65,131) (6,495) 1,633,241 (71,626) Total corporates .................................................... 2,423,674 (96,104) 310,977 (31,040) 2,734,651 (127,144) Other asset-backed securities 41,498 (337) Redeemable preferred stocks, by sector: Utilities ............................................................ Total redeemable preferred stocks........................ 5,857 5,857 (244) (244) — — — — — — 41,498 (337) 5,857 5,857 (244) (244) Total investment grade securities ............................ 2,828,756 (106,414) 313,064 (31,657) 3,141,820 (138,071) 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........................ — — 15,567 32,478 51,640 99,685 — — — — — (385) (172) (291) (848) — — — 357 — 83,174 91,165 34,463 95,679 304,481 9,714 19,912 19,912 357 (194) (194) — (22,592) (24,736) (2,023) (10,017) (59,368) (10,285) 83,174 106,732 66,941 147,319 404,166 9,714 (7,218) (7,218) 19,912 19,912 (22,592) (25,121) (2,195) (10,308) (60,216) (10,285) (7,218) (7,218) Total below investment grade securities .................. 99,685 (848) 334,464 (77,065) 434,149 (77,913) Total fixed maturities .......................................... $ 2,928,441 $ (107,262) $ 647,528 $ (108,722) $ 3,575,969 $ (215,984) 76 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, 2015 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 ...................... $ 310,676 $ (13,196) $ 14,731 $ (882) $ 325,407 $ (14,078) States, municipalities and political subdivisions.... Foreign governments ............................................ 55,351 7,302 (1,611) (163) Corporates, by sector: Financial ............................................................ Utilities ............................................................... Energy ............................................................... Metals and mining .............................................. Other corporate sectors ..................................... Total corporates .................................................... Redeemable preferred stocks, by sector: 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) (11,552) 56,022 7,302 476,469 435,692 827,650 251,104 (6,661) 1,651,199 143,196 (59,625) 3,642,114 (1,653) (163) (18,599) (28,267) (187,569) (62,409) (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 Total fixed maturities ............................................. $ 3,973,908 (19,760) 244,902 (111,184) 338,800 (130,944) $ (391,847) $ 403,500 $ (171,733) $ 4,377,408 $ (563,580) Gross unrealized losses decreased from $564 million at year end 2015 to $216 million at year end 2016, a decrease of $348 million. The decrease in the gross unrealized losses from prior year was primarily attributable to the improved conditions during 2016 in the energy and metals and mining sectors. 77 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, 2016 ............................................................. As of December 31, 2015 ............................................................. 407 480 94 75 501 555 Torchmark’s entire fixed maturity portfolio consisted of 1,565 issues at December 31, 2016 and 2015. The weighted- average quality rating of all unrealized loss positions at amortized cost was BBB+ for both 2016 and 2015. Other investment information: Other long-term investments consist of the following: Year Ended December 31, 2016 2015 Investment in limited partnerships ................................................................................ $ Low-income housing interests ..................................................................................... Other ............................................................................................................................ Total ....................................................................................................................... $ 51,509 $ — 2,343 53,852 $ 31,409 3,767 3,262 38,438 Torchmark did not have any invested assets that were non-income producing during the twelve months ended December 31, 2016. Concentrations of Credit Risk: Torchmark maintains a diversified investment portfolio with limited concentration in any given issuer. At December 31, 2016, 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 ......................................................................................................................................... 80% 9 2 1 4 — 3 1 100% As of December 31, 2016, securities of state and municipal governments represented 9% of invested assets at fair value. Such investments are made throughout the U.S. At year end 2016, 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 concentration within any given state greater than 5%. 78 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 84% 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, 2016, based on fair value: Insurance ................................................................................................................................... Electric utilities ........................................................................................................................... Oil and natural gas pipelines ...................................................................................................... Banks ......................................................................................................................................... Oil and natural gas exploration and production .......................................................................... Transportation ............................................................................................................................ Chemicals .................................................................................................................................. Metals and mining ...................................................................................................................... Food ........................................................................................................................................... Real estate investment trusts ..................................................................................................... 17% 12 6 6 4 4 4 3 3 3 At year end 2016, 4% of invested assets at fair value were represented by fixed maturities rated below investment grade. Par value of these investments was $834 million, amortized cost was $751 million, and fair value was $695 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, 2015 2014 2016 Balance at beginning of year ............................................................... $ 3,617,135 $ 3,457,397 $ 3,325,433 Additions: Deferred during period: Commissions ............................................................................ Other expenses ........................................................................ Total deferred ......................................................................... Foreign exchange adjustment ....................................................... Adjustment attributable to unrealized investment losses(1)........... Total additions ........................................................................ 436,252 199,066 635,318 2,180 — 637,498 401,166 211,015 612,181 — 8,682 620,863 358,969 203,276 562,245 — — 562,245 Deductions: Amortized during period ................................................................ Foreign exchange adjustment ....................................................... Adjustment attributable to unrealized investment gains(1) ............ Total deductions ..................................................................... (415,914) (8,167) (6,200) (430,281) Balance at end of year ........................................................................ $ 3,783,158 $ 3,617,135 $ 3,457,397 (445,625) (15,500) — (461,125) (469,063) — (2,412) (471,475) (1) Represents amounts pertaining to investments relating to universal life-type products. 79 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 Prescription Drug Plan business as a discontinued operation. Historically, the business was a reportable segment. Effective July 1, 2016, Torchmark sold its Medicare Part D Prescription Drug Plan business to an unaffiliated third party. Management believes this sale allows the Company to better focus on its core protection life and health insurance businesses, as well as provides additional capital to invest. The initial sale price was based on the number of enrollees as of the end of the second quarter 2016 and will be adjusted based on the number of enrollees as of January 1, 2017 as determined by the Center for Medicare Services (CMS) in March 2017. Estimated ultimate net proceeds from the sale resulted in a gain of $1.8 million ($1.2 million, net of tax). The deferred acquisition costs write-off of $16.4 million and the contingent sale price reserve of $3.6 million are included in the net gain calculation. The gain is recognized in income from discontinued operations as of December 31, 2016. Torchmark retained certain assets and liabilities related to the Medicare Part D business including all corresponding profits or losses for the 2016 plan year. The buyer assumed the rights and obligations related to the business for all subsequent plan years. To facilitate a seamless transition, Torchmark administered the plans for the duration of 2016. The remaining assets and liabilities reflected on the Torchmark balance sheet related to discontinued operations are receivables and payables primarily associated with 2016 plan year that are expected to be settled in the ordinary course of business during 2017 and 2018. The net assets related to discontinued operations at December 31, 2016 and 2015 were as follows: At December 31, 2016 2015 Assets: Due premiums ................................................................................................................ $ Other receivables(1) ........................................................................................................ Deferred acquisition costs .............................................................................................. Total assets related to discontinued operations ..................................................... 8,840 $ 8,041 118,692 — 127,532 287,765 17,037 312,843 Liabilities: Unearned and advance premiums ................................................................................. Policy claims and other benefits payable ....................................................................... Risk sharing payable ...................................................................................................... Current and deferred income taxes payable .................................................................. Other(2) ........................................................................................................................... Total liabilities related to discontinued operations ................................................. 67 10,868 8,374 3,820 4,295 27,424 806 12,309 23,837 13,604 479 51,035 Net assets ....................................................................................................................... $ 100,108 $ 261,808 (1) At December 31, 2016, other receivables included $50 million from CMS and $69 million from drug manufacturer rebates. At December 31, 2015, the comparable amounts were $193 million and $95 million, respectively. (2) Balance includes $3.6 million contingent sale price reserve for the year ended December 31, 2016. 80 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, 2016 is as follows: Year Ended December 31, 2016 2015 2014 Revenue: Health premium ............................................................................... $ 222,840 $ 260,657 $ 373,280 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 ...................................................... Income before income taxes for discontinued operations ................. Gain from sale of discontinued operations ........................................ Income taxes ..................................................................................... Income from discontinued operations ............................................... $ 183,423 3,747 16,396 5,377 208,943 13,897 1,779 (5,487) 213,114 3,506 20,909 6,502 244,031 16,626 — (5,819) 10,189 $ 10,807 $ 315,816 2,858 26,613 5,123 350,410 22,870 — (8,005) 14,865 Income taxes paid related to discontinued operations for the three years ended December 31, 2016 were as follows: Income taxes paid ....................................................................................... $ 15,271 $ 3,409 $ 12,013 Note 7—Liability for Unpaid Claims Activity in the liability for unpaid health claims is summarized as follows: Year Ended December 31, 2015 2014 2016 Year Ended December 31, 2015 2014 2016 Balance at beginning of year ............................................................. $ Incurred related to: 137,120 $ 128,265 $ 116,559 Current year .................................................................................. Prior years .................................................................................... Total incurred ............................................................................ 510,075 (1,127) 508,948 502,009 (7,845) 494,164 Paid related to: Current year .................................................................................. Prior years .................................................................................... Total paid .................................................................................. Balance at end of year ...................................................................... $ 386,278 116,662 502,940 143,128 $ 379,037 106,272 485,309 137,120 $ 453,014 804 453,818 343,648 98,464 442,112 128,265 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 7—Liability for Unpaid Claims (continued) 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” in the Consolidated Balance Sheets. Short-Duration Contracts Although Torchmark primarily sells long-duration contracts for both life and health, the Company also has a limited amount of group health products that qualify as short-duration contracts in accordance with the applicable guidance. The below table illustrates the total incurred claims for short-duration products over the last five years. Claim frequency is determined by duration and incurred date. For the years ended December 31, As of December 31, 2016 Cumulative incurred claims(1) 2012 2013 2014 2015 2016 Total of incurred-but- not-reported liabilities plus expected development on reported claims Cumulative number of reported claims(1) $ 84,975 $ 83,965 $ 83,928 $ 83,906 $ 83,906 $ 82,644 101,407 99,876 84,111 83,151 83,119 99,810 141,667 141,460 140,944 Total $ 549,239 $ — — 19 478 26,224 26,721 1,357 1,337 1,600 2,222 1,863 Accident Year 2012 2013 2014 2015 2016 (1) The incurred claims and cumulative number of reported claims for all years prior to 2016 are unaudited. 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 7—Liability for Unpaid Claims (continued) This table illustrates the total cumulative paid claims and allocated claims for short-duration products over the last five years: Cumulative paid claims(1) For the years ended December 31, Accident Year 2012 ................................................................................ $ 68,742 $ 83,766 $ 83,919 $ 83,906 $ 83,906 83,119 2013 ................................................................................ 2014 ................................................................................ 2015 ................................................................................ 2016 ................................................................................ 115,922 140,982 114,720 83,131 99,545 81,054 82,408 68,159 99,791 2012 2014 2013 2015 2016 Short-duration claim liability as of December 31, 2016 26,721 Total incurred claims & IBNR $549,239 Total 522,518 (1) The cumulative paid claims for all years prior to 2016 are unaudited. Below is the reconciliation of the net incurred and paid claims development tables to the liability for "Policy claims and other benefits payable" in the Consolidated Balance Sheets. Policy claims and other benefits payable: Short-duration products ............................................................................................................... $ Insurance lines other than short duration—health ....................................................................... Insurance lines other than short duration—life ............................................................................ Total policy claims and other benefits payable ............................................................................ $ 26,721 116,407 156,437 299,565 December 31, 2016 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 8—Income Taxes The components of income taxes were as follows: Income tax expense from continuing operations(1).................................... $ Shareholders’ equity: Year Ended December 31, 2015 249,894 $ 2016 232,645 $ 2014 256,603 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 (1) ................................................................ 186,206 (411,646) 424,089 — (17,577) $ 418,851 $ (179,329) $ (18,524) 662,168 (1) Due to the adoption of ASU 2016-09, the excess tax benefits related to share-based awards are now recorded through income tax expense rather than additional paid in capital as described in Note 1—Significant Accounting Policies under "Stock Compensation." Income tax expense from continuing operations consists of: Year Ended December 31, 2015 2014 2016 Current income tax expense ..................................................................... $ Deferred income tax expense ................................................................... 132,806 $ 174,284 $ 169,319 99,839 75,610 87,284 $ 232,645 $ 249,894 $ 256,603 In each of the years 2014 through 2016, 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 ............................................... $ 270,282 Increase (reduction) in income taxes resulting from: 2016 Low income housing investments ............................. Share-based awards ................................................. (18,202) (18,653) (782) Income tax expense from continuing operations ......... $ 232,645 Other ......................................................................... Year Ended December 31, 2015 % 35.0 $ 268,165 2014 % 35.0 $ 274,637 % 35.0 (2.4) (2.4) (0.1) (19,031) — 760 (2.5) — 0.1 (17,541) — (2.2) — (493) — 30.1 $ 249,894 32.6 $ 256,603 32.8 The effective income tax rates for the year ended December 31, 2016 differed from the effective income tax rates for 2015 and 2014 primarily as a result of the Company adopting ASU 2016-09 as of January 1, 2016. As a result of the adoption, the excess tax benefits related to share-based awards are now recorded through income tax expense rather than additional paid-in capital. See Note 1—Significant Accounting Policies for further discussion. 84 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 .................................................................................. 15,004 $ 3,906 18,910 16,098 2,266 18,364 Deferred tax liabilities: December 31, 2016 2015 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 ............................................................................... 128,683 83,229 921,799 340,854 17,176 1,491,741 Net deferred tax liability ............................................................................................... $ 1,760,041 $ 1,473,377 315,509 92,131 975,873 391,451 3,987 1,778,951 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 2013 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 $11.2 million at December 31, 2016 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 2014 through 2016, 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 $9 thousand, $11 thousand, and $465 thousand, net of federal income tax expense, in its Consolidated Statements of Operations for 2016, 2015, and 2014, respectively. The Company had no accrued interest or penalties at December 31, 2016 or 2015. 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 9—Postretirement Benefits Torchmark has qualified noncontributory defined benefit pension plans and contributory savings plans which cover substantially all employees. There are also two nonqualified noncontributory supplemental benefit pension plans (SERPs) which cover a limited number of employees. The total cost of these retirement plans charged to operations was as follows: Year Ended December 31, 2016 ............................................................................................................. $ 2015 ............................................................................................................. 2014 ............................................................................................................. (1) 401K plans (2) Qualified pension plans and SERPs Defined Contribution Plans(1) Defined Benefit Pension Plans(2) 24,202 29,230 23,463 3,614 $ 3,429 3,078 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. Pension Plans: 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 $15.8 million in 2016, $15.5 million in 2015, and $14.6 million in 2014. Torchmark estimates as of December 31, 2016 that it will contribute an amount not to exceed $20 million to these plans in 2017. The actual amount of contribution may be different from this estimate. Torchmark has two SERPs, one of which is active and 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. This SERP is nonqualified 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 following table includes activity for the active SERP for the three years ended December 31, 2016. Premiums paid for insurance coverage .......................................... $ 2,050 $ 10,068 $ 2,150 Year Ended December 31, 2015 2014 2016 Total investments of this SERP: Company owned life insurance .................................................... $ Exchange Traded Funds(1) ........................................................... $ December 31, 2016 2015 37,267 $ 48,999 86,266 $ 34,178 45,014 79,192 Liability for this SERP ..................................................................... $ 74,687 $ 67,243 (1) There were no deposits in 2016, 2015 or 2014. 86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 9—Postretirement Benefits (continued) Because this plan is nonqualified, the investments and the policyholder value of the insurance policies in the Rabbi Trust are not included as defined benefit plan assets, but rather assets of the Company. They are included in “Other Assets” in the Consolidated Balance Sheets. The second supplemental benefit pension plan 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 also nonqualified and unfunded. Liability for this closed plan was $3 million at December 31, 2016 and December 31, 2015. Pension cost for both supplemental defined benefit plans is determined in the same manner as for the qualified defined benefit plans. Plan assets in the funded plans consist primarily of investments in marketable fixed maturities and equity securities and are valued at fair value. Torchmark measures the fair value of its financial assets, including the assets in its benefit plans, in accordance with accounting guidance which establishes a hierarchy for asset values and provides a methodology for the measurement of value. Please refer to 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, 2016 and 2015. Pension Assets by Component at December 31, 2016 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 Corporate bonds: Financial ...................................... $ Utilities ......................................... Energy ......................................... Other corporates .......................... Total corporate bonds ................ Exchange traded fund(1) ................. Other bonds ................................... Guaranteed annuity contract(2) ....... Short-term investments .................. Other .............................................. $ 41,578 $ $ 43,890 25,427 49,141 160,036 258 18,997 — 41,578 43,890 25,427 49,141 160,036 134,771 258 18,997 7,391 7,418 13 13 8 15 49 41 — 6 2 2 — 134,771 7,391 7,418 Grand Total ..................................... $ 149,580 $ 179,291 $ — $ 328,871 100 (1) A fund including marketable securities that mirror the S&P 500 index. (2) Representing a guaranteed annuity contract issued by Torchmark's subsidiary, American Income Life Insurance Company, to fund the obligations of the American Income Pension Plan. 87 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, 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 ................................... Consumer, Non-Cyclical ............... Industrial ...................................... 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 12,216 15,176 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 12,216 15,176 2,510 — 123,428 36,266 43,229 25,890 40,996 — 146,381 270 17,082 15,593 4,842 16 8 6 4 5 1 40 12 14 8 13 47 — 6 5 2 Grand Total ..................................... $ 143,855 $ 163,741 $ — $ 307,596 100 (1) Representing a guaranteed annuity contract issued by Torchmark's subsidiary, American Income Life Insurance Company, to fund the obligations of the American Income Pension Plan. 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. 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 9—Postretirement Benefits (continued) 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 can include common and preferred stocks, securities convertible into equities, mutual funds and exchange traded funds that invest in equities, and other equity-related investments. Equities are listed on major exchanges and adequate market liquidity is required. Fixed maturities consist of marketable debt securities rated investment grade at purchase by a major rating agency. Short-term investments include fixed maturities with maturities less than one year and invested cash. Short-term investments in commercial paper must be rated at least A-2 by Standard & Poor’s with the issuer rated investment grade. Invested cash is limited to banks rated A or higher. Investments outside of the aforementioned list are not permitted, except by prior approval of the Plan’s Trustees. 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. As of December 31, 2016, Torchmark sold all equity securities in various sectors and replaced them with an exchange traded fund that mirrors the S&P 500 index to better align with a passive approach rather than an actively managed portfolio. At December 31, 2016, 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, 2016. 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: 2016 2015 Discount Rate ............................................................................... Rate of Compensation Increase ................................................... 4.27% 4.31 4.64% 4.33 For Periodic Benefit Cost for the Year: 2016 2015 2014 Discount Rate ............................................................................... Expected Long-Term Returns ....................................................... Rate of Compensation Increase ................................................... 4.64% 7.19 4.33 4.23% 6.96 4.35 5.12% 6.97 4.35 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. 89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 9—Postretirement Benefits (continued) Net periodic pension cost for the defined benefit plans by expense component was as follows: Year Ended December 31, 2015 2014 2016 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 .................................................................. $ 15,502 $ 21,631 (23,127) 10,135 61 24,202 $ 15,902 $ 19,887 (21,204) 14,465 180 29,230 $ 12,925 19,270 (19,031) 10,283 16 23,463 An analysis of the impact on other comprehensive income (loss) concerning pensions and other postretirement benefits is as follows: Balance at January 1 ........................................................................... $ Amortization of: Year Ended December 31, 2015 (152,999) $ 2016 (152,149) $ 2014 (97,467) Prior service cost ............................................................................... Net actuarial (gain) loss(1) .................................................................. Total amortization ................................................................................ Plan amendments ............................................................................... Experience gain (loss) ......................................................................... Balance at December 31 ..................................................................... $ 477 9,691 10,168 — (31,902) (173,883) $ 377 14,209 14,586 (2,104) (11,632) (152,149) $ 2,113 8,172 10,285 — (65,817) (152,999) (1) Includes amortization of postretirement benefits other than pensions of $33 thousand in 2016, $120 thousand in 2015, and $2 thousand in 2014. 90 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 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, 2016 2015 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 .............................................................................................. 476,581 $ 15,502 21,631 — 34,667 (20,859) 527,522 477,426 15,902 19,887 2,104 (19,226) (19,512) 476,581 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 ......................................................................................... $ 307,596 26,377 15,757 (20,859) 328,871 (198,651) $ 322,898 (11,333) 15,543 (19,512) 307,596 (168,985) Amounts recognized in accumulated other comprehensive income consist of: Net loss (gain) .............................................................................................................. $ Prior service cost ......................................................................................................... Net amounts recognized at year end ......................................................................... $ 167,313 $ 4,611 171,924 $ 145,623 5,088 150,711 The portion of other comprehensive income that is expected to be reflected in pension expense in 2017 is as follows: Amortization of prior service cost .......................................................................................................... $ Amortization of net actuarial loss .......................................................................................................... Total ............................................................................................................................................... $ 476 11,806 12,282 The accumulated benefit obligation (ABO) for Torchmark’s funded defined benefit pension plans was $411 million and $371 million at December 31, 2016 and 2015, respectively. In the nonqualified plans, the ABO was $69 million at December 31, 2016 and $63 million at 2015. 91 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 9—Postretirement Benefits (continued) Torchmark has estimated its expected pension benefits to be paid over the next ten years as of December 31, 2016. These estimates use the same assumptions that measure the benefit obligation at December 31, 2015, taking estimated future employee service into account. Those estimated benefits are as follows: For the year(s) 2017 .......................................................................................................................................................... $ 19,839 21,198 2018 .......................................................................................................................................................... 22,516 2019 .......................................................................................................................................................... 24,109 2020 .......................................................................................................................................................... 25,678 2021 .......................................................................................................................................................... 152,071 2022-2025 ................................................................................................................................................. 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 postretirement 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, 2015 2014 2016 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 ......................................................... $ — $ 1,139 — 33 (132) 1,040 $ — $ 1,075 — 120 367 1,562 $ — 646 — 2 (256) 392 92 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, 2016 2015 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 ......................................................................................... $ 22,479 $ — 1,139 412 (309) 23,721 — — 309 (309) — (23,721) $ 22,895 — 1,075 (1,133) (358) 22,479 — — 358 (358) — (22,479) Amounts recognized in accumulated other comprehensive income: Net loss(1) ................................................................................................................... $ Net amounts recognized at year end ..................................................................... $ 1,959 $ 1,959 $ 1,447 1,447 (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: 2016 2015 Discount Rate ............................................................................... 4.29% 4.66% For Periodic Benefit Cost for the Year: 2016 2015 2014 Discount Rate ............................................................................... 4.66% 4.23% 5.12% 93 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) 2017 ..................................................................................................................................................... $ 2018 ..................................................................................................................................................... 2019 ..................................................................................................................................................... 2020 ..................................................................................................................................................... 2021 ..................................................................................................................................................... 2022-2025 ............................................................................................................................................ 1,014 1,133 1,247 1,351 1,462 9,811 Note 10—Supplemental Disclosures of Cash Flow Information The following table summarizes Torchmark’s noncash transactions, which are not reflected on the Consolidated Statements of Cash Flows: Year Ended December 31, 2015 2014 2016 Stock-based compensation not involving cash ........................................... $ Commitments for low-income housing interests ......................................... Exchanges of fixed maturity investments .................................................... Net unsettled security trades ...................................................................... 26,326 $ 56,818 224,901 15,020 28,664 $ 68,949 — — 32,203 75,706 17,333 — The following table summarizes certain amounts paid during the period: Year Ended December 31, 2015 2014 2016 Interest paid ................................................................................................ $ Income taxes paid ....................................................................................... 81,338 $ 79,790 74,792 $ 110,650 77,066 100,922 94 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 Annual Interest Rate Issue Date Periodic Interest Payments Due Outstanding Principal (Par Value) Outstanding Principal (Book Value) Outstanding Principal (Fair Value) Outstanding Principal (Book Value) As of December 31, 2016 2015 6/09 5/93 Long-term debt: Notes, due 5/15/23(3,5) ............... 