ANNUAL REPORT 2017
PRINCIPAL EXECUTIVE OFFICE
3700 South Stonebridge Drive
McKinney, Texas 75070
(972) 569-4000
ANNUAL MEETING
OF SHAREHOLDERS
10:00 a.m. CDT, Thursday, April 26, 2018
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
STOCK EXCHANGE LISTINGS
New York Stock Exchange
Symbol: TMK
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AND 6 1/8% AND 5 11/40% JUNIOR
SUBORDINATED DEBENTURES
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STOCK TRANSFER AGENT AND SHAREHOLDER
ASSISTANCE
EQ Shareowner Services
P.O. Box 64854
St. Paul, MN 55164-0854
or
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120-4100
Toll-Free Number: (866) 557-8699
TDD: Hearing impaired can use
a relay service
Outside the U.S.: (651) 450-4064
Website: www.shareowneronline.com
TORCHMARK CORPORATION WEBSITE
On the www.torchmarkcorp.com home
page are links to the web pages of:
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
Financial Information
Environmental, Social and
Governance Report
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
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 EQ 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.
• Code of Business Conduct and Ethics
• Corporate By-laws
• Code of Ethics for CEO and Senior
Financial Officers
• Corporate Governance Guidelines
• Related Party Transaction Policy
• Employee Complaint Procedures
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
2017 IN FOCUS
$ in thousands
$3,282,935
Total Premium From
Continuing Operations
$573,681
Net Operating
Income From
Continuing Operations
$2,373,099
Annualized Life
Premium In Force
$1,018,020
Annualized Health
Premium In Force
2 | TORCHMARK CORPORATION |
FINANCIAL HIGHLIGHTS
$ in thousands, except per share amounts
OPERATIONS
2017
2016
% CHANGE
Total Premium From Continuing
Operations
$3,282,935
$3,137,034
Net Operating Income From Continuing
Operations 1
573,681
549,360
Net Income
1,454,494+
549,779
Annualized Life Premium In Force
2,373,099
2,262,736
Annualized Health Premium In Force
1,018,020
998,634
Diluted Average Shares Outstanding
118,983
122,368
4.7
4.4
+
4.9
1.9
2.8
Net Operating Income From All
Operations as a Return on Average Equity
(excluding net unrealized gains on fixed
maturities1)
PER COMMON SHARE ON A DILUTED BASIS
Net Operating Income From Continuing
Operations 1
14.3%
14.6%
$4.82
$4.49
7.3
Shareholders’ Equity (excluding net
unrealized gains on fixed maturities1)
39.77+
32.13
23.8
1The following financial measures utilized by management and contained in the following Letter to
Shareholders are considered non-GAAP: net operating income; net operating income as a return
on average equity, excluding net unrealized gains on fixed maturities; book value (shareholders’
equity) per share, excluding net unrealized gains or losses on fixed maturities; underwriting
income or margin (consolidated). Torchmark includes non-GAAP measures to enhance investors’
understanding of management’s view of the business. The non-GAAP measures are not a
substitute for GAAP, but rather a supplement to increase transparency by providing broader
perspective. Torchmark’s definitions of non-GAAP measures may differ from other companies’
definitions. Reconciliations to GAAP financial data are presented on pages 14-15.
+As a result of the tax reform legislation enacted in 2017, the Company made a one-time adjustment
of $874 million to net income. Excluding the tax reform adjustment, net income and shareholders’
equity, excluding net unrealized gains on fixed maturities, would have been $581 million and
$34.68, respectively.
“ We believe Torchmark has a
very bright future. Many times
we hear that life insurance is
a mature market with limited
growth potential. For Torchmark,
this is simply not true. We
are uniquely positioned to
thrive and build shareholder
value well into the future.”
LETTER TO SHAREHOLDERS*
Torchmark had another good year in 2017. Return on equity, excluding net unrealized gains on fixed maturities, was 14.3% and total premiums
grew 5%. Agency sales grew 8%, driven by increases in both agent count and productivity. We have had sales growth in each of our exclusive
agencies now for four years in a row. While Direct Response sales have declined, this was by design due to actions taken to maximize profit
dollars. We are encouraged with recent results as we have seen the margins stabilize. We expect to begin to see Direct Response sales growth
again in 2019.
Many investors ask us how Torchmark differs from other life insurance companies. The answer can be found in our business model, a model that
has consistently facilitated significant growth regardless of general economic conditions. The components of this model are discussed below:
MARKET
the middle-income market – a vastly
underserved marketplace with significant
growth potential and relatively little
competition.
CONTROLLED DISTRIBUTION
We market our products primarily through
exclusive agency and direct response
channels. This enhances our ability to limit
competitive pressures and control costs.
CASH FLOWS
Torchmark’s highly persistent block of in force
business produces strong excess cash flows
year in and year out. The persistency of our
in force block has always been very stable,
regardless of macro-economic conditions.
Nearly 90% of our premium revenue comes
from policies sold in prior years.
PRODUCTS
We focus on basic life and supplemental
health products that best meet the needs of
our marketplace. These products are simple
for agents and customers to understand
and are not impacted by interest rate or
equity market fluctuations.
MARGINS
Torchmark has a long history of
administrative efficiency. Our ability to
control both acquisition and administrative
costs helps produce healthy underwriting
margins. As such, we don’t have to rely
on investment income to generate
operating income.
*Throughout this letter net operating income represents net operating income from
continuing operations.
RETURN OF EXCESS CAPITAL TO
SHAREHOLDERS
Due to the significant amount of excess
cash flow produced each year, Torchmark
has returned approximately 71% of its net
income to shareholders through share
repurchases and dividends since 1986
(absent the positive impact that tax reform
had on 2017 net income, this ratio would be
76%). We remain committed to returning
excess capital to shareholders.
LETTER TO SHAREHOLDERS | TORCHMARK CORPORATION | 3
We will continue to follow this business model. That being said, we
must continually refine that model through innovation and the use
of technology in response to the changing needs and expectations
of our agents and customers. It is imperative that we work with
customers and agents in a manner that best meets their needs and
preferences.
In order to ensure that we maximize our ability to be nimble and
adapt to a rapidly changing environment, we continue to make
significant investments in technology. These investments are
designed with the following goals in mind:
• Facilitate a digital consumer experience
Improve the agent experience and ease of doing business
•
• Replace back office legacy systems with modern, commercial
solutions
• Expand the use of data analytics
• Protect against cyber threats
NET INCOME PER SHARE
Compound Annual Growth Rate:
10 Year: 18.2%, 5 Year: 27.7%
$12.22*
$2.30
2007
$2.05
2009
$3.02
2011
$3.79
$4.16
2013
2015
2017
* Net income per share calculated prior to the tax reform adjustment would have
been $4.88, resulting in a 10-year compound annual growth rate of 7.8% and a
5-year compound annual growth rate of 6.3%.
While these investments require significant resources and attention,
we believe they are a critical component of profitable future growth.
Torchmark has produced steady growth in earnings per share and
book value per share as evidenced by the charts below.
BOOK VALUE PER SHARE
(Excluding Net Unrealized Gains or Losses on Fixed Maturities)
Compound Annual Growth Rate:
10 Year: 10.4%, 5 Year: 11.1%
$39.77*
NET OPERATING INCOME PER SHARE
Compound Annual Growth Rate:
10 Year: 8.3%, 5 Year: 7.8%
$30.09
$25.85
$21.31
$17.88
$14.77
$4.82
$4.13
$3.65
2007
2009
2011
2013
2015
2017
* Book value per share, excluding net unrealized gains on fixed maturities,
calculated prior to the tax reform adjustment would have been $34.68.
$2.91
$2.18
$2.32
2007
2009
2011
2013
2015
2017
BOOK VALUE PER SHARE
Compound Annual Growth Rate:
10 Year: 13.9%, 5 Year: 11.6%
$52.95*
$25.27
$27.66
$32.71
$14.47
$16.40
2007
2009
2011
2013
2015
2017
* Book value per share calculated prior to the tax reform adjustment would have
been $45.52.
4 | TORCHMARK CORPORATION | LETTER TO SHAREHOLDERS
Torchmark consistently generates a strong return on equity (ROE).
In 2017, the ROE, excluding net unrealized gains on fixed maturities,
was 14.3%. On a GAAP basis, 2017 ROE was 28.2%. The higher GAAP
level was due primarily to the impact of tax reform.
INSURANCE OPERATIONS
COMPONENTS OF NET OPERATING INCOME
($ in millions, except per share data)
Underwriting Income
Excess Investment Income
Tax and Parent Expenses
Stock Compensation Expense, Net of Tax
Net Operating Income
PER SHARE
$5.25
2.01
(2.42)
(0.02)
$4.82
$625
239
(288)
(2)
$574
Underwriting income reflects premiums less policy benefits,
acquisition costs, and administrative expenses. In contrast to many
other life insurance companies, most of Torchmark’s operating
income is generated by insurance underwriting margin, rather
than investment income. Underwriting income accounted for
approximately 73% of pre-tax operating income in 2017.
COMPONENTS OF UNDERWRITING INCOME
($ in millions)
Underwriting Margin
Life
Health
Other
Total
Administrative Expenses Net of
Other Income
Underwriting Income
$
$604
219
11
$834
(209)
$625
AS % OF
PREMIUM
26.2%
22.5%
25.4%
6.4%
19.0%
We prefer to focus on basic protection life insurance and
supplemental health insurance products that provide more
predictable profitability and better meet the needs of our market
than other types of coverage. Our products provide protection
to families against loss of income due to the death or illness of a
breadwinner by helping with final expenses, mortgage payments,
tuition or other household expenses.
LETTER TO SHAREHOLDERS | TORCHMARK CORPORATION | 5
DISTRIBUTION CHANNELS
AMERICAN INCOME LIFE
We reach the market through several distinct channels, each serving
a particular niche.
The chart below shows the distribution of underwriting margin
among our distribution channels.
2017 TOTAL UNDERWRITING MARGIN
7%
American Income Life
15%
17%
17%
Globe Life Direct Response
44%
General Agency
Liberty National LIfe
Family Heritage Life
As can be seen in the charts below, American Income has a long
history of impressive sales and agent count growth. In addition, life
premiums have grown at an 8.5% compound annual growth rate
over the past ten years.
For more than 50 years, American Income has operated as an
all-union company with a unionized labor force. Through a strong
relationship with organized labor, American Income enjoys a natural
affinity with the market it serves – working families. While the
union affiliation is core to the American Income business, we have
diversified over the years through a strong push to focus on other
sources of leads such as referrals.
We believe American Income has the potential for significant future
growth due to its unique competitive position in an underserved
market and its proven ability to grow the agency force.
AMERICAN INCOME LIFE LIFE SALES
($ in millions)
10-Year Compound Annual Growth Rate: 9.3%
$223
$198
$142
$153
$128
$92
2007
2009
2011
2013
2015
2017
AMERICAN INCOME LIFE AGENT COUNT
10-Year Compound Annual Growth Rate: 10.5%
6,552
6,880
5,302
4,154
4,381
2,545
2007
2009
2011
2013
2015
2017
6 | TORCHMARK CORPORATION | LETTER TO SHAREHOLDERS
LIBERTY NATIONAL LIFE
FAMILY HERITAGE LIFE
Over the last several years, Liberty National has been transformed
from a fixed-cost home service model to a variable-cost model.
After a long history of flat to declining life premiums, we believe
Liberty National is positioned for sustainable growth. Life premiums
grew 2% in 2017, the first annual increase since 2003.
Family Heritage primarily markets limited-benefit health products in
non-urban areas through a door-to-door approach. Most of these
products include a return of premium feature that generates better
persistency, margins and investment income than typical health
insurance products.