7.875% Senior Notes, due 6/15/19(3,7).... 9.250% Senior Notes, due 9/15/22(3,7).... 3.800% Junior Subordinated Debentures due 12/15/52(4,8,11).. 5.875% Junior Subordinated Debentures due 3/15/36(4,6,11).... 4.263% (12) Junior Subordinated Debentures due 6/15/56(4,9)....... 6.125% 4/16 Term loan due 5/17/21(1,6) ......... 1.856% (13) 6/16 9/12 9/12 (10) 5/15 & 11/15 $ 165,612 $ 164,095 $ 196,496 $ 163,920 6/15 & 12/15 3/15 & 9/15 292,647 150,000 291,424 148,189 338,363 152,777 291,002 147,913 quarterly 125,000 120,929 124,378 120,898 quarterly 20,000 20,000 20,000 20,000 quarterly monthly 300,000 100,000 290,403 100,000 302,880 100,000 — — 1,153,259 1,135,040 1,234,894 743,733 Less current maturity of term loan .................................................... 1,875 1,875 1,875 — Total long-term debt ..................................................................... 1,151,384 1,133,165 1,233,019 743,733 Short-term debt: Senior Notes, due 6/15/16 ........ 6.375% 6/15 & 12/15 Current maturity of term loan ............................................................ Commercial paper(2) ......................................................................... Total short-term debt .................................................................... 6/06 — 1,875 262,850 264,725 — 1,875 262,600 264,475 — 1,875 262,600 264,475 249,753 — 240,376 490,129 Total debt ................................................................................ $ 1,416,109 $ 1,397,640 $ 1,497,494 $ 1,233,862 (1) The term loan has higher priority than all other debt issues. (2) Commercial paper has priority over all other debt except the term loan. (3) All securities, other than the term loan, commercial paper and Junior Subordinated Debentures have equal priority with one another. (4) All Junior Subordinated Debentures have equal priority, but are subordinate to all other issues. (5) Not callable. (6) Callable anytime. (7) Callable subject to “make-whole” premium. (8) Callable as of December 15, 2017. (9) Callable subject to “make-whole” premium until June 15, 2021 and at par on and any time after June 15, 2021. (10) Assumed upon November 1, 2012 acquisition of Family Heritage. (11) Quarterly payments on the 15th of March, June, September, and December. (12) Interest paid at 3 Month LIBOR plus 330 basis points, resets each quarter. (13) Interest paid at 1 Month LIBOR plus 125 basis points, resets each month. 95 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 11—Debt (continued) Contractual Debt Obligations: The following table presents expected scheduled principal payments under our contractual debt obligations: Debt obligations ............................. $ 264,725 $ 4,375 $ 299,522 $ 9,375 $ 77,500 $ 760,612 2017 2018 2019 2020 2021 Thereafter Year Ended December 31, Funded debt: On April 5, 2016, Torchmark completed the issuance and sale of $300 million in aggregate principal of Torchmark’s 6.125% Junior Subordinated Debentures due 2056. The debentures were sold pursuant to Torchmark’s shelf registration statement on Form S-3, filed September 25, 2015. The net proceeds from the sale of the debentures were $290 million, after giving effect to the underwriting discount and expenses of the offering of the debentures. Torchmark used the net proceeds from the offering of the debentures to repay the $250 million outstanding principal, plus accrued interest of $8 million, on the 6.375% Senior Notes that were due June 15, 2016. The remaining proceeds were used for general corporate purposes. Credit Facility: On May 17, 2016, Torchmark amended its credit facility to include, as a part of the facility, the issuance of a $100 million term loan and to extend the maturity date of the entire credit facility to May 2021. The 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 of $750 million, less any letters of credit issued. Interest is charged at variable rates. The term loan will be repaid on a redemption schedule which provides for quarterly installments beginning June 30, 2017 that escalate each annual period with a balloon payment of $75 million due in May 2021. Interest on the term loan is computed and paid monthly at 125 basis points plus 1 Month LIBOR. In accordance with the agreement, Torchmark is subject to certain covenants regarding capitalization. As of December 31, 2016, the Company was in full compliance with these covenants. Commercial paper outstanding and any amortization payments of the term loan due within one year are reported as short-term debt on the Consolidated Balance Sheets. A table presenting selected information concerning Torchmark’s commercial paper borrowings is presented below. Credit Facility - Commercial Paper Balance at end of period (at par value) ........................................................................ $ Annualized interest rate ............................................................................................... Letters of credit outstanding ......................................................................................... $ Remaining amount available under credit line ............................................................. At December 31, 2016 262,850 0.96% 177,000 310,150 $ $ 2015 240,544 0.55% 177,000 332,456 Year Ended December 31, 2015 350,851 2016 301,550 $ $ 2014 296,246 0.83% 0.43% 412,676 $ 458,110 $ 0.26% 343,000 Average balance outstanding during period ........................................ $ Daily-weighted average interest rate (annualized) .............................. Maximum daily amount outstanding during period .............................. $ 96 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 2014: Balance at January 1, 2014 ............................................................ — — 151,218,183 (16,965,802) 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) 2016: Grants of restricted stock ................................................................ Vesting of performance shares ........................................................ Issuance of common stock due to exercise of stock options ........... Treasury stock acquired .................................................................. Retirement of treasury stock ........................................................... 12,549 159,020 2,184,169 (6,694,582) (3,000,000) 3,000,000 Balance at December 31, 2016 .................................................. — — 127,218,183 (9,187,075) 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 5.2 million shares at a cost of $311 million in 2016, 6.3 million shares at a cost of $359 million in 2015, and 7.2 million shares at a cost of $375 million in 2014. 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 1.5 million shares at a cost of $93 million in 2016, 1.0 million shares at a cost of $60 million in 2015, and 1.4 million shares at a cost of $74 million in 2014. Retirement of Treasury Stock: Torchmark retired 3.0 million shares of treasury stock in 2016, 4.0 million in 2015, and 17.0 million in 2014. 97 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 12—Shareholders’ Equity (continued) Restrictions: Restrictions exist on the flow of funds to Torchmark from its insurance subsidiaries. Statutory regulations require life insurance subsidiaries to maintain certain minimum amounts of capital and surplus. Dividends from insurance subsidiaries of Torchmark are restricted based on regulations by their state of domicile. 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 $438 million in 2016, $466 million in 2015, and $479 million in 2014. As of December 31, 2016, dividends and transfers from insurance subsidiaries to parent available to be paid in 2017 are limited to the amount of $262 million without regulatory approval, such that $1.1 billion was considered restricted net assets of the subsidiaries. Dividends exceeding these limitations may be available during the year pending regulatory approval. While there are no legal restrictions on the payment of dividends to shareholders from Torchmark’s retained earnings, retained earnings as of December 31, 2016 were restricted by lenders’ covenants which require the Company to maintain and not distribute $2.6 billion from its total consolidated retained earnings of $3.9 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 ...................................... 120,001,191 Weighted average dilutive options outstanding .................................. 2,366,594 Diluted weighted average shares outstanding.................................... 122,367,785 2016 Year Ended December 31, 2015 125,094,628 1,662,607 126,757,235 2014 130,721,738 1,918,506 132,640,244 There were no anti-dilutive shares as of December 31, 2016, 2015, or 2014. Income available to common shareholders for basic earnings per share is equivalent to income available to common shareholders for diluted earnings per share. As discussed earlier in Note 1—Significant Accounting Policies, the Company adopted ASU 2016-09 on January 1, 2016. Note 13—Stock-Based Compensation Torchmark’s stock-based compensation consists of stock options, restricted stock, restricted stock units, and performance shares. Certain employees and directors 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 Directors ................................. 7 years 7 years Employees ............................. Employees(1) .......................... 10 years 6 Months 100% —% —% Shares vested by period Year 1 Year 2 Year 3 Year 4 Year 5 —% —% 50% 25% 50% 25% 25% 25% (1) Grant offered through the Torchmark Corporation 2011 Incentive Plan only. 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. 98 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) .......................... Available for Grant 2015 2014 2016 6,872,282 8,458,593 4,368,753 — 8,518 — — 6,300,000 90,371 89,745 3,488 31,620 (1,306,306) (1,334,514) (1,523,982) (486,033) (431,913) (721,286) Balance at December 31, ......................................................................... 5,088,461 6,872,282 8,458,593 (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, 2016 is presented below: Stock-based compensation expense recognized(1)................................... $ Tax benefit recognized(2) ........................................................................... 26,326 $ 27,867 28,664 $ 10,033 32,203 11,271 (1) No stock-based compensation expense was capitalized in any period. (2) Due to the adoption of ASU 2016-09 as described in Note 1—Significant Accounting Policies under "Accounting Pronouncements Adopted in the Current Year", certain current year balances related to excess tax benefits from stock compensation were adjusted prospectively. 2016 2015 2014 Additional stock compensation information is as follows at December 31: Unrecognized compensation(1) ....................................................................................... $ Weighted average period of expected recognition (in years)(1) ....................................... (1) Includes restricted stock and performance shares. No equity awards were cash settled during the three years ended December 31, 2016. 2016 2015 27,334 $ 33,977 0.89 0.85 99 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 13—Stock-Based Compensation (continued) Options: The following table summarizes information about stock options outstanding at December 31, 2016. Range of Exercise Prices $20.58 - $32.48 ................................... 37.40 - 43.06 ....................................... 50.64 ................................................... 50.69 ................................................... 