As can be seen below, total sales and agent counts have grown at
a compound annual growth rate of 7% and 8%, respectively, over
the past five years. This growth is being driven by development of
agency middle management that is responsible for the recruiting
and training of new agents. We are encouraged by the turnaround
at Liberty National and are very optimistic regarding Liberty
National’s long-term growth prospects.
Family Heritage was purchased by Torchmark late in 2012. Since
2013, health sales and agent count have grown 7% and 9%,
respectively, driven by incorporation of Torchmark recruiting
programs and a focus on agency development. We expect to see
consistent growth as Family Heritage continues to incorporate best
practices of other Torchmark agencies and cultivate an agency
culture centered on recruiting and development of agency middle
management.
LIBERTY NATIONAL LIFE SALES
($ in millions)
5-Year Compound Annual Growth Rate: 7.3%
FAMILY HERITAGE LIFE HEALTH SALES
($ in millions)
4-Year Compound Annual Growth Rate: 6.7%
$67
$60
$44
$47
$50
$51
$57
$47
$45
$52
$54
2012
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
LIBERTY NATIONAL LIFE AGENT COUNT
5-Year Compound Annual Growth Rate: 8.2%
FAMILY HERITAGE LIFE AGENT COUNT
5-Year Compound Annual Growth Rate: 8.9%
1,419
1,430
1,498
1,478
2,106
1,758
702
695
785
1,076
911
909
2012
2013
2014
2015
2016
2017
2012
2013
2014
2015
2016
2017
LETTER TO SHAREHOLDERS | TORCHMARK CORPORATION | 7
GLOBE LIFE DIRECT RESPONSE
UNITED AMERICAN
This unit began operations over 50 years ago as a direct mail-
only distribution channel. Over the years, we have transitioned to
a multifaceted approach, with the addition of insert media and
electronic media distribution. Having multiple direct response
channels provides us a unique competitive niche in the direct
response market because it gives us more ways to monetize leads
and allows us to reach consumers more effectively.
While Direct Response has a long history of sales growth, sales have
declined in the past couple of years due to operational changes
that have been made in response to higher than originally expected
claims which emerged in 2015 in certain blocks of business. These
operational changes were designed to maximize margin dollars,
knowing that sales would be negatively impacted. We expect to
begin to grow sales in 2019 through further use of analytics and
innovation. However, our primary focus will continue to be the
maximization of profit dollars, rather than sales levels.
The value of the Direct Response unit extends far beyond direct
response sales production. The expertise and resources of this unit
also support the recruiting, lead generation and data management
efforts of our agencies. We expect Direct Response to continue to
help drive Torchmark’s success well into the future.
DIRECT RESPONSE LIFE SALES
($ in millions)
10-Year Compound Annual Growth Rate: 1.8%
$132
$137
$144
$136
$164
$114
2007
2009
2011
2013
2015
2017
This unit primarily markets Medicare Supplement insurance through
independent agents and brokers to individuals as well as union
and employer groups. The Medicare Supplement market is very
different than the markets we serve through controlled distribution.
It is a highly regulated, competitive market that is relatively easy
for companies to enter and exit. While short-term sales trends are
difficult to predict because of the use of independent distribution
and the impact of adding large groups, this unit has a relatively
stable in force block that continues to grow as shown in the
chart below.
We have been in the Medicare Supplement market since the
inception of Medicare. We have the expertise and the infrastructure
to administer this business efficiently. The use of independent
producers allows us to take advantage of opportunity when market
conditions are favorable and avoid competitive pressure when
market conditions are not as favorable.
UNITED AMERICAN HEALTH SALES
($ in millions)
5-Year Compound Annual Growth Rate: 7.7%
$84
$72
$56
$61
$42
$41
2012
2013
2014
2015
2016
2017
UNITED AMERICAN HEALTH PREMIUMS
($ in millions)
5-Year Compound Annual Growth Rate: 4.0%
$299
$298
$305
$345
$355
$364
2012
2013
2014
2015
2016
2017
8 | TORCHMARK CORPORATION | LETTER TO SHAREHOLDERS
INVESTMENT OPERATIONS
INVESTMENT PORTFOLIO
COMPONENTS OF NET OPERATING INCOME
($ in millions, except per share data)
INVESTMENT PORTFOLIO DECEMBER 31, 2017
Invested Assets ($ in millions)
Underwriting Income
Excess Investment Income
Tax and Parent Expenses
Stock Compensation Expense, Net of Tax
Net Operating Income
PER SHARE
$5.25
2.01
(2.42)
(0.02)
$4.82
$625
239
(288)
(2)
$574
$
AS % OF
TOTAL
Fixed Maturities (at amortized cost)
$14,995
95%
Policy Loans
Other Investments
Total
530
235
3
2
$15,760
100%
We evaluate the investment function on a stand-alone basis rather
than allocating investment income to the insurance operations.
Excess investment income is the measure used to evaluate the
performance of the investment segment. The components of
excess investment income can be seen in the chart above. Excess
investment income produced 28% of our pre-tax operating income
in 2017.
EXCESS INVESTMENT INCOME
($ in millions)
Net Investment Income
Required Interest on Net Policy Liabilities
Interest on Debt
Excess Investment Income
$848
(524)
(85)
$239
In recent years, growth in excess investment income has been
limited by the low interest rate environment. We are encouraged
by the prospect of a higher long-term interest rate environment as
it would provide higher excess investment income because of the
positive impact on net investment income.
The strength of our underwriting margins allows us to
maintain a conservative philosophy and not make risky bets on
investments. While we seek to maximize risk-adjusted returns,
the most important criteria when considering new investments is
preservation of principal.
We choose to invest almost exclusively in long-term fixed
maturities as these fixed-rate investments best match our long
term fixed-rate liabilities and enhance our ability to manage capital
as efficiently as possible.
TOTAL INVESTED ASSETS AT
AMORTIZED COST
($ in billions)
10-Year Compound Annual Growth Rate: 5.6%
$15.8
$13.0
$13.8
$9.2
$10.3
$11.4
2007
2009
2011
2013
2015
2017
As can be seen in the chart above, invested assets have grown from
about $9 billion at the end of 2007 to just under $16 billion. This
growth was achieved in spite of the fact that we spent $4.0 billion to
repurchase shares over that period.
LETTER TO SHAREHOLDERS | TORCHMARK CORPORATION | 9
FIXED MATURITY PORTFOLIO YIELD
CAPITAL MANAGEMENT
FIXED MATURITY PORTFOLIO YIELD
(at end of year)
operations, maintain appropriate capital levels, and maximize both
the amount of and return on excess cash flow.
6.96%
6.81%
6.49%
5.91%
5.83%
5.60%
We define excess cash flow as the cash available to the parent
company from the dividends received from the insurance
subsidiaries to the parent after paying dividends to Torchmark
shareholders and interest on debt.
The next chart illustrates the significant excess cash flow generated
routinely at Torchmark.
2007
2009
2011
2013
2015
2017
EXCESS CASH FLOW
($ in millions)
This chart demonstrates the negative impact of lower interest rates
on investment yields over the last ten years. As we indicated earlier,
we hope for higher interest rates – the sooner the better. We are not
concerned about the possibility of unrealized losses resulting from
higher interest rates as we have the intent and more importantly,
the ability, to hold our investments to maturity.
However, if rates don’t rise as anticipated, we can continue to thrive
in a low interest rate environment as our products are not sensitive
to interest rate or equity market fluctuations.
$353
$367
$364
$358
$281
$330
$320-
330
2007
2009
2011
2013
2015
2017
2018
Estimate
Excess cash flow has been somewhat lower in the last couple of
years due to slight declines in net statutory income. These declines
have resulted in part from the strong life sales growth in recent
years and investments in technology discussed earlier. While life
sales growth and these technology investments are detrimental to
statutory net income in the short run, they will produce growth in
excess cash flow in the long run.
10 | TORCHMARK CORPORATION | LETTER TO SHAREHOLDERS
SHARE REPURCHASES
TOTAL SPENT
(IN MILLIONS)
NO. OF SHARES
(IN 000’S)
AVERAGE
PRICE
P/E RATIO*
$427
17,185
$24.83
10.9
2009
2010
2011
2012
2013
2014
2015
2016
2017
$47
$204
$788
$360
$360
$375
$359
$311
$325
4,613
8,560
28,347
11,219
8,280
7,155
6,292
5,208
4,126
$10.12
$23.78
$27.78
$32.13
$43.48
$52.42
$56.99
$59.78
$78.67
4.4
9.4
9.5
9.7
11.9
13.4
13.8
13.3
16.3
* Ratios were calculated using net operating income.
Our share repurchase program has been in place now for over 30
years. During that time, there has only been one year in which we
did not repurchase stock. That was in 1995 due to the acquisition
of American Income. Since 1986, we have spent $7.1 billion to
repurchase 79% of the outstanding shares of the Company.
Returning excess capital to shareholders is core to our business
model. As noted earlier, we have returned approximately 71%
of our net income to shareholders through dividends and share
repurchases since 1986. While share repurchases have been the
most efficient use of excess capital over the years, we continually
evaluate alternative uses to help ensure we maximize shareholder
value.
RETURN TO SHAREHOLDERS
($ in millions)
SHARE
REPURCHASES
DIVIDENDS
PAID
(A) TOTAL
CASH
RETURNED
(B) NET
INCOME
2008
2009
2010
2011
2012
2013
2014
2015
2016
$427
$47
$204
$788
$360
$360
$375
$359
$311
$49
$47
$50
$49
$56
$61
$65
$67
$67
Subtotal
2017
$325
$69
10Year Total
$476
$94
$254
$837
$416
$421
$440
$426
$378
$3,742
$394
$4,136
$427
$383
$499
$497
$529
$528
$543
$527
$550
$4,483
$1,454*
$5,937
(A)/
(B)
111%
25%
51%
168%
79%
80%
81%
81%
69%
83%
27%*
70%
* The Company made a one-time adjustment to 2017 net income as a result of re-
measuring deferred tax assets and liabilities at the newly enacted corporate rate.
Excluding the tax reform adjustment, the ratio of total cash returned to net income
would have been 68% in 2017 and 82% over the past ten years.
TAX REFORM
We want to add our thoughts here regarding the impact of the tax
reform legislation recently enacted. Overall, tax reform will be very
positive for Torchmark in the long term due to taxation of future
profits at the new 21% tax rate. However, due to various other
provisions in the new law that impact taxable income, we anticipate
our cash tax savings in the short term from the new law will only be
about $5 million to $10 million per year. Over time we will begin to
see more benefit.
The impact of tax reform on required capital levels is yet to be
determined. Regardless of the positions the rating agencies and
regulators eventually take on this issue, we have a great deal of
flexibility. We plan to take actions that will be in Torchmark’s best
interests and will provide the best overall value for our shareholders.
LETTER TO SHAREHOLDERS | TORCHMARK CORPORATION | 11
CONCLUSION
We believe Torchmark has a very bright future. Many times we hear that life insurance is a
mature market with limited growth potential. For Torchmark, this is simply not true. There
is great need for our products in the middle-income market. Our task is to further reach out
and demonstrate that need to potential customers as we grow our distribution channels.
he past fifty
We have essentially been selling the same products in the same markets for the past fifty
years and the need for our products today is greater than ever. Due to the tremendous
dous
amount of data and experience Torchmark possesses with these products and this market,
we are uniquely positioned to thrive and build shareholder value well into the future.
Thank you for your investment in Torchmark.
LARRY M. HUTCHISON
Co-Chairman and
Chief Executive Officer
GARY L. COLEMAN
Co-Chairman and
Chief Executive Officer
Note: 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, 2017, found on the following pages and on
file with the Securities and Exchange Commission. Torchmark specifically disclaims any obligation to update or revise any forward-looking
statement because of new information, future developments, or otherwise.