51.62 - 56.32 ....................................... $20.58 - $56.32 ................................... Number Outstanding 1,549,010 1,111,634 1,412,225 1,406,282 1,494,440 6,973,591 Options Outstanding Weighted- Average Remaining Contractual Life (Years) Weighted- Average Exercise Price 2.23 $ 3.53 7.41 4.63 5.65 4.70 $ 30.01 37.67 50.64 50.69 53.64 44.64 Options Exercisable Number Exercisable Weighted- Average Exercise Price 1,470,267 $ 998,713 — 604,802 42,065 3,115,847 $ 29.99 37.70 — 50.69 54.79 36.81 An analysis of option activity for each of the three years ended December 31, 2016 is as follows: 2016 2015 2014 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 ............... Weighted Average Exercise Price Weighted Average Exercise Price Weighted Average Exercise Price Options 7,734,841 $ 834,212 597,225 (2,184,169) (8,518) — 6,973,591 $ Options 7,889,321 $ 1,220,751 296,875 (1,576,485) (95,621) — 7,734,841 $ Options 8,579,202 $ 1,226,270 297,712 (2,210,348) (3,488) (27) 7,889,321 $ 32.91 53.62 53.61 22.81 48.85 — 38.84 38.84 50.78 50.64 28.08 39.35 — 44.64 27.84 50.70 50.69 25.47 40.05 — 32.91 Exercisable at end of year ............ 3,115,847 $ 36.81 3,774,061 $ 29.37 3,809,415 $ 24.58 Additional information about Torchmark’s stock option activity as of December 31, 2016 and 2015 is as follows: Outstanding options: Weighted-average remaining contractual term (in years) .......................................... Aggregate intrinsic value ........................................................................................... $ 4.70 87,286 $ 4.32 141,728 Exercisable options: Weighted-average remaining contractual term (in years) .......................................... Aggregate intrinsic value ........................................................................................... $ 2.96 63,395 $ 2.74 104,885 Selected stock option activity for the three years ended December 31, 2016 is presented below: 2016 2015 100 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 13—Stock-Based Compensation (continued) 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 .................................................................. 2016 2015 2014 9.04 $ 11.97 $ 73,995 61,329 25,898 54,854 35,958 24,470 14.77 61,229 56,294 23,232 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 ..................................................................... $ 2016 3,857,744 50.97 $ 6.11 23,891 $ 2015 3,960,780 47.86 5.82 36,843 Torchmark expects that substantially all unvested options will vest. 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. Certain executive restricted stock and performance share grants contain terms related to age that could accelerate vesting. Restricted stock units outstanding at each of the year ends 2016, 2015, and 2014 were 112,591, 105,679, and 98,039, respectively. All restricted stock units were fully vested at the end of each year of grant. Below is the final determination of the performance share grants in 2012 to 2014: Year of grants 2012 .................................................................................................. 2013 .................................................................................................. 2014 .................................................................................................. Final settlement of shares Final settlement date 211,287 159,020 119,896 January 27, 2015 February 24, 2016 February 21, 2017 For the 2015 and 2016 performance share grants, actual shares that could be distributed range from 0 to 353 thousand for the 2015 grants and 0 to 335 thousand shares for the 2016 grants. 101 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 13—Stock-Based Compensation (continued) A summary of restricted stock grants for each of the years in the three-year period ended December 31, 2016 is presented in the table below. Executives restricted stock: Shares .................................................................................................... Price per share ....................................................................................... $ Aggregate value ..................................................................................... $ Percent vested as of 12/31/16 ................................................................ — — $ — $ —% — — $ — $ —% 12,000 50.69 608 —% 2016 2015 2014 Directors restricted stock: Shares .................................................................................................... Price per share ....................................................................................... $ Aggregate value ..................................................................................... $ Percent vested as of 12/31/16 ................................................................ 12,549 57.39 720 85% Directors restricted stock units (including dividend equivalents): Shares .................................................................................................... Price per share ....................................................................................... $ Aggregate value ..................................................................................... $ Percent vested as of 12/31/16 ................................................................ 6,912 56.74 392 100% Performance shares: Target shares .......................................................................................... Target price per share ............................................................................. $ Assumed adjustment for performance objectives (in shares) ................. Aggregate value ..................................................................................... $ Percent vested as of 12/31/16 ................................................................ 167,500 50.64 (35,073) 8,482 6,648 54.16 360 100% 7,640 54.44 416 100% 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 $ $ $ $ $ $ —% —% —% 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. 102 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 2014: Balance at January 1, 2014 ............. Grants .............................................. Additional performance shares(1) ..... Restriction lapses and settlements .. Forfeitures ....................................... Balance at December 31, 2014 ..... 2015: Grants .............................................. Additional performance shares(1) ..... Restriction lapses ............................ Forfeitures ....................................... Balance at December 31, 2015 ..... 2016: Grants .............................................. Additional performance shares(1) ..... Restriction lapses ............................ Forfeitures ....................................... Balance at December 31, 2016 ..... 344,445 12,000 (90,315) (2,700) 263,430 — (61,815) (13,950) 187,665 — (130,215) — 57,450 362,550 179,250 22,060 (7,500) 556,360 179,500 (58,056) (211,287) (7,500) 459,017 167,500 (35,073) (159,020) — 432,424 — 7,041 — 12,322 (7,041) (12,322) — — 6,648 7,640 Total 706,995 210,613 22,060 (109,678) (10,200) 819,790 193,788 (58,056) (6,648) (7,640) (287,390) — — 12,549 6,912 (21,450) 646,682 186,961 (35,073) (10,655) (6,912) (306,802) 1,894 — 491,768 — (1) Estimated additional (reduced) share grants expected due to achievement of performance criteria. An analysis of the weighted-average grant-date fair values per share of unvested restricted stock is as follows for the year 2016: Executive Restricted Stock Executive Performance Shares Directors Restricted Stock Directors Restricted Stock Units Grant-date fair value per share at January 1, 2016 . $ Grants ..................................................................... 32.92 $ — Estimated additional performance shares ............... Restriction lapses .................................................... Forfeitures ............................................................... Grant-date fair value per share at December 31, 2016 ................................................. (30.47) — 46.77 50.64 $ (70.47) (37.40) — 57.39 $ 56.32 (56.32) (56.32) 38.46 49.79 63.39 103 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, 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 2016 Distribution Channel Amount % of Total United American Independent ........................... $ 13,733 Liberty National Exclusive ................................. American Income Exclusive .............................. Family Heritage Exclusive ................................. Direct Response ............................................... Other ................................................................. 270,476 913,355 2,866 782,765 206,138 1 12 42 — 36 9 Amount $ 355,015 201,798 84,382 236,075 70,393 38 21 9 25 7 % of Total Amount % of Total Amount % of Total $ 38 100 $ 368,786 472,274 997,737 238,941 853,158 206,138 $ 3,137,034 12 15 32 8 27 6 100 $ 2,189,333 100 $ 947,663 100 $ 38 100 Distribution Channel For the Year 2015 Life Health Annuity Total Amount % of Total Amount % of Total Amount % of Total Amount % of Total United American Independent ........................... $ 15,036 1 $ 345,330 Liberty National Exclusive ................................. American Income Exclusive .............................. Family Heritage Exclusive ................................. Direct Response ............................................... Other ................................................................. 271,113 830,903 2,334 746,693 206,986 13 40 — 36 10 209,150 80,339 221,091 69,610 37 23 9 24 7 $ 135 100 $ 360,501 480,263 911,242 223,425 816,303 206,986 12 16 30 8 27 7 $ 2,073,065 100 $ 925,520 100 $ 135 100 $ 2,998,720 100 104 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 14—Business Segments (continued) 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 .............................. Family Heritage Exclusive ................................. Direct Response ............................................... Other ................................................................. 272,265 766,458 1,595 702,023 207,377 14 39 — 36 10 222,017 78,722 204,667 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 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 2016, Torchmark recorded $3.8 million in administrative settlements ($2.5 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 2016. 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. 105 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 14—Business Segments (continued) 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. 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 noted in the paragraphs 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. Life Health Annuity Investment Other Corporate Adjustments Consolidated For the year 2016 Revenue: Premium .................................................. $2,189,333 $947,663 $ 38 Net investment income............................ Other income........................................... $ 806,903 $ 1,534 $ Total revenue .......................... 2,189,333 947,663 38 806,903 1,534 Expenses: Policy benefits ......................................... 1,475,477 612,725 36,751 Required interest on: Policy reserves................................ (577,827) (73,382) (51,131) 702,340 Deferred acquisition costs............... 178,946 23,060 Amortization of acquisition costs ............. 374,499 90,385 807 4,179 (202,813) $ 3,137,034 806,903 1,375 3,945,312 (2) (159) (159) 3,795 (3) 2,128,748 Commissions, premium taxes, and non- deferred acquisition costs ....................... Insurance administrative expense (1)....... Parent expense ....................................... Stock-based compensation expense ...... Interest expense...................................... 164,476 84,819 38 (2) (159) 553 (4) 196,598 $ 8,587 26,326 83,345 Total expenses........................ 1,615,571 737,607 (9,356) 582,872 196,598 34,913 4,189 Subtotal ...................................................... 