12 | TORCHMARK CORPORATION | LETTER TO SHAREHOLDERS
DIRECTORS
CHARLES E. ADAIR
President of Kowaliga Capital
Montgomery, Alabama
LINDA L. ADDISON
Immediate Past Managing Partner and Former Chair of the
US Management Committee of Norton Rose Fulbright US LLP
Houston, Texas
MARILYN A. ALEXANDER
Principal of Alexander and Friedman, LLC
Laguna Beach, California
CHERYL D. ALSTON
Executive Director and Chief Investment Officer of
Employees’ Retirement Fund of the City of Dallas
Frisco, Texas
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;
Co-Chief Executive Officer of PAAMCO Prisma Holdings
Irvine, California
r
OFFICERS
GARY L. COLEMAN
Co-Chairman and Chief Executive Officer
LARRY M. HUTCHISON
Co-Chairman and Chief Executive Officer
J. MATTHEW DARDEN
Executive Vice President and Chief Strategy Officer
JENNIFER A. HAWORTH
Vice President, Marketing
MARY ELIZABETH HENDERSON
Vice President, Enterprise Lead Generation
VERN D. HERBEL
Executive Vice President and
Chief Administrative Officer
DISTRIBUTION OFFICERS
AMERICAN INCOME LIFE
STEVEN K. GREER
Chief Executive Officer, AIL Agency Division
GARY L. COLEMAN
Co-Chairman and Chief Executive
Officer of Torchmark
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
Tampa, Florida
DARREN M. REBELEZ
President of International House
of Pancakes, LLC
Glendale, California
LAMAR C. SMITH
Director and Majority Owner of Coles Bay Capital LLC;
Retired Chief Executive Officer of
First Command Financial Services, Inc.
Fort Worth, Texas
MARY E. THIGPEN
Chief Executive Officer and Director of OpsDataStore
Alpharetta, Georgia
PAUL J. ZUCCONI
Retired Partner of KPMG LLP
Plano, Texas
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,
General Counsel and Chief Risk Officer
CHRISTOPHER T. MOORE
Assistant Secretary
W. MICHAEL PRESSLEY
Executive Vice President and
Chief Investment Officer
JOEL P. SCARBOROUGH
Assistant Secretary
FRANK M. SVOBODA
Executive Vice President and
Chief Financial Officer
REBECCA E. ZORN
Assistant Secretary and Director of Human Resources
GLOBE LIFE DIRECT RESPONSE
BILL E. LEAVELL
President and Chief Executive Officer,
Globe Life Direct Response
UNITED AMERICAN
MICHAEL C. MAJORS
President
FAMILY HERITAGE LIFE
KENNETH J. MATSON
President and Chief Executive Officer, FHL Agency Division
LIBERTY NATIONAL LIFE
STEVEN J. DICHIARO
Chief Executive Officer, LNL Agency Division
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
Pre-tax operating income
Income tax
Net operating income before stock compensation expense
Stock compensation expense, net of tax
NET OPERATING INCOME FROM CONTINUING OPERATIONS
Operating EPS 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
Part D adjustments - discontinued operations
Administrative settlements
Non-operating fees
Guaranty fund assessment
Tax reform adjustment
NET INCOME
EPS on a diluted basis
Twelve months ended December 31,
2017
2016
% Increase
or Decrease
5
5
3
4
7
5
5
7
5
4
7
3
6
$2,306,547
(942,595)
(693,693)
(65,922)
604,337
976,373
(550,848)
(183,787)
(22,230)
219,508
10,562
834,407
1,270
(210,590)
625,087
$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
847,885
806,903
(734,370)
210,380
(84,532)
239,363
(9,631)
854,819
(278,812)
576,007
(2,326)
$573,681
$4.82
0
$573,681
$4.82
118,983
(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
$573,681
$558,393
17,590
(3,769)
(5,628)
(187)
(1,171)
873,978
$1,454,494
$12.22
(6,944)
1,156
(2,467)
(359)
0
0
$549,779
$4.49
The Operating Summary has been prepared in the manner Torchmark management uses to evaluate the operating results of the Company. It differs from the
Consolidated Statement of Operations found in the accompanying SEC Form 10-K.
14 | TORCHMARK CORPORATION | OPERATING SUMMARY
CONDENSED BALANCE SHEET
Unaudited and $ in thousands except 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,
2017
2016
$14,995,101
245,634
638,088
3,968,882
441,591
1,153,764
68,520
$21,511,580
$13,931,831
899,687
328,067
1,132,201
489,609
49,854
4,680,331
$21,511,580
114,593
117,696
$39.77
14.3%
$4,016,094
23.8%
$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%
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
$4,680,331
$3,885,967
1,974,224
(10,819)
(412,315)
$6,231,421
$16,969,325
3,958,063
23,474,985
6,231,421
1,312,002
52.95
28.2%
$5,166,815
19.0%
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%
*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
TORCHMARK CORPORATION BOARD OF DIRECTORS
From left to right: David L. Boren, Paul J. Zucconi, Darren M. Rebelez, Steven P. Johnson, Jane M. Buchan, Cheryl D. Alston, Gary L. Coleman,
Larry M. Hutchison, Lamar C. Smith, Marilyn A. Alexander, Linda L. Addison, Mary E. Thigpen, Charles E. Adair, Robert W. Ingram, Lloyd W.
Newton
Note: Mses. Addison, Alston, and Thigpen were elected to the Board of Directors on February 26, 2018.
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, 2017
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
CUSIP
891027104
Name of each exchange on
which registered
New York Stock Exchange
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,” “smaller reporting company”, and "emerging
growth 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
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act.
Emerging growth 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, 2017, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
$8,893,792,769 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 16, 2018
114,081,876 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Proxy Statement for the Annual Meeting of Stockholders to be
held April 26, 2018 (Proxy Statement)
Parts Into Which Incorporated
Part III
TORCHMARK CORPORATION
Table of Contents
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.
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 ................................................................................
Item 9.
Note 16- Selected Quarterly Data ..............................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...........
Item 9A. Controls and Procedures ................................................................................................................
Page
1
6
12
12
12
12
13
15
16
49
50
52
53
54
55
56
57
57
67
68
70
80
81
82
84
87
94
95
97
98
103
110
112
113
113
Item 9B. Other Information ...........................................................................................................................
113
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 .........................................................................................
116
116
116
116
116
PART III.
PART IV.
Item 15. Exhibits and Financial Statement Schedules ..................................................................................
117
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
6,880 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
Supplemental limited-benefit
health insurance to middle-
income families.
1,076 producing
agents in the U.S.
Cleveland, Ohio
Liberty National
Exclusive
Agency
Liberty National Life
Insurance Company
McKinney, Texas
Individual life and
supplemental health
insurance marketed to
middle-income families.
2,106 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.
4,192 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
TMK 2017 FORM 10-K
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
(Dollar amounts in thousands)
2016
2015
2017
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Whole life:
Traditional ................................................... $ 1,567,077
44,286
Interest-sensitive ........................................
664,558
Term ................................................................
97,178
Other ...............................................................
$ 2,373,099
66 $ 1,471,054
47,358
657,797
86,527
100 $ 2,262,736
2
28
4
65 $ 1,378,290
50,808
642,599
78,801
100 $ 2,150,498
2
29
4
64
2
30
4
100
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
(Dollar amounts in thousands)
2016
782,222 $
2017
796,628 $
2015
757,518
American Income ...................................................................................
Liberty National ......................................................................................
1,059,216
295,235
966,990
288,005
880,021
284,597
Independent agents:
United American .....................................................................................
Other ......................................................................................................
12,121
209,899
14,488
213,874
$ 2,373,099 $ 2,262,736 $ 2,150,498
13,292
212,227
Health Insurance
Torchmark offers Medicare Supplement and 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 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 increasing risks, declining margins, 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.
2
TMK 2017 FORM 10-K
The following table presents supplemental health annualized premium in force information for the three years ended
December 31, 2017 by product category.
Annualized Premium in Force
(Dollar amounts in thousands)
2016
2015
2017
Medicare Supplement ..................................... $
Limited-benefit plans .......................................
495,982
522,038
$ 1,018,020
49 $
51
100 $
502,691
495,943
998,634
51 $
49
100 $
Amount
% of
Total
Amount
% of
Total
Amount
498,696
474,346
973,042
% of
Total
51
49
100
The following table presents supplemental health annualized premium in force for the three years ended December 31,
2017 by distribution method.
Annualized Premium in Force
(Dollar amounts in thousands)
2016
2015
2017
Direct Response ....................................................................................... $
Exclusive agents:
76,672 $
74,261 $
72,423
Liberty National ....................................................................................
American Income .................................................................................
Family Heritage ....................................................................................
205,136
84,775
268,584
210,260
78,947
249,857
216,139
74,058
234,120
Independent agents:
United American ...................................................................................
382,853
$ 1,018,020 $
385,309
998,634 $
376,302
973,042
Annuities
Annuity products include single-premium and flexible-premium deferred annuities. Annuities in each of the three years
ended December 31, 2017 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, investment income, expenses, and target profit margins. 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 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 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
TMK 2017 FORM 10-K
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. 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. Approximately
96% of our invested assets at fair value are fixed maturities at December 31, 2017. (See Note 4—Investments 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 that 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. A significant portion of assessments are recoverable as offsets against state premium taxes. (See Note 15
—Commitments and Contingencies for current assessment.)
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TMK 2017 FORM 10-K
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 2017, Torchmark had 3,102 employees.
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TMK 2017 FORM 10-K
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 industry, each of which has its own set of risks.
The development and maintenance of our various distribution systems are critical to growth in product sales
and profits. Development and retention of producing agents are critical to support sales growth in this market because
our insurance sales are primarily made to individuals rather than groups and the face amounts of the life insurance
policies sold are typically lower than those of policies sold in higher-income markets. Compensation that is competitive
with other career opportunities and motivates producing agents to increase sales is also 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 primarily
serve 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 or stop payment of 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 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 result in
increased policy obligations 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: 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 capital. 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 financial condition and results of 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
company, and from time to time rating agencies have, in their discretion, altered the models. Changes to the models
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TMK 2017 FORM 10-K
could impact the rating agencies’ judgment of the rating to be assigned to the rated company. There can be no assurance
that our 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. 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 unions 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 our life insurance 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 our health insurance 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 under price new sales in order to gain market share. We choose not to compete for market share
based on these terms. Accordingly, changes in the competitive landscape, including the pricing strategies employed
by our competitors, could negatively impact the future sales of our health insurance products.
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, including conditions under which the premiums for such
policies may be increased, is 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 typically 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 business, financial condition and results
of operations.
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
access, alter or delete customer or proprietary information from our systems or to render our systems unavailable for
business use. Additionally, we may not become aware of sophisticated cyber attacks for some time after they occur,
thereby increasing the Company's exposure. We may have to incur significant costs to address or remediate
interruptions, threats and vulnerabilities in our information and technology systems and to comply with existing and
future regulatory requirements related thereto. These risks are heightened as the frequency and sophistication of cyber-
attacks increase.
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.
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TMK 2017 FORM 10-K
Additionally, we anticipate more frequent and sophisticated cyber-attacks along with more impactful regulatory oversight
models. 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 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, agents or customers for a period of
time. A disaster or natural catastrophe, an industrial accident, terrorist attack or war may make our information systems
unavailable to support business operations for a period of time, which could adversely affect our financial condition
and results of operations. 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 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 predominately of fixed maturity and short-term investments
issued by corporations, where we are exposed to the risk that individual corporate issuers will not have the ability to
make required interest or principal payments on an investment. The concentration of these investments in any particular
issuer, industry, group of related industries or geographic areas increases this risk. Factors that may affect both market
and credit risks include interest rate levels (consisting of both treasury rate and credit spread), 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 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 can give 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.
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TMK 2017 FORM 10-K
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.
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 states of domicile.
Accordingly, impairments in 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 laws or regulations 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 our health 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 interest rates rise 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 financial prospects if we were to incur large investment losses or if the level
of our business activity were to decrease 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.
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TMK 2017 FORM 10-K
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 regulatory changes 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 and/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 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 our profitability.
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), charged with
monitoring systemic risk exposure in the insurance industry, and a Financial Stability Oversight Council (FSOC), which
serves to identify and respond to risks and emerging threats to U.S. financial systems. A Center for Consumer Information
and Insurance Oversight (CCIIO), established under the Department of Health and Human Services, is charged with
overseeing implementation of the Affordable Care Act (ACA). 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 ongoing operations of the FIO, FSOC and CCIIO, as well as any
other proposals or executive action 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 or negatively impact our insurance
subsidiaries' capital. Changes to the Internal Revenue Code, administrative rulings, or court decisions affecting the
insurance industry, including the products insurers offer, could increase our effective tax rate and lower our net income,
adversely impact our insurance subsidiaries' capital, or limit the ability of our insurance subsidiaries to sell certain of
their 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.
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TMK 2017 FORM 10-K
Non-compliance with restrictions on customer and consumer privacy and information security, including
taking steps to ensure that our business associates who obtain access to sensitive customer and consumer
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), the Health Information Technology for Economic and Clinical
Health Act (HITECH), 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 our 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 adverse financial effect or cause significant harm to
our reputation, which, in turn, could materially harm our business and our business prospects.
Actual or alleged misclassification of independent contractors at our insurance subsidiaries could result in
adverse legal, tax or financial consequences. A significant portion of our sales agents are independent contractors.
Although we believe we have properly classified such individuals, a risk nevertheless exists that a court, the IRS or
other authority will take the position that those sales agents are employees. The laws and regulations that govern the
status and classification of workers are subject to change and differing interpretations, which we cannot predict.
If there is an adverse determination regarding the classification of some or all of the independent contractors at our
insurance subsidiaries by a court or governmental agency, we could incur significant costs with respect to payroll tax
liabilities, employee benefits, wage payments, fines, judgments and/or legal settlements, any of which could have a
material adverse effect on our business, financial condition and results of operations. In addition, any resulting
reclassification could necessitate significant changes in our affected insurance subsidiaries’ business models.
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.
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TMK 2017 FORM 10-K
As of December 31, 2017, 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
3,230 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.
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TMK 2017 FORM 10-K
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 2,662
shareholders of record on December 31, 2017, 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 $
90.71
Quarter
1
2
3
4
Year-end closing price $
73.76
$
$
2017
Market Price
High
Low
Dividends
Per Share
78.71 $
77.77
80.09
91.16
73.00 $
74.11
74.68
80.32
0.140
0.150
0.150
0.150
2016
Market Price
High
Low
Dividends
Per Share
57.01 $
62.39
65.21
74.83
48.58 $
52.83
60.38
63.17
0.135
0.140
0.140
0.140
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 12/31/12 in stock or index, including reinvestment of dividends. Fiscal year ended December 31st.
(Copyright © 2018 Standard & Poor's, a division of S&P Global. All rights reserved.)
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TMK 2017 FORM 10-K
Purchases of Certain Equity Securities by the Issuer and Others for the Fourth Quarter 2017
(a) Total Number
of Shares
Purchased
(b) Average
Price Paid
Per Share
(c) Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
(d) Maximum Number
of Shares (or
Approximate Dollar
Amount) that May
Yet Be Purchased
Under the Plans or
Programs
260,690 $
593,200
439,315
82.44
85.22
89.91
260,690
593,200
439,315
—
—
—
Period
October 1-31, 2017 ......
November 1-30, 2017 ..
December 1-31, 2017 ..
On August 7, 2017, 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
TMK 2017 FORM 10-K
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:
Year ended December 31,
Premium revenue:
(Dollar amounts in thousands except per share and percentage data)
2017
2016
2015
2014
2013
Life .......................................................................... $ 2,306,547
976,373
Health ......................................................................
15
Other .......................................................................
3,282,935
Total ....................................................................
847,885
Net investment income ..............................................
23,611
Realized investment gains (losses) ............................
4,155,573
Total revenue .............................................................
1,458,263
Income from continuing operations, net of tax............
(3,769)
Income from discontinued operations, net of tax ........
Net income(1) ..............................................................
1,454,494
Per common share:
Basic earnings:
Income from continuing operations ....................
Income from discontinued operations.................
Net income .....................................................
Diluted earnings:
Income from continuing operations ....................
Income from discontinued operations.................
Net income(1) ..................................................
Cash dividends declared ........................................
Cash dividends paid ...............................................
Basic weighted average shares outstanding ..............
Diluted weighted average shares outstanding............
12.53
(0.03)
12.50
12.26
(0.04)
12.22
0.60
0.59
116,343
118,983
$ 2,189,333
947,663
38
3,137,034
806,903
(10,683)
3,934,629
539,590
10,189
549,779
$ 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
4.50
0.08
4.58
4.41
0.08
4.49
0.56
0.56
120,001
122,368
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
2017
As of December 31,
Cash and invested assets .......................................... $17,853,047
23,474,985
Total assets ................................................................
328,067
Short-term debt ..........................................................
1,132,201
Long-term debt ..........................................................
Shareholders' equity(1) ...............................................
6,231,421
Per diluted common share(1) ..................................
52.95
2016
$15,955,891
21,436,087
264,475
1,133,165
4,566,861
37.76
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
Effect of fixed maturity revaluation on diluted
equity per common share(2) ....................................
Annualized premium in force:
13.18
5.63
2.62
8.28
1.81
Life .........................................................................
Health ....................................................................
Total ....................................................................
Basic shares outstanding ...........................................
Diluted shares outstanding ........................................
2,373,099
1,018,020
3,391,119
114,593
117,696
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) On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law which revises corporate income tax rates from 35% to 21%, among
other modifications. See further discussion of the tax reform implications in the Results of Operations. Excluding the effects of tax reform, net
income, net income per diluted common share, shareholders' equity and shareholders' equity per diluted common share would have been
$581 million, $4.88, $5.36 billion and $45.52, respectively.
(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
TMK 2017 FORM 10-K
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, 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, 2017.
16
TMK 2017 FORM 10-K
Current Year Highlights:
• Net income as a return on equity (ROE) was 28.2%(1) and net operating income as a ROE, excluding net
unrealized gains on the fixed maturity portfolio was 14.3%(1).
• Total premium increased by 5% over the prior year. Life premium also increased by 5% for the year from $2.2
billion to $2.3 billion. Life underwriting margin also increased 5% from $574 million in 2016 to $604 million in
2017.
• Net investment income increased 5% over the prior year. In addition, excess investment income, a measure
used by management as explained below, increased by 7% over the prior year.
• During 2017, the Company repurchased 4.1 million shares at a total cost of $325 million for an average share
price of $78.67.
The following represents net income and net operating income from continuing operations for the 3 years ended
December 31, 2017.
(1) As further discussed below regarding Tax Legislation, excluding the tax reform adjustment, net income as a ROE and net operating income
as a ROE would have been 11.7% and 14.4%, respectively. In 2017, the Company recorded a one-time adjustment of $874 million
impacting net income. As the impact of the Tax Legislation was treated as a non-operating event, it was excluded from net operating
income.
Net income as a ROE and net operating income as a ROE, excluding net unrealized gains on the fixed maturity portfolio in 2016 were
12.0% and 14.6%, respectively and 11.9% and 14.5%, respectively in 2015. Net operating income as a ROE, excluding net unrealized
gains on the fixed maturity portfolio is considered a non-GAAP measure. Management utilizes this measure to view the business without
the effect of the unrealized gains or losses which are primarily attributable to fluctuation in interest rates on the available-for-sale portfolio.
Summary of Operations: Net income was $1.5 billion in 2017, compared with $550 million in 2016. This sharp increase
was due to an $874 million increase to net income, primarily relating to a reduction of deferred income tax liabilities
resulting from enactment of the Tax Cuts and Jobs Act of 2017 (Tax Legislation). See further discussion below. Net
income also increased in 2016 from $527 million in 2015. On a diluted per common share basis, 2017 net income rose
17
TMK 2017 FORM 10-K
172% to $12.22 after an 8% increase in 2016, again largely related to implementation of the Tax Legislation. Without
the impact of the Tax Legislation, net income per diluted common share would have been $4.88. Net income per diluted
common share in 2016 rose to $4.49 from $4.16 in 2015. 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 $0.15, $(0.06), and $(0.05), in 2017, 2016 and 2015, 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 $523 million in 2015 to $549
million in 2016 to $574 million in 2017. Net operating income is the consolidated total of segment profits after tax and
as such is considered a non-GAAP measure. Net income is the most directly comparable GAAP measure. See Note
14—Business Segments for a discussion of the usefulness and purpose of this measure. 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 2015 through 2017. 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. 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.
Tax Cuts and Jobs Act of 2017: On December 22, 2017, the Tax Legislation was enacted which changed existing tax
law, including a reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018. The Company
recorded $877 million of tax benefits in net income as a result of re-measuring its deferred tax liabilities using the lower
corporate tax rate as of the date of enactment. Based on the analysis of the Tax Legislation, the Company was able
to determine that this amount is a reasonable estimate of the impact of the Tax Legislation in accordance with SEC
Staff Accounting Bulletin No. 118. However, the Company will continue to analyze relevant information to complete the
accounting for income taxes which may result in an adjustment to income tax expense in 2018. The accounting is
expected to be complete when the 2017 U.S. corporate income tax returns are filed later in 2018. In addition, the
Company early adopted ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, and recorded a $252 million
reclassification from Accumulated Other Comprehensive Income to Retained Earnings to eliminate the stranded tax
effects associated with the tax rate change, primarily relating to the unrealized gains and losses on the available-for-
sale fixed maturity portfolio. More information concerning income taxes is provided in Note 8—Income Taxes.
There will be substantial long-term benefits from the Tax Legislation due to the taxation of future profits at the new 21%
tax rate. Looking forward, we are anticipating the effective tax rate on our net operating income before stock
compensation expense to decrease and be in the range of 19% to 20%. Despite the lower expected tax rate for financial
reporting purposes, in the short and intermediate term, we do not anticipate a significant reduction in our current tax
expense, as benefits of the lower tax rate will be virtually offset by several provisions included in the Tax Legislation
that increase the Company's current taxable income.
The below table illustrates the impact of the tax reform adjustment on certain balances.
Current and deferred income taxes payable ............................. $
Accumulated other comprehensive income (loss) ....................
Retained earnings .....................................................................
Shareholders' equity .................................................................
Income before income taxes .....................................................
Income tax benefit (expense) ....................................................
Net income ................................................................................
Total diluted net income per common share .............................
Prior to tax
adjustment
Tax reform
adjustment
GAAP
balance
2,189,402 $
(877,400) $
1,312,002
1,171,874
4,181,208
5,357,443
834,028
(249,743)
580,516
4.88
252,400
625,000
873,978
(3,380)
877,358
873,978
7.34
1,424,274
4,806,208
6,231,421
830,648
627,615
1,454,494
12.22
18
TMK 2017 FORM 10-K
Torchmark’s operations on a segment-by-segment basis are discussed in depth under the appropriate captions following
in this report.
Analysis of Profitability by Segment
(Dollar amounts in thousands)
2017
2016
2015
$ 573,762
$ 569,402
210,056
204,377
9,394
4,568
224,031
219,504
15,332
2017
Change
$ 30,575
9,452
1,168
%
5
4
12
7
2016
Change
$ 4,360
5,679
4,826
4,527
%
1
3
106
2
Life insurance underwriting margin ................. $ 604,337
Health insurance underwriting margin ............