573,762 210,056 9,394 224,031 (195,064) (34,913) Non-operating items ............................. Measure of segment profitability (pretax).............................................. $ 573,762 $210,056 $ 9,394 $ 224,031 $(195,064) $ (34,913) $ — Deduct applicable income taxes ........................................................................................................................................................................... Net operating income from continuing operations ....................................................................................................................................... Add back income taxes applicable to segment profitability ................................................................................................................................... Add (deduct) realized investment gains (losses) .................................................................................................................................................. Deduct administrative settlements (3) .................................................................................................................................................................... Deduct non-operating fees (4) ................................................................................................................................................................................ (4,348) 4,348 (3,4) Income before income taxes per Consolidated Statement of Operations .................................................................................................... $ 772,235 (1) Administrative expense is not allocated to insurance segments. (2) Elimination of intersegment commission. (3) Administrative settlements. (4) Non-operating fees. 106 — — 469,063 249,174 197,151 8,587 26,326 83,345 3,162,394 782,918 4,348 787,266 (237,906) 549,360 237,906 (10,683) (3,795) (553) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 14—Business Segments (continued) 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 $ (194) (2) (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 ................... Amortization of acquisition costs ................. Commissions, premium taxes, and non- deferred acquisition costs ............................ Insurance administrative expense (1) ............ Parent expense............................................ Stock-based compensation expense ........... Interest expense .......................................... 172,947 353,595 22,760 83,341 1,138 8,689 (196,845) 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 1,200 Subtotal........................................................... 569,402 204,377 4,568 219,504 (183,812) (37,667) (1,394) Non-operating items ................................. Measure of segment profitability (pretax) .................................................. $ 569,402 $204,377 $ 4,568 $ 219,504 $(183,812) $ (37,667) $ — 1,394 (3) Deduct applicable income taxes .......................................................................................................................................................................... Net operating income from continuing operations ...................................................................................................................................... Add back income taxes applicable to segment profitability ................................................................................................................................. Add (deduct) realized investment gains (losses) ................................................................................................................................................. Deduct administrative settlements (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) Income before income taxes per Consolidated Statement of Operations ........................................................................................................... $ 766,187 (1) Administrative expense is not allocated to insurance segments. (2) Elimination of intersegment commission. (3) Administrative settlements. 107 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 14—Business Segments (continued) Life Health Annuity Investment Other Corporate Adjustments Consolidated For the Year 2014 Revenue: Premium ..................................................... $1,966,300 $869,440 $ 400 Net investment income ............................... Other income .............................................. $ 758,286 $ 2,354 Total revenue ....................................... 1,966,300 869,440 400 758,286 2,354 Expenses: Policy benefits............................................. 1,293,384 559,817 42,005 Required interest on: Policy reserves ...................................... (530,192) (64,401) (55,255) 649,848 $ 2,836,140 758,286 2,121 3,596,547 $ (233) (2) (233) 8,178 (4) 1,903,384 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) 2,422 (3) (85) (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) Non-operating items ................................ Measure of segment profitability (pretax) ................................................. $ 556,489 $199,319 $ 4,312 $ 224,364 $ (172,478) $ (40,362) $ — Deduct applicable income taxes .......................................................................................................................................................................... Net operating income from continuing operations ...................................................................................................................................... Add back income taxes applicable to segment profitability .................................................................................................................................. Add (deduct) realized investment gains (losses) ................................................................................................................................................. Deduct legal settlement expenses (3) ................................................................................................................................................................... Deduct administrative settlements (4) .................................................................................................................................................................... (10,515) 10,515 (3,4) — — 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) Income before income taxes 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. 108 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 14—Business Segments (continued) The following table summarizes the measures of segment profitability as determined in the three preceding tables for comparison with prior periods. The table also reconciles segment profits to net income. Analysis of Profitability by Segment 2016 2015 2014 2016 Change Life insurance underwriting margin ............................................ $ 573,762 $ 569,402 $ 556,489 $ 4,360 Health insurance underwriting margin ....................................... 210,056 204,377 199,319 Annuity underwriting margin ...................................................... 9,394 4,568 4,312 Excess investment income ........................................................ 224,031 219,504 224,364 5,679 4,826 4,527 Other insurance: 2015 Change $ 12,913 5,058 256 % 2 3 6 (4,860) (2) % 1 3 106 2 Other income ..................................................................... 1,534 2,379 2,354 (845) (36) 25 Administrative expense ..................................................... (196,598) (186,191) (174,832) (10,407) Corporate and adjustments ....................................................... (34,913) (37,667) (40,362) Pre-tax total ............................................................... Applicable taxes(1) ..................................................................... Net operating income from continuing operations ..... Discontinued operations (after tax)(2) ......................................... 787,266 776,372 771,644 (237,906) (253,459) (252,041) 549,360 522,913 519,603 10,189 10,807 14,865 (618) Total ........................................................................... 559,549 533,720 534,468 25,829 2,754 10,894 15,553 26,447 (11,359) 2,695 4,728 (1,418) 3,310 1 6 (7) 1 1 1 (4,058) (27) (748) — 6 (7) 1 (6) 5 (6) 5 Realized gains (losses)—investments (after tax) ....................... (6,944) (5,714) 15,306 (1,230) (21,020) Legal settlement expenses (after tax) ........................................ Administrative settlements (after tax) ........................................ — (2,467) Non-operating fees (after tax) .................................................... (359) Net income ................................................................ $ 549,779 — (906) — (1,519) (5,316) — — (1,561) (359) 1,519 4,410 — $ 527,100 $ 542,939 $ 22,679 4 $ (15,839) (3) (1) Certain current year amounts were prospectively adjusted to give effect to the adoption of ASU 2016-09 related to excess tax benefits from stock compensation as described in Note 1—Significant Accounting Policies under "Accounting Pronouncements Adopted in the Current Year." (2) 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, 2016 Life Health Annuity Investment Other Consolidated Cash and invested assets .............................. Accrued investment income ........................... $ 15,955,891 223,148 Deferred acquisition costs .............................. $ 3,261,220 $ 512,701 $ 9,237 Goodwill ......................................................... 309,609 131,982 Other assets .................................................. $ 1,032,299 $ 15,955,891 223,148 3,783,158 441,591 1,032,299 Total assets ............................................... $ 3,570,829 $ 644,683 $ 9,237 $ 16,179,039 $ 1,032,299 $ 21,436,087 109 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 14—Business Segments (continued) Life Health Annuity Investment Other Consolidated At December 31, 2015 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 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 as well as current and deferred income taxes payable. Debt represents both short and long term. Liabilities by Segment Life Health Annuity Investment Other Consolidated At December 31, 2016 Future policy benefits ........................................... $ 9,825,776 $ 1,706,870 $ 1,293,191 $ 12,825,837 Unearned and advance premiums ....................... Policy claims and other benefits payable ............. 16,828 156,437 47,189 143,128 Debt ..................................................................... Other .................................................................... $ 1,397,640 $ 2,282,167 64,017 299,565 1,397,640 2,282,167 Total liabilities .................................................... $ 9,999,041 $ 1,897,187 $ 1,293,191 $ 1,397,640 $ 2,282,167 $ 16,869,226 Life Health Annuity Investment Other Consolidated At December 31, 2015 Future policy benefits ........................................... $ 9,327,561 $ 1,600,240 $ 1,318,010 $ 12,245,811 Unearned and advance premiums ....................... Policy claims and other benefits payable ............. 17,381 135,778 49,640 137,120 Debt ..................................................................... Other .................................................................... $ 1,233,862 $ 1,978,069 67,021 272,898 1,233,862 1,978,069 Total liabilities .................................................... $ 9,480,720 $ 1,787,000 $ 1,318,010 $ 1,233,862 $ 1,978,069 $ 15,797,661 110 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 million per life. Life insurance ceded represented 0.4% of total life insurance in force at December 31, 2016. Insurance ceded on life and accident and health products represented 0.3% of premium income for 2016. 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 1.9% of life insurance in force at December 31, 2016 and reinsurance assumed on life and accident and health products represented 0.7% of premium income for 2016. 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, 2016 is as follows: Year Ended December 31, 2016 2015 2014 Rental expense ............................................................................................................ $ 6,520 $ 6,722 $ 4,200 Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 2016 were as follows: Operating lease commitments ............................... $ 8,182 $ 5,254 $ 5,047 $ 4,898 $ 4,625 $ 7,801 Year Ended December 31, 2017 2018 2019 2020 2021 Thereafter Low-Income Housing Tax Credit Interests: As described in Note 1—Significant Accounting Policies, Torchmark had $280 million invested in entities which provide certain tax benefits at December 31, 2016. As of December 31, 2016, Torchmark remained obligated under these commitments as follows: Low-Income housing commitments ....................... $34,162 $18,350 $ 2,964 $ 838 $ 302 $ 202 Year Ended December 31, 2017 2018 2019 2020 2021 Thereafter Investments: As of December 31, 2016, Torchmark had committed to purchase $8.4 million of private placement fixed maturities managed by a third party in early 2017. Guarantees: At December 31, 2016, 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, 2016, 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 2021. 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. Letters of credit outstanding were $177 million at December 31, 2016 and 2015. 111 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, 2016, total remaining undiscounted payments under the leases were approximately $15 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 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. 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. As previously reported, litigation was filed on February 10, 2015 against Torchmark subsidiary, Globe Life And Accident Insurance Company in Oklahoma County, Oklahoma District Court (Proctor v. Globe Life And Accident Insurance Company, Case No. CJ-2015-838) asserting claims for breach of the implied covenants of good faith and fair dealing and for false representation, deceit and conversion in connection with Globe’s denial of plaintiff’s claim on a life insurance policy for non-payment of premium. Plaintiff, who had alleged that Globe had improperly retained 12 monthly premium payments on a policy that was treated as lapsed or not returned to in-force status, seeks actual and punitive damages, prejudgment interest, attorney fees, costs and other relief. Plaintiff subsequently amended his complaint to add allegations of conversion and civil theft on behalf of a purported class of Globe’s U.S. policyholders who had paid premiums retained by Globe when their policies were lapsed and not reinstated at the time of the premium payments. Globe removed the case to the U.S. District Court for the Western District of Oklahoma (Case No. 15-CV-0070-M) on July 10, 2015 and filed a Motion to Dismiss on July 17, 2015. The Court denied plaintiff’s Motion to Remand back to state court on October 26, 2015, but allowed the plaintiff to amend the complaint to assert a putative class action in federal court. Plaintiff filed a Motion for Class Certification on September 23, 2016. Globe filed a Response in Opposition on November 4, 2016. The Court has not yet ruled on Plaintiff’s Motion. 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. 112 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, 2016. 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 2016: 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(1) ...................................................... Basic net income per common share: Continuing operations ...................................... Discontinued operations .................................. Total basic net income per share ................... Diluted net income per common share:(1) Continuing operations ...................................... Discontinued operations .................................. Total diluted net income per share ................. 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 ................. 779,860 $ 197,053 293 977,627 524,973 118,806 195,448 133,574 (9,541) 124,033 785,855 $ 201,642 4,005 991,884 531,485 117,245 199,344 139,294 (865) 138,429 783,411 $ 202,720 3,482 989,773 532,152 116,821 201,461 141,910 9,959 151,869 1.10 (0.08) 1.02 1.08 (0.07) 1.01 1.16 (0.01) 1.15 1.13 — 1.13 1.19 0.08 1.27 1.16 0.09 1.25 742,056 $ 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) 127,110 748,109 $ 193,213 5,140 947,154 501,156 111,643 199,009 133,858 11,528 145,386 1.03 (0.07) 0.96 1.02 (0.07) 0.95 1.05 (0.04) 1.01 1.04 (0.04) 1.00 1.08 0.09 1.17 1.06 0.09 1.15 787,908 205,488 (18,463) 975,345 540,138 116,191 175,982 124,812 10,636 135,448 1.05 0.09 1.14 1.03 0.09 1.12 756,071 194,319 (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 (1) Due to the adoption in 2016 of ASU 2016-09, certain current year balances related to excess tax benefits from stock compensation were adjusted prospectively as described in Note 1—Significant Accounting Policies under "Stock Compensation." 113 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, 2016, an evaluation was performed under the supervision and with the participation of Torchmark management, including the Co-Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer, of Torchmark’s disclosure controls and procedures (as those terms are defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon their evaluation, the Co- Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer have concluded that Torchmark’s disclosure controls and procedures are effective as of the date of this Form 10-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, 2016, there have not been any changes in Torchmark’s internal control over financial reporting or in other factors that could significantly affect this control over financial reporting subsequent to the date of their evaluation which have materially affected, or are reasonably likely to materially affect, Torchmark’s internal control over financial reporting. No material weaknesses in such internal controls were identified in the evaluation and as a consequence, no corrective action was required to be taken. There were no items required. Item 9B. Other Information 114 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, 2016. The Company’s independent registered public accounting firm has issued an attestation report on the Company’s internal control over financial reporting as stated in their report which is included herein. /s/ Gary L. Coleman Gary L. Coleman Co-Chairman and Chief Executive Officer /s/ Larry M. Hutchison Larry M. Hutchison Co-Chairman and Chief Executive Officer /s/ Frank M. Svoboda Frank M. Svoboda Executive Vice President and Chief Financial Officer February 27, 2017 115 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, 2016, 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, 2016, 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, 2016 of Torchmark and our report dated February 27, 2017 expressed an unqualified opinion on those financial statements and financial statement schedules. /s/ DELOITTE & TOUCHE LLP Dallas, Texas February 27, 2017 116 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 April 27, 2017 (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”, “2016 Grants of Plan-based Awards”, “Outstanding Equity Awards at Fiscal Year End 2016”, “Option Exercises and Stock Vested during Fiscal Year Ended December 31, 2016”, “Pension Benefits at December 31, 2016”, “Potential Payments upon Termination or Change in Control”, “2016 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, 2016 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 6,973,591 $ — 6,973,591 $ 44.64 — 44.64 5,088,461 — 5,088,461 (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. 117 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, 2016 and 2015 .......................................................... Consolidated Statements of Operations for each of the three years in the period ended December 31, 2016 .............................................................................................................................. Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2016 ............................................................................................................................. Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2016 ............................................................................................................................. Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2016 .............................................................................................................................. Notes to Consolidated Financial Statements ........................................................................................ Schedules Supporting Financial Statements for each of the three years in the period ended December 31, 2016: 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. 51 52 53 54 55 56 57 126 130 118 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 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) 4.9 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) 4.10 Second Supplemental Indenture dated as of April 5, 2016 between Torchmark Corporation and The Bank of New York Mellon Trust Company of New York, N.A., as Trustee, supplementing the Junior Subordinated Indenture dated as of November 2, 2011 (incorporated by reference from Exhibit 4.3 to Form 8-K dated April 5, 2016) 4.11 4.12 10.1 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)* 119 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 10.16 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)* Second Amended and Restated Credit Agreement dated as of May 17, 2016 among Torchmark Corporation, as the Borrower, TMK Re, Ltd., as a Loan Party, Wells Fargo Bank, National Association, as Administrative Agent, Swing Line Lender and L/C Administrator and the other lenders party thereto (incorporated by reference from Exhibit 10.1 to Form 8-K dated May 16, 2016) 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* (incorporated by reference from Exhibit 10.14 to Form 10-K for the fiscal year ended December 31, 2015) The Torchmark Corporation 1998 Stock Incentive Plan (incorporated by reference from Exhibit 10 (n) to Form 10-K for the fiscal year ended December 31, 1998)* The Torchmark Corporation Savings and Investment Plan (amended and restated as of January 1, 2014)* (incorporated by reference from Exhibit 10.16 to From 10-K for the fiscal year ended December 31, 2015) 120 Page of this Report 10.17 10.18 10.19 Torchmark Corporation 2013 Management Incentive Plan effective as of January 1, 2013 (incorporated by reference from Exhibit 10.1 to Form 8-K dated April 30, 2013)* Coinsurance and Servicing Agreement between Security Benefit Life Insurance Company and Liberty National Life Insurance Company, effective as of December 31, 1995 (incorporated by reference from Exhibit 10(u) to Form 10-K for the fiscal year ended December 31, 1995) Torchmark Corporation 1996 Non-Employee Director Stock Option Plan (incorporated by reference from Exhibit 10(w) to Form 10-K for the fiscal year ended December 31, 1996)* 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)* 121 Page of this 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) 122 Page of this 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, effective January 1, 2017* 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 Acknowledgment 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 Torchmark Corporation Savings and Investment Plan 2016 Amendment Number One* (incorporated by reference from Exhibit 10.2 to Form 8-K dated May 17, 2016) 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)* 123 Page of this Report 125 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* 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* 10.77 Form of Performance Share Award Certificate under Torchmark Corporation 2011 Incentive Plan, as amended with Non-Compete, Non-Solicit and Confidentiality Provisions* 10.78 Form of Seven Year Stock Option Grant Agreement (Special) under Torchmark Corporation 2011 Incentive Plan, as amended with Non-Compete, Non-Solicit and Confidentiality Provisions* 10.79 2016 Amendment to the Torchmark Corporation Savings and Investment Plan (effective December 31, 2016)* 10.80 Torchmark Corporation Pension Plan 2016 Amendment to Limit Eligibility (effective December 31, 2016)* 12 Statement re computation of ratios 20 Proxy Statement for Annual Meeting of Stockholders to be held April 27, 2017** 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, 2016. 