219,508
Annuity underwriting margin ...........................
Excess investment income .............................
10,562
239,363
Other insurance:
Other income .............................................
1,270
1,534
2,379
(264)
(17)
(845)
(36)
Administrative expense .............................
(210,590)
(196,598)
(186,191)
(13,992)
Corporate and other .......................................
(43,285)
(34,913)
(37,667)
(8,372)
Pre-tax total ..........................................
821,165
787,266
776,372
33,899
Applicable taxes .............................................
(247,484)
(237,906)
(253,459)
(9,578)
7
24
4
4
4
(10,407)
2,754
10,894
15,553
26,447
6
(7)
1
(6)
5
573,681
549,360
522,913
24,321
—
9,033
10,807
(9,033)
(100)
(1,774)
(16)
573,681
558,393
533,720
15,288
3
24,673
5
Net operating income from continuing
operations .............................................
Discontinued operations—Part D, net of tax...
Net operating income ............................
Reconciling items, net of tax: .........................
Realized gains (losses)—investments .......
Part D adjustments—discontinued
operations .................................................
Guaranty fund assessments ......................
Administrative settlements .........................
Non-operating fees ....................................
17,590
(6,944)
(5,714)
24,534
(3,769)
(1,171)
(5,628)
(187)
1,156
—
(2,467)
(359)
—
—
—
(906)
—
(4,925)
(1,171)
(3,161)
172
— 873,978
(1,230)
1,156
—
(1,561)
(359)
—
Tax reform adjustment ...............................
873,978
Net income ........................................... $ 1,454,494
$ 549,779
$ 527,100
$904,715
165
$ 22,679
4
The life insurance segment is our strongest segment and is the largest contributor to earnings in each year presented.
This segment contributed $31 million in 2017 and $4 million in 2016 to the growth in our underwriting margin. Also
contributing to growth in income in both years was our health insurance segment, which provided $9 million of additional
margin in 2017 and $6 million in 2016.
Excess investment income, the measure of profitability of our investment segment, increased 7% to $239 million from
the prior year amount of $224 million. In 2016, excess investment income increased 2%. Investment yields continue
to be pressured by investing at yields lower than the yield on dispositions and the average yield on the portfolio.
Total revenues rose 6% in 2017 to $4.2 billion, or $221 million over the prior year total of $3.9 billion. Life premium
rose 5% or $117 million in 2017 to $2.3 billion. Life premium increased $116 million in 2016 to $2.2 billion. Net investment
income rose $41 million or 5% in 2017, and rose 4% or $33 million in 2016. Health premium increased 3% to $976
million in 2017 and contributed $29 million to 2017 revenue growth, after having gained 2% to $948 million in 2016.
Health premium contributed $22 million to 2016 revenue growth.
Life insurance premium and underwriting margins have grown in each of the last three years ended December 31,
2017. 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 remained flat in 2017 at 26%, after decreasing from 27%
to 26% from 2015 to 2016. Net life sales increased in 2017 to $416 million. Net life sales were flat between 2015 and
2016. The life insurance segment is discussed further in this report under the caption Life Insurance.
19
TMK 2017 FORM 10-K
Health insurance premium income increased 3% to $976 million in 2017. Health net sales rose 9% to $158 million
during 2017 due to both individual and group sales. 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 3% to $136 million from
the prior year total of $140 million as a result of higher net sales in Medicare Supplement in the fourth quarter of 2015
that positively affected the 2016 first-year collected premium. Health margins as a percentage of premium were flat at
22%, with underwriting income increasing to $220 million for 2017 due to the growth in premium income. Underwriting
income was $210 million in 2016 compared with $204 million in 2015. The health insurance segment is discussed
further in this report under the caption Health Insurance.
We do not currently market annuities. See the caption Annuities for discussion of the Annuity segment.
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 2017, net investment income rose
5%, compared with 4% in 2016. At the same time, our investment portfolio grew 6% in 2017 and 2016, on an amortized
cost basis. In recent years, the percentage growth in net investment income has been less than the growth in the
overall investment portfolio due primarily to new investments being made at yield rates lower than the yield rates on
dispositions and the average yield on the portfolio. The growth rate of net investment income is impacted at times 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. The growth in the investment portfolio has been augmented in 2017 and 2016 due to the receipt
of certain receivables that had accumulated under our Medicare Part D business.
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 2017 increased 1% to $85 million from $83 million in 2016. The additional interest expense resulted
primarily from an increase in the cost of our short-term borrowings and, in lesser part, from the issuance of our new
5.275% Junior Subordinated Debt security thirty-six days before the repayment of our 5.875% Junior Subordinated
Debt security.
Insurance administrative expenses were up 7.1% in 2017 when compared with the prior year period, and increased
to 6.4% as a percentage of premium from 6.3% in 2016 and 6.2% in 2015. The increase in administrative expenses
is primarily due to an increase in other employee costs and investments in information technology. Corporate and Other
expenses were up primarily due to an increase in stock-based compensation expense, reflecting Torchmark's higher
share price as compared with the same period a year ago, and recognition of a one-time increase in stock-based
compensation expense due to the Tax Legislation.
20
TMK 2017 FORM 10-K
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 resulting 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
Share repurchase program ..................................
Shares Amount
Shares Amount
Shares Amount
4,126 $ 324,622
5,208 $ 311,332
6,292 $ 358,552
Option proceeds ...................................................
1,103
88,367
1,487
93,452
1,049
59,974
Total .................................................................
5,229 $ 412,989
6,695 $ 404,784
7,341 $ 418,526
2017
2016
2015
Throughout the remainder of this discussion, share purchases refer only to those made from excess cash flow at the
Parent Company.
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.
Life Insurance
Life insurance is our largest insurance segment, with 2017 life premium representing 70% of total premium. Life
underwriting income before other income and administrative expense represented 72% of the total in 2017. 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 (Gross premium that would be received during the policies' first year
in force and assuming that none of the policies lapsed or terminated.), 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.
21
TMK 2017 FORM 10-K
The following table presents the summary of results of life insurance. Further discussion of the results by distribution
channel is included below.
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
2017
% of
2016
% of
2015
% of
Premium
Amount
Premium Amount
Premium Amount
Premium and policy charges.............. $2,306,547
100 $2,189,333
100 $2,073,065
100
Policy obligations ...............................
Required interest on reserves ............
Net policy obligations .......................
Commissions, premium taxes, and
non-deferred acquisition expenses ....
Amortization of acquisition costs........
1,549,602
(607,007)
942,595
177,111
582,504
Total expense ...................................
1,702,210
Insurance underwriting margin before
other income and administrative
expenses ........................................... $ 604,337
67
(26)
41
1,475,477
(577,827)
897,650
8
25
74
164,476
553,445
1,615,571
67
(26)
41
1,374,608
(552,298)
822,310
8
25
74
154,811
526,542
1,503,663
26 $ 573,762
26 $ 569,402
67
(27)
40
8
25
73
27
Life insurance premium rose 5% to $2.3 billion in 2017 after having increased 6% in 2016 to $2.2 billion. Life insurance
products are marketed through several distribution channels. Premium income by distribution channel for each of the
last three years is as follows:
LIFE INSURANCE
Premium by Distribution Channel
(Dollar amounts in thousands)
2017
2016
2015
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
American Income Exclusive Agency ............. $ 999,279
Globe Life Direct Response ..........................
812,907
Liberty National Exclusive Agency ................
Other Agencies .............................................
274,635
219,726
43 $ 913,355
42 $ 830,903
35
12
10
782,765
270,476
222,737
36
12
10
746,693
271,113
224,356
40
36
13
11
$ 2,306,547
100 $ 2,189,333
100 $ 2,073,065
100
Annualized life premium in force was $2.37 billion at December 31, 2017, an increase of 4.9% over $2.26 billion a year
earlier. Annualized life premium in force was $2.15 billion at December 31, 2015.
22
TMK 2017 FORM 10-K
The following table shows net sales information for each of the last three years by distribution channel.
LIFE INSURANCE
Net Sales by Distribution Channel
(Dollar amounts in thousands)
2017
2016
2015
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
American Income Exclusive Agency ............ $ 223,259
135,704
Globe Life Direct Response .........................
46,886
Liberty National Exclusive Agency ...............
10,233
Other Agencies ............................................
$ 416,082
54 $ 209,856
150,267
33
40,159
11
11,673
2
51 $ 198,046
164,348
36
35,782
10
13,705
3
48
40
9
3
100 $ 411,955
100 $ 411,881
100
The table below discloses first-year collected life premium by distribution channel.
LIFE INSURANCE
First-Year Collected Premium by Distribution Channel
(Dollar amounts in thousands)
2017
2016
2015
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
American Income Exclusive Agency............ $ 182,538
Globe Life Direct Response .........................
92,057
Liberty National Exclusive Agency...............
33,191
Other Agencies ............................................
9,633
$ 317,419
58 $ 173,573
56 $ 156,206
29
10
3
98,496
29,103
11,458
31
9
4
106,417
27,554
12,036
52
35
9
4
100 $ 312,630
100 $ 302,213
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, third party internet vendor leads, and referrals to help ensure sustainable growth. This agency
is Torchmark’s largest contributor to life premium of any distribution channel at 43% of Torchmark’s 2017 total. This
group produced premium income of $999 million, an increase of 9% over the prior year total of $913 million, after
having risen 10% in 2016. First-year collected premium was $183 million compared to $174 million in 2016, an increase
of 5%. First-year collected premium rose 11% in 2016. Net sales increased 6% to $223 million in 2017 over the 2016
total of $210 million. Net sales increased 6% in 2016 over the 2015 total of $198 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 4% to 6,962 in 2017. 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 continues to focus on growing and strengthening middle management to
support sustainable growth of the agency force. To accomplish this, the agency places an 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 have made considerable investments in information technology in support of the agency, including
the launching of a lead mapping and management tool to the agency force. We anticipate this tool will help the Agency
enhance agent productivity and agent retention.
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TMK 2017 FORM 10-K
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 4% to $813 million, representing 35% of Torchmark’s total life
premium during 2017. Life premium in this channel increased 5% in 2016 to $783 million over the 2015 total of $747
million. Net sales of $136 million for this group decreased 10% from $150 million in 2016, after a 9% decrease in 2016
due to operational changes designed to maximize underwriting margin dollars. We expect sales to decline, consistent
with this recent trend, through 2018. First-year collected premium decreased 7% to $92 million in 2017 after having
decreased 7% in 2016.
The Liberty National Exclusive Agency markets individual and group life insurance to middle-income customers.
Life premium income for this agency was $275 million in 2017, an increase of 2% from $270 million in 2016. Life
premium income in 2015 totaled $271 million. Net sales increased 17% during 2017 to $47 million over the 2016 total
of $40 million. Net sales in 2016 increased 12%. The continued increases in net sales reflect changes in structure of
the agency that were put in place several years ago. Middle management has also grown within the agency which will
help continue this growth. First-year collected premium increased 14% to $33 million during 2017 and increased 6%
in 2016 to $29 million.
The Liberty average producing agent count increased from 1,715 in 2016 to 2,017 in 2017. 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 $220 million of life premium income, or 10% of Torchmark’s total in 2017, but contributed only 2% of net
sales for the year.
24
TMK 2017 FORM 10-K
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 2017, 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.
The following table presents the summary of results for health insurance.
HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
Premium .............................................. $ 976,373
Amount
% of
Premium Amount
100 $ 947,663
% of
Premium Amount
100 $ 925,520
% of
Premium
100
2017
2016
2015
Policy obligations .................................
Required interest on reserves..............
Net policy obligations .........................
Commissions, premium taxes, and
non-deferred acquisition expenses ......
Amortization of acquisition costs..........
Total expense ....................................
628,640
(77,792)
550,848
86,044
119,973
756,865
Insurance underwriting margin before
other income and administrative
expense ............................................... $ 219,508
65
(8)
57
9
12
78
612,725
(73,382)
539,343
84,819
113,445
737,607
65
(8)
57
9
12
78
602,610
(69,057)
533,553
81,489
106,101
721,143
22 $ 210,056
22 $ 204,377
65
(7)
58
9
11
78
22
Health premium increased 3% from $948 million in 2016 to $976 million in 2017. Health underwriting margin increased
4% from $210 million in 2016 to $220 million in 2017. Further discussion is included below by distribution channels.
25
TMK 2017 FORM 10-K
Premium income by distribution channel for each of the last three years is as follows:
HEALTH INSURANCE
Premium by Distribution Channel
(Dollar amounts in thousands)
2017
2016
2015
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans .......................................... $ 11,438
Medicare Supplement ........................................
352,690
364,128
37
Family Heritage Exclusive Agency
Limited-benefit plans ..........................................
253,534
Medicare Supplement ........................................
—
$ 12,704
342,311
355,015
236,075
—
38
$ 15,260
330,070
345,330
221,091
—
37
253,534
26
236,075
25
221,091
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 ........................................
144,128
52,079
196,207
88,776
260
89,036
545
72,923
73,468
Total Premium
Limited-benefit plans ..........................................
Medicare Supplement ........................................
498,421
477,952
51
49
475,421
472,242
142,026
59,772
142,130
67,020
20
201,798
21
209,150
23
84,064
318
79,984
355
84,382
9
80,339
9
9
8
552
69,841
70,393
869
68,741
69,610
459,334
466,186
7
50
50
7
50
50
$976,373
100
$947,663
100
$925,520
100
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TMK 2017 FORM 10-K
We market supplemental health insurance products through a number of distribution channels. The following table
presents net sales by distribution channel for the last three years.
HEALTH INSURANCE
Net Sales by Distribution Channel
(Dollar amounts in thousands)
2017
2016
2015
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans .......................................... $
Medicare Supplement ........................................
Family Heritage Exclusive Agency
Limited-benefit plans ..........................................
Medicare Supplement ........................................
Liberty National Exclusive Agency
Limited-benefit plans ..........................................
Medicare Supplement ........................................
American Income Exclusive Agency
Limited-benefit plans ..........................................
Medicare Supplement ........................................
Direct Response
Limited-benefit plans ..........................................
Medicare Supplement ........................................
Total Net Sales
Limited-benefit plans ..........................................
Medicare Supplement ........................................
500
60,670
61,170
56,534
—
56,534
20,407
—
20,407
13,943
—
13,943
—
5,582
5,582
39
$
558
55,451
56,009
51,349
—
39
$
734
70,891
71,625
50,266
—
46
36
51,349
35
50,266
32
19,513
9
18,021
41
13
19,522
13
18,062
12
12,666
—
12,666
—
5,560
5,560
9
4
9
3
11,501
—
11,501
7
—
5,003
5,003
3
51
49
100
91,384
66,252
$157,636
58
42
100
84,086
61,020
$145,106
58
42
100
80,522
75,935
$156,457
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TMK 2017 FORM 10-K
The following table discloses first-year collected health premium by distribution channel.
HEALTH INSURANCE
First-Year Collected Premium by Distribution Channel
(Dollar amounts in thousands)
2017
2016
2015
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
458
54,393
54,851
44,535
—
44,535
$
547
64,848
65,395
40
$
660
76,575
77,235
47
49
40,822
—
39,196
—
33
40,822
29
39,196
25
Limited-benefit plans ..........................................
16,425
Medicare Supplement ........................................
2
16,103
6
14,690
168
16,427
12
16,109
11
14,858
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 ........................................
14,673
—
14,673
—
5,657
5,657
76,091
60,052
13,710
—
12,041
—
11
13,710
10
12,041
—
4,457
4,457
71,182
69,311
(2)
13,843
13,841
66,585
90,586
3
51
49
4
56
44
9
8
9
42
58
$136,143
100
$140,493
100
$157,171
100
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 2017, premium income was $364 million, representing 37% of Torchmark’s total health premium. Net sales were
$61 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 $353 million. The UA Independent Agency
represents 74% of all Torchmark Medicare Supplement premium and 92% of Medicare Supplement net sales. Medicare
Supplement premium in this agency rose 3% in 2017. Total health premium increased 3% in 2017 and 2016. Medicare
Supplement net sales increased 9% in 2017 from the prior year due to increases in individual and group sales. 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 systems. The Family Heritage Agency contributed $57 million in net sales in 2017, compared with $51 million
in 2016 and $50 million in 2015. Health premium income was $254 million in 2017, representing 26% of Torchmark’s
28
TMK 2017 FORM 10-K
health premium. This compared with $236 million or 25% of health premium in 2016 and $221 million or 24% in 2015.
The average producing agent count was 995 for the year ended December 31, 2017, compared with 923 for the same
period in 2016, an increase of 8%.
The Liberty National Exclusive Agency represented 20% of all Torchmark health premium income at $196 million
in 2017. 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 2017, health premium income declined 3% after declining 4% during 2016. Liberty’s health
premium decline has been due primarily to its declining Medicare Supplement block. Liberty's first-year collected
premium increased 2% to $16 million in 2017 compared with an increase of 8% in 2016, 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 17% of health premium in 2017 and 16% in 2016. 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 2017 and 2016 and $5 million in 2015.
In 2016 and 2015, the Affordable Care Act (ACA) imposed an annual fee to health insurance issuers offering commercial
health insurance as well as another fee for premium stabilization. These fees totaled $621 thousand and $1.2 million
in 2016 and 2015, respectively. There were no fees for 2017.
Annuities. Our fixed annuity balances at the end of 2017 and 2016 were $1.25 billion and $1.29 billion, respectively.
Underwriting income was $10.6 million, $9.4 million, and $4.6 million for the three years ended December 31, 2017,
respectively.
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.
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.
29
TMK 2017 FORM 10-K
Administrative expenses. Operating expenses are included in the Corporate and Other segment 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, 2017.
Operating Expenses Selected Information
(Dollar amounts in thousands)
2017
2016
2015
Amount
% of
Premium
Amount
% of
Premium
Amount
% of
Premium
Insurance administrative expenses:
Salaries ........................................................ $ 96,185
Non-salary employee costs .........................
33,539
Information technology costs .......................
26,048
Other administrative expense ......................
46,066
Legal expense—insurance ..........................
8,752
Total insurance administrative expenses ...
210,590
Parent company expense ..............................
Stock-based compensation expense .............
Non-operating fees ........................................
9,631
37,034
—
Total operating expenses, per
Consolidated Statements of Operations.. $257,255
2.9
1.0
0.8
1.4
0.3
6.4
$ 91,415
29,852
23,303
43,727
8,301
196,598
8,587
26,326
553
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
—
$232,064
$223,858
2.9
1.0
0.6
1.4
0.3
6.2
Insurance administrative expenses:
Increase (decrease) over prior year .............
7.1%
Total operating expenses:
Increase (decrease) over prior year .............
10.9%
5.6%
3.7%
6.5%
2.9%
Insurance administrative expenses were up 7.1% in 2017 when compared with the prior year after increasing 5.6%
during 2016. As a percentage of total premium, insurance administrative expenses increased to 6.4% in 2017 from
6.3% in 2016 and 6.2% 2015. Total operating expenses increased 10.9% in 2017, after increasing 3.7% in 2016. The
increase in other employee costs was due primarily to higher pension expense driven by lower interest rates.
The increase in information technology costs was due to investments that will enhance our customer experience,
expand our data analytics capabilities, modernize our systems in order to improve our ability to react quickly to future
changes, and bolster our information security programs.
The increase in stock-based compensation expense was primarily due to higher expense associated with equity awards,
reflecting Torchmark's higher share price and higher stock option values as compared with the same period a year
ago. The increase also reflects a one-time increase in stock-based compensation expense due to the effects of the
Tax Legislation as previously discussed.
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TMK 2017 FORM 10-K
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. 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 common share as an important and useful measure to evaluate
the performance of the investment segment. It is defined as excess investment income divided by the total diluted
weighted average shares outstanding, representing the contribution by the investment segment to the consolidated
earnings per share of the Company. Since implementing our share repurchase program in 1986, we have used $7.1
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. If we had not used this excess cash to
repurchase shares, but had instead invested it in interest-bearing assets, we would have earned more investment
income and had more 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:
2017
847,885
2016
806,903
2015
773,951
$
$
Interest on reserves .......................................................................
(734,370)
(702,340)
(674,650)
Interest on deferred acquisition costs ............................................
210,380
202,813
196,845
Net required interest ................................................................
(523,990)
(499,527)
(477,805)
Financing costs ....................................................................................
Excess investment income ................................................................... $
(84,532)
239,363
Excess investment income per diluted share ....................................... $
2.01
(83,345)
224,031
1.83
$
$
$
$
(76,642)
219,504
1.73
Mean invested assets (at amortized cost) ............................................ $15,376,781
Average net insurance policy liabilities(1) ..............................................
9,359,780
Average debt and preferred securities (at amortized cost)...................
1,458,706
$14,461,502
$13,697,129
8,945,850
1,379,933
8,574,699
1,343,663
(1) Net of deferred acquisition costs, excluding the associated unrealized gains and losses thereon.
Excess investment income increased $15 million or 7% during 2017 after increasing 2% during 2016. The rate of
growth was higher in 2017 than in 2016, in part, because excess investment income during 2016 was negatively
impacted by an increase in financing costs attributable to the early refinancing of our 6.375% Senior Notes as is
discussed below in the discussion of our financing costs. In addition, the growth rate in 2017 was positively impacted
by the investment of positive cash flows relating to the collection in 2016 and 2017 of various receivables that had
accumulated in prior years in the Medicare Part D business.
Excess investment income per diluted common share increased 10% during 2017 after increasing 6% during 2016.
Excess investment income per diluted common share generally increases at a faster pace than excess investment
income because the number of diluted shares outstanding generally decreases from year to year as a result of our
share repurchase program.
The largest component of excess investment income is net investment income, which increased at a compound annual
growth rate of 4% during the last three years. Growth in net investment income has been negatively impacted in recent
years by the declining interest rate environment during which time we have invested new money and reinvested the
31
TMK 2017 FORM 10-K
proceeds from bonds that matured or were called or otherwise disposed of at yield rates less than what we earned on
these bonds before their maturity or disposition. We currently expect that the average annual turnover rate of fixed
maturity assets during the next five years will not exceed 1% to 3% of the portfolio, and will not have a significant
negative impact on the growth of net investment income. 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) ......................
5.1%
6.3%
4.3%
5.6%
2.1%
3.2%
2017
2016
2015
Should interest rates rise, especially long-term rates, Torchmark's net investment income would benefit due to higher
interest rates on new purchases. While such a rise in interest rates could adversely affect the fair value of the fixed
maturities portfolio, we could withstand an increase in interest rates of approximately 100 to 105 basis points before
the net unrealized gains on our fixed maturity portfolio as of December 31, 2017 would be eliminated. Should interest
rates increase further than that, we would not be concerned with potential interest rate driven unrealized losses in our
fixed maturity portfolio because we have the intent and, more importantly, the ability, to hold our fixed maturities to
maturity.
Required interest on net insurance policy liabilities reduces net investment income as it is the amount of net investment
income considered by management necessary to “fund” 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, 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.
Since 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 do not expect an extended low-interest-rate environment to
cause a loss recognition event.