124 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. 125 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (Amounts in thousands) Assets: December 31, 2016 2015 Long-term investments .................................................................................................. $ Cash .............................................................................................................................. Investment in affiliates ................................................................................................... Due from affiliates ......................................................................................................... Taxes receivable from affiliates ..................................................................................... Other assets .................................................................................................................. 35,498 — 5,438,749 50,765 79,599 93,936 Total assets ........................................................................................................... $ 6,342,227 $ 5,698,547 33,586 $ — 6,004,429 96,005 88,406 119,801 Liabilities and shareholders’ equity: Liabilities: Short-term debt ......................................................................................................... $ Long-term debt .......................................................................................................... Due to affiliates ......................................................................................................... Other liabilities .......................................................................................................... Total liabilities ........................................................................................................ 264,475 $ 1,282,891 — 228,000 1,775,366 490,129 893,417 57,157 202,292 1,642,995 Shareholders’ equity: 351 Preferred stock .......................................................................................................... 130,218 Common stock .......................................................................................................... 832,795 Additional paid-in capital ........................................................................................... 231,947 Accumulated other comprehensive income .............................................................. 3,614,369 Retained earnings ..................................................................................................... (754,128) Treasury stock ........................................................................................................... Total shareholders’ equity ..................................................................................... 4,055,552 Total liabilities and shareholders’ equity ................................................................ $ 6,342,227 $ 5,698,547 351 127,218 840,932 577,574 3,890,798 (870,012) 4,566,861 See Notes to Condensed Financial Statements and accompanying Report of Independent Registered Public Accounting Firm. 126 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) CONDENSED STATEMENTS OF OPERATIONS (Amounts in thousands) Year Ended December 31, 2015 2014 2016 Net investment income ............................................................................. $ Realized investment gains (losses) .......................................................... Total revenue ...................................................................................... 25,352 $ — 25,352 23,715 $ 8 23,723 22,259 4,767 27,026 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 ......................................................................................... 52,613 (54,288) 86,853 85,178 (59,826) 23,479 (36,347) 586,126 549,779 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 Other comprehensive income (loss): Attributable to Parent Company ............................................................. Attributable to affiliates ........................................................................... Comprehensive income (loss) ............................................................ $ (28,680) (3,539) (11,314) 815,151 (761,966) 356,941 895,406 $ (238,405) $ 1,329,410 See Notes to Condensed Financial Statements and accompanying Report of Independent Registered Public Accounting Firm. 127 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(continued) CONDENSED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2016 2015 2014 Net income ..................................................................................................... $ 549,779 $ 527,100 $ 542,939 Equity in earnings of affiliates ........................................................................ (582,139) Cash dividends from subsidiaries .................................................................. (586,126) (568,176) 437,566 478,840 466,416 Other, net ....................................................................................................... (6,718) 20,371 17,842 Cash provided from operations .................................................................. 394,501 445,711 457,482 Cash provided from (used for) investing activities: Disposition of investments ........................................................................... Net decrease (increase) in short-term investments ..................................... Investment in subsidiaries ............................................................................ Additions to properties ................................................................................ — (3,466) (35,000) (21,965) — 17,338 (2) (468) 5,064 2,729 — — Loaned money to affiliates ........................................................................... (363,056) (282,508) (81,000) Repayments from affiliates .......................................................................... 318,056 282,508 Cash provided from (used for) investing activities ................................... (105,431) 16,868 81,000 7,793 — — — — — — 1,978 35,958 9,328 56,294 Cash provided from (used for) financing activities: Repayment of debt ...................................................................................... Proceeds from issuance of debt .................................................................. Payment for debt issuance costs ................................................................. Net issuance (repayment) of commercial paper .......................................... Issuance of stock ......................................................................................... (250,000) 400,000 (9,638) 22,224 61,329 Acquisitions of treasury stock ...................................................................... (404,784) (418,526) (449,309) Borrowed money from affiliate ..................................................................... 60,000 15,000 168,000 Repayments to affiliates ............................................................................... Excess tax benefit on stock option exercises(1) ............................................ Payment of dividends .................................................................................. Cash provided from (used for) financing activities .................................. (78,000) — (90,201) (289,070) (15,000) 8,180 (90,169) (462,579) (168,000) 6,688 (88,276) (465,275) Net increase (decrease) in cash .................................................................... Cash balance at beginning of period .............................................................. Cash balance at end of period ....................................................................... $ — — — $ — — — $ — — — (1) Certain current year amounts were prospectively adjusted to give effect to the adoption of ASU 2016-09 related to excess tax benefits from stock compensation as described in Note 1—Significant Accounting Policies under "Accounting Pronouncements Adopted in the Current Year." See Notes to Condensed Financial Statements and accompanying Report of Independent Registered Public Accounting Firm. 128 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 ...................................................................... $ Year Ended December 31, 2015 466,416 $ 2016 437,566 $ 2014 478,840 Note B—Supplemental Disclosures of Cash Flow Information The following table summarizes noncash transactions, which are not reflected on the Condensed Statements of Cash Flows: Year Ended December 31, 2015 2014 2016 Stock-based compensation not involving cash ......................................... $ Borrowed money from affiliate .................................................................. Investment in subsidiaries ........................................................................ Purchase of agent debit balances ............................................................ 26,326 $ — — — 28,664 $ 56,503 39,206 17,297 32,203 — — — The following table summarizes certain amounts paid (received) during the period: Year Ended December 31, 2015 2014 2016 Interest paid .............................................................................................. $ Income taxes received .............................................................................. 84,952 $ (20,838) 77,920 $ (22,009) 77,663 (25,581) Note C—Preferred Stock As of December 31, 2016, 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. 129 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, 2016 Life insurance in force ....................... $ 174,314,897 $ Premiums:(2) 725,867 $ 3,352,113 $ 176,941,143 Life insurance .................................. $ Health insurance ............................. 2,152,698 $ 4,507 $ 22,915 $ 2,171,106 951,137 3,474 — 947,663 Total premium ............................. $ 3,103,835 $ 7,981 $ 22,915 $ 3,118,769 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 ............................. 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 1.9 1.1 — 0.7 2.1 1.2 — 0.8 2.2 1.3 — 0.9 (1) No amounts have been netted against ceded premium. (2) Excludes policy charges of $18.3 million, $19.3 million, and $20.9 million in each of the years 2016, 2015, and 2014, respectively. See accompanying Report of Independent Registered Public Accounting Firm. 130 Pursuant to the requirements of Section 12 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES By: By: By: TORCHMARK CORPORATION /s/ GARY L. COLEMAN Gary L. Coleman Co-Chairman and Chief Executive Officer and Director /s/ LARRY M. HUTCHISON Larry M. Hutchison Co-Chairman and Chief Executive Officer and Director /s/ FRANK M. SVOBODA Frank M. Svoboda, Executive Vice President and Chief Financial Officer (Principal Accounting Officer) Date: February 27, 2017 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: By: /s/ CHARLES E. ADAIR * Charles E. Adair Director /S/ MARILYN A. ALEXANDER * Marilyn A. Alexander Director /S/ DAVID L. BOREN * David L. Boren Director /s/ JANE M. BUCHAN * Jane M. Buchan Director /s/ ROBERT W. INGRAM * Robert W. Ingram Director Date: February 27, 2017 *By: /s/ FRANK M. SVOBODA Frank M. Svoboda Attorney-in-fact By: By: By: By: By: /s/ STEVEN P. JOHNSON * Steven P. Johnson Director /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 131 [THIS PAGE INTENTIONALLY LEFT BLANK] 3700 S. Stonebridge Drive McKinney, Texas 75070 www.torchmarkcorp.com 

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