32
TMK 2017 FORM 10-K
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
2017
Life and Health .................................................................................... $
Annuity ................................................................................................
Total .................................................................................................... $
Increase in 2017 .................................................................................
468,038
55,952
523,990
$ 8,099,319
1,260,461
$ 9,359,780
4.90%
4.63%
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%
5.78%
4.44
5.60
5.77%
4.47
5.58
5.77%
4.50
5.57
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
(Dollar amounts in thousands)
Interest on funded debt ....................................................................... $
Interest on term loan ...........................................................................
Interest on short-term debt ..................................................................
Other ...................................................................................................
Financing costs ............................................................................... $
74,115 $
2,336
8,076
5
84,532 $
75,988 $
993
6,360
4
83,345 $
71,180
—
5,457
5
76,642
2017
2016
2015
Financing costs increased $1 million or 1% from 2016 to 2017. In 2017, interest on short-term debt increased because
of the increase in the weighted-average interest rate on such debt. Financing costs also increased $7 million or 9%
from 2015 to 2016 due primarily to the additional interest expense on our funded debt associated with the issuance of
a 6.125% Junior Subordinated Debt security seventy days before the maturity and repayment of the 6.375% Senior
Notes. More information on our debt transactions are disclosed in the Financial Condition section of this report and in
Note 11—Debt.
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
33
TMK 2017 FORM 10-K
long periods to support the liabilities. Expected yields on these investments are taken into account when setting
insurance premium rates and product profitability expectations.
Despite our intent to hold fixed maturity investments for a long period of time, 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.
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, 2017.
Analysis of Realized Gains (Losses), Net of Tax
(Dollar amounts in thousands, except for per share data)
2017
Year Ended December 31,
2016
2015
Amount
Per Share
Amount
Per Share
Amount
Per Share
Fixed maturities:
Sales ........................................... $
Called or tendered.......................
Write-downs ................................
Loss on redemption of debt ...............
Other .................................................
2,587 $
20,292
(159)
(2,627)
(2,503)
Total ...................................... $ 17,590 $
0.02 $ (17,209) $
0.17
—
(0.02)
(0.02)
0.15 $ (6,944) $
10,290
—
—
(25)
(0.14) $ (10,813) $
0.08
—
—
—
4,652
—
—
447
(0.06) $ (5,714) $
(0.09)
0.04
—
—
—
(0.05)
As described in Note 4—Investments under the caption Other-than-temporary impairments, the Company recorded
$245 thousand ($159 thousand, net of tax) in security write-downs. We did not incur any write downs in our fixed
maturity portfolio as a result of other-than-temporary impairment for the years 2015 and 2016.
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 2015 through 2017, 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.
34
TMK 2017 FORM 10-K
Fixed Maturity Acquisitions Selected Information
(Dollar amounts in thousands)
Year Ended December 31,
2016
2015
2017
Cost of acquisitions(1):
Investment-grade corporate securities ............................................. $ 1,308,567
Taxable municipal securities ............................................................
—
Other investment-grade securities ...................................................
6,042
Total fixed maturity acquisitions ............................................. $ 1,314,609
$ 1,505,135
$ 1,026,520
13,023
14,727
29,092
15,296
$ 1,532,885
$ 1,070,908
Effective annual yield (one year compounded)(2)................................
Average life (in years, to next call) .....................................................
Average life (in years to maturity) .......................................................
Average rating ....................................................................................
4.67%
23.0
24.0
BBB+
4.67%
24.6
25.4
BBB+
4.79%
27.2
27.9
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. Absent sales, however, the average life will not be less than the average
life to next call and will not exceed the average life to maturity. Data for both of these average life measures is provided
in the above chart.
From 2015 through 2017, 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 $55 million in other long-term investments in 2017 compared with $20 million in 2016
and $32 million in 2015.
New cash flow available for investment has been primarily provided through our insurance operations and interest
received on existing investments. The amount of cash available for investment in 2016 was greater than 2015 due in
part to the collection of various receivables from our Medicare Part D business. In some years, a significant amount
of new investments can be derived from proceeds from dispositions including issuer calls. While calls increase funds
available for investment, as noted earlier in this discussion, they can also 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 $371 million in 2017, $182 million in 2016, and $178 million in 2015.
Portfolio Composition. The composition of the investment portfolio at book value on December 31, 2017 and 2016 was
as follows:
Invested Assets
(Dollar amounts in thousands)
2017
2016
Amount
% of Total
Amount
% of Total
Fixed maturities (at amortized cost) .................................... $ 14,995,101
Policy loans .........................................................................
529,529
Other long-term investments(1) ............................................
107,953
Short-term investments .......................................................
127,071
Total ................................................................................ $ 15,759,654
95 $ 14,188,050
3
1
1
507,975
53,355
72,040
100 $ 14,821,420
96
3
—
1
100
(1)
Includes equities available for sale at cost.
35
TMK 2017 FORM 10-K
Approximately 95% 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,
2017
2016
5.60%
5.74%
17.5
19.1
10.8
11.5
17.6
19.8
10.4
11.3
(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.
36
TMK 2017 FORM 10-K
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, 2017 and 2016.
Fixed Maturities by Sector
At December 31, 2017
(Dollar amounts in thousands)
Below Investment Grade
Total Fixed Maturities
% of Total Fixed
Maturities
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
At
Amortized
Cost
At
Fair
Value
Corporates:
Financial
Insurance - life, health,
P&C ............................. $
66,489 $
3,896 $
(3,650) $
66,735
$ 2,018,315
$ 346,364
$
(4,588) $ 2,360,091
Banks ..........................
Other financial .............
27,104
74,956
—
—
(2,727)
(17,661)
24,377
57,295
747,249
853,583
117,724
74,765
(3,007)
861,966
(18,524)
909,824
Total financial............
168,549
3,896
(24,038)
148,407
3,619,147
538,853
(26,119)
4,131,881
Utilities
Electric.........................
20,713
Gas and water .............
—
Total utilities..............
20,713
1,159
—
1,159
—
—
—
21,872
1,463,872
306,812
(1,275)
1,769,409
—
520,418
64,726
(120)
585,024
21,872
1,984,290
371,538
(1,395)
2,354,433
Industrial - Energy
Pipelines ......................
40,590
937
(1,092)
40,435
880,379
117,765
(2,320)
995,824
Exploration and
production....................
Oil field services ..........
Refiner .........................
28,174
33,867
—
Driller ...........................
54,561
1,180
—
—
87
(85)
(6,004)
—
29,269
27,863
—
(14,448)
40,200
527,581
83,722
73,106
54,561
79,784
11,074
17,430
(2,620)
604,745
(6,004)
—
88,792
90,536
40,200
87
(14,448)
Total energy..............
157,192
2,204
(21,629)
137,767
1,619,349
226,140
(25,392)
1,820,097
—
7,727
—
7,727
—
2,965
1,581
5,076
—
57,438
21,334
47,136
26,443
143,995
642,800
Industrial - Basic
materials
Chemicals....................
—
Metals and mining .......
57,438
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) .....................
—
—
—
—
—
65,165
541,785
387,134
59,216
85,105
—
112,175
16,911
(20)
600,981
—
—
472,239
129,086
65,165
1,041,094
161,232
(20)
1,202,306
(4,498)
—
16,836
50,101
1,834,778
1,326,051
192,887
179,694
(6,494)
2,021,171
12
12
(671)
1,505,074
(162)
27,862
553,435
90,211
(195)
643,451
(9,387)
139,684
1,310,445
123,588
(13,236)
1,420,797
24,608
(59,714)
607,694
13,288,589
1,884,143
(73,522) 15,099,210
89
90
306
—
(105)
201
1,501,865
147,772
(1,507)
1,648,130
59,150
20,084
(7,653)
71,581
59,150
20,084
(7,653)
71,581
—
—
—
—
—
—
—
—
144,040
4,790
1,457
118
—
(1)
148,830
1,574
10
—
1
—
9
—
1
—
Total fixed maturities. $
702,256 $
44,692 $
(67,472) $
679,476
$14,995,101
$2,056,907
$
(82,683) $16,969,325
100
100
(1) Includes GNMA's
37
TMK 2017 FORM 10-K
14
5
6
25
10
3
13
6
4
1
—
—
11
3
3
1
7
14
5
6
25
11
3
14
6
4
1
—
—
11
3
3
1
7
9
3
9
9
4
8
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)
34,852
(18,589)
56,366
681,422
623,836
71,828
39,215
(11,692)
(24,628)
741,558
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..............
21,300
Industrial - Energy
Pipelines ......................
Exploration and
production....................
Oil field services ..........
Refiner .........................
Driller ...........................
Total energy..............
Industrial - Basic
materials
45,394
28,954
33,880
—
54,642
162,870
Chemicals....................
—
Metals and mining .......
107,102
Forestry products and
paper ...........................
Total basic materials.
Industrial - Consumer,
non-cyclical.....................
—
107,102
—
Other industrials .............
80,311
486
—
486
87
182
—
—
322
591
—
491
—
491
—
4,066
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) .....................
—
—
—
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)
42,184
809,300
67,313
(11,431)
865,182
(744)
28,392
531,754
43,009
(11,806)
562,957
(6,483)
27,397
—
—
(14,597)
40,367
83,753
62,977
54,642
7,624
9,721
322
(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
—
—
(2,195)
105,398
481,127
389,908
112,702
983,737
21,538
25,247
10,270
57,055
(10,204)
(2,613)
492,461
412,542
(415)
122,557
(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
9
4
9
9
4
8
—
—
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
551
—
(194)
357
1,686,021
129,064
(10,539)
1,804,546
12
12
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
—
—
—
—
—
—
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
At December 31, 2017, fixed maturities had a fair value of $17.0 billion, compared with $15.2 billion at December 31,
2016. The net unrealized gain position in the fixed maturity portfolio increased from $1.1 billion at December 31, 2016
to $2.0 billion at December 31, 2017, primarily as a result of a decrease in credit spreads. The December 31, 2017
net unrealized gain consisted of gross unrealized gains of $2.1 billion offset by $83 million of gross unrealized losses,
compared with the December 31, 2016 net unrealized gain which consisted of a gross unrealized gain of $1.3 billion
and a gross unrealized loss of $216 million.
Corporate securities, which consist of bonds and redeemable preferred stocks, were the largest component of the
fixed maturity portfolio, representing 89% of amortized cost and 90% of fair value. The remainder of the portfolio is
38
TMK 2017 FORM 10-K
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. At December 31,
2017, the total fixed maturity portfolio consists of 596 issuers, with 220 issuers within the financial, utility, and energy
sectors.
The net unrealized gain of the fixed maturity portfolio increased $916 million from December 31, 2016. The financial,
utility, energy, and basic materials sectors experienced increases of $237 million, $132 million, $117 million, and $117
million respectively, in net unrealized gains from December 31, 2016 to December 31, 2017. 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, 2017 and 2016, including a
discussion of other-than-temporary impairments, an analysis of unrealized investment losses and a schedule of
maturities, see Note 4—Investments.
An analysis of the fixed maturity portfolio by a composite rating at December 31, 2017 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 $591 million at amortized cost ($613 million at fair value) for which the ratings were assigned
by the third party managers.
Fixed Maturities by Rating
At December 31, 2017
(Dollar amounts in thousands)
Amortized
Cost
%
Fair
Value
%
Investment grade:
AAA ...................................................................................... $
AA .........................................................................................
A ...........................................................................................
BBB+ ....................................................................................
BBB ......................................................................................
BBB- .....................................................................................
Investment grade ...........................................................
649,559
1,095,502
4,139,252
3,493,309
3,302,118
1,613,105
14,292,845
4 $
7
28
23
22
11
95
689,356
1,222,148
4,959,570
3,936,939
3,696,880
1,784,956
16,289,849
Below investment grade:
BB ........................................................................................
B ...........................................................................................
Below B ................................................................................
Below investment grade .................................................
413,425
152,454
136,377
702,256
$ 14,995,101
3
1
1
5
397,063
133,582
148,831
679,476
100 $ 16,969,325
4
7
29
23
22
11
96
2
1
1
4
100
Of the $15.0 billion of fixed maturities at amortized cost as of December 31, 2017, $14.3 billion or 95% were investment
grade with an average rating of A-. Below-investment-grade bonds were $702 million with an average rating of B+.
Below-investment-grade bonds at amortized cost were 15% of our shareholders’ equity, excluding the effect of
unrealized gains and losses on fixed maturities as of December 31, 2017. Overall, the total portfolio had a weighted
average quality rating of BBB+ based on amortized cost, the same as at the end of 2016.
39
TMK 2017 FORM 10-K
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,
2017
2016
Balance at beginning of year ................................................................................. $
Downgrades by rating agencies ......................................................................
Upgrades by rating agencies ..........................................................................
Disposals ........................................................................................................
Write down of other-than-temporarily impaired securities ...............................
Amortization ....................................................................................................
Balance at end of year ........................................................................................... $
751,144 $
61,691
(55,345)
(59,420)
(245)
4,431
640,150
179,077
(58,626)
(13,860)
—
4,403
702,256 $
751,144
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 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 do not have any exposure to European sovereign debt at December 31, 2017. Our exposure
to Puerto Rican obligations is insignificant.
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 95%
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.
The following table illustrates the market risk sensitivity of our interest-rate sensitive fixed maturity portfolio at
December 31, 2017 and 2016. 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,
2017
21,455,515 $
19,024,031
16,969,325
15,221,207
13,723,745
2016
19,126,303
17,030,458
15,245,861
13,716,023
12,395,635
(1) In basis points.
40
TMK 2017 FORM 10-K
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 2017, the Parent received $454 million of cash dividends from its subsidiaries, compared with $438
million in 2016 and $466 million in 2015. 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 2017 of approximately $330 million, compared with $311 million in 2016 and $358 million in 2015.
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, additional shareholder dividends, or share
repurchases. In 2018, it is expected that the Parent Company will receive approximately $450 million in dividends and
transfers from subsidiaries and that approximately $320 to $330 million will be available as excess cash flow. Certain
restrictions exist on the payment of these dividends. For more information on the restrictions on the payment of dividends
by subsidiaries, see the Restrictions section of Note 12—Shareholders’ Equity. Although these restrictions exist,
dividend availability from subsidiaries historically has been more than sufficient for the cash flow needs of the Parent
Company.
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. 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, 2017, we had available $249 million of additional borrowing capacity under this facility, compared with
$310 million a year earlier. There have been no difficulties in accessing the commercial paper market during the three
years ended December 31, 2017.
In summary, Torchmark expects to have readily available funds for 2018 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 $1.4 billion in 2017,
compared with $1.2 billion in 2016 and $1.1 billion in 2015. In addition to cash inflows from operations, our companies
received proceeds from maturities, calls, and repayments of fixed maturities in the amount of $489 million in 2017,
compared with $236 million in 2016 and $376 million in 2015.
41
TMK 2017 FORM 10-K
Our cash and short-term investments were $246 million at year-end 2017 and $148 million at year-end 2016. 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 $17.0 billion at December 31, 2017. 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, 2017 and 2016. 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 insignificant increase in financing costs.
As of December 31, 2017, 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.
The following table presents information about future payments under our contractual obligations for the selected
periods as of December 31, 2017.
Contractual Obligations
(Dollar 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)............ $ 1,460,268 $ 1,475,634 $ 328,625 $
Debt—interest(2) .............
6,837
Capital leases ................
1,134,369
73,967
—
—
—
—
33,846
16,564
290,999
3,483
27,326
308,897 $ 227,500 $
610,612
111,475
87,988
860,939
—
6,422
12,455
—
4,829
4,382
—
1,830
246,836
250,595
292,824
21,603
48,572
55,059
167,590
44,847,264
Total ........................... $15,191,018 $ 55,673,213 $ 2,039,778 $ 3,562,610 $ 3,335,754 $ 46,735,071
13,439,472
52,462,823
1,584,774
2,955,996
3,074,789
Operating leases ............
Purchase obligations(3)...
Postretirement
obligations(4) ...................
Future insurance
obligations(5) ...................
(1) Debt is itemized in Note 11—Debt.
(2)
(3) Purchase obligations include various long-term non-cancelable purchase commitments as well as commitments to provide capital for low-
Interest on debt is based on our fixed contractual obligations.
income housing tax credit interests.
(4) 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, 2017, these pension obligations were $603 million, but there were also assets of $378 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 $26 million. Please refer to Note 9—Postretirement Benefits for more information on pension obligations.
(5) Future insurance obligations consist primarily of estimated future contingent benefit payments on policies in force at December 31, 2017.
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
$13.4 billion at December 31, 2017, 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 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.
Debt: The carrying value of the long-term debt was $1.1 billion at December 31, 2017, the same as a year earlier.
42
TMK 2017 FORM 10-K
On November 17, 2017, Torchmark completed the issuance and sale of $125 million in aggregate principal of
Torchmark’s 5.275% Junior Subordinated Debentures due 2057. The debentures were sold in a private placement
pursuant to exemptions from the registration requirements of the Securities Act of 1933. The initial purchaser of the
debentures was outside the United States. The net proceeds from the sale of the debentures were $123.3 million, after
giving effect to the discount payable to the initial purchaser and expenses of the offering of the debentures. Torchmark
used the net proceeds from the offering of the debentures to repay the $125 million outstanding principal of the 5.875%
Junior Subordinated Debentures that were due December 15, 2052 and that were callable beginning December 15,
2017.
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: For the past several years, our insurance subsidiaries have targeted a capital ratio of approximately
325% of Company Action Level regulatory capital under Risk-Based Capital (RBC) standards, a formula designed by
insurance regulatory authorities to monitor the adequacy of capital. At December 31, 2017, our insurance subsidiaries
had an aggregate RBC ratio of 314%, a decrease in the ratio from the prior year of 324% due to the reduction in
deferred tax assets as a result of the Tax Legislation previously discussed in the Results of Operations in this report.
Should the NAIC adjust the RBC factors in 2018, as expected, to take into account the lower tax rate, we would expect
a further reduction in our consolidated RBC ratio for the year ending December 31, 2018. At this time, target RBC
levels for 2018 are yet to be determined pending discussion with regulators and rating agencies. Management believes
more than sufficient liquidity exists at the Parent Company to make additional contributions as necessary to maintain
the targeted ratio.
Shareholder's Equity: As noted under the caption Analysis of Share Repurchases in this report, we have an ongoing
share repurchase program. Under this program, we acquired 4 million shares at a cost of $325 million in 2017, 5 million
shares at a cost of $311 million in 2016, and 6 million shares for $359 million in 2015. 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 2015, it was increased to $0.135 per share from $0.1267 per share. In the first quarter of 2016, it was
raised to $0.14 per share. Finally, in the first quarter of 2017, dividends were raised to $0.15 per share.
Shareholders’ equity was $6.2 billion at December 31, 2017, compared with $4.6 billion at December 31, 2016, a $1.7
billion or 36% increase. During the twelve months since December 31, 2016, shareholders’ equity was reduced by
$325 million in share purchases under the repurchase program and $88 million to offset the dilution from stock option
exercises. However, it was increased by $1.5 billion of net income, $874 million of which was attributed to a tax
adjustment as a result of the Tax Legislation and $870 million of after-tax unrealized gains, of which $275 million was
attributed to a tax adjustment as a result of the Tax Legislation.
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. If market conditions are favorable, we currently expect
that share repurchases will continue to be a primary use of those funds.
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.
43
TMK 2017 FORM 10-K
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.
The following table presents selected data related to our capital resources. Additionally, the table presents 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. Excluding the effect of unrealized gains and losses on the fixed maturity
portfolio from shareholders' equity is considered non-GAAP. Below we include the reconciliation to GAAP.
Selected Financial Data
(Dollar amounts in thousands except per share and percentage data)
At December 31, 2017
At December 31, 2016
At December 31, 2015
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 ........................ $16,969,325
Deferred acquisition costs(2) ......
3,958,063
Total assets ............................... 23,474,985
Short-term debt .........................
328,067
Long-term debt .........................
1,132,201
$ 1,974,224
$15,245,861
$ 1,057,811
$13,758,024
$ 506,153
(10,819)
3,783,158
(10,281)
3,617,135
(7,869)
1,963,405
21,436,087
1,047,530
19,853,213
498,284
Shareholders’ equity .................
6,231,421
1,551,090
Book value per diluted share.....
Debt to capitalization(3) ..............
Diluted shares outstanding........
Actual shares outstanding.........
52.95
19.0%
117,696
114,593
13.18
(4.8)%
—
—
264,475
1,133,165
4,566,861
37.76
23.4%
120,958
118,031
—
—
490,129
743,733
—
—
680,894
4,055,552
323,885
5.63
(3.1)%
32.71
23.3%
123,996
122,370
2.62
(1.5)%
(1) Amount added to (deducted from) comprehensive income to produce the stated GAAP item.
(2)
(3) Torchmark’s debt covenants require that the effect of the accounting guidance requiring revaluation be removed to determine this ratio. This
Includes the value of insurance purchased.
ratio is computed by dividing total debt by the sum of debt and shareholders’ equity.
Torchmark’s ratio of earnings before interest and taxes to interest requirements (times interest earned) was 10.8 times
in 2017, compared with 10.3 times in 2016 and 11.0 times in 2015 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.
44
TMK 2017 FORM 10-K
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,
2017.
Liberty ............................................................................................................
Globe .............................................................................................................
United American .............................................................................................
American Income ...........................................................................................
Family Heritage ..............................................................................................
Standard
& Poor’s
AA-
AA-
AA-
AA-
NR
A.M
Best
A+ (Superior)
A+ (Superior)
A+ (Superior)
A+ (Superior)
A+ (Superior)
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.
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 2017, 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.
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 .
45
TMK 2017 FORM 10-K
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.
Approximately 87% of our liabilities for future policy benefits at December 31, 2017 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
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, 2017.
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—Significant Accounting Policies.
Over 99% of our recorded amounts for deferred acquisition costs at December 31, 2017 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, 2017.
Less than 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, 2017.
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
TMK 2017 FORM 10-K
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 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 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, 2017, our gross liability under these plans was $603 million,
but was offset by assets of $378 million.
The actuarial assumptions used in determining our obligations for pensions include employee mortality and turnover,
retirement age, the expected return on plan assets, projected salary increases, and the discount rate at which future
obligations could be settled. These assumptions have an important effect on the pension obligation. A decrease in the
discount rate or rate of return on plan assets will cause an increase in the pension obligation. A decrease in projected
salary increases will cause a decrease in this obligation. Small changes in assumptions may cause significant
differences in reported results for these plans. For example, a sensitivity analysis is presented below for the impact of
change in the discount rate and the long-term rate of return on assets assumed on our defined benefit pension plans
expense for the year 2017 and projected benefit obligation as of December 31, 2017.
47
TMK 2017 FORM 10-K
Pension Assumptions
(Dollar amounts in thousands)
% Change
Impact on
Expense
Impact on
Projected
Benefit
Obligation
Assumption
Discount Rate(1):
Increase .......................................................................................
Decrease .....................................................................................
0.25 $
(0.25)
(2,890) $
3,054
(23,697)
25,181
Expected Return(2):
Increase .......................................................................................
Decrease .....................................................................................
0.25
(0.25)
(923)
923
(1) The discount rate was 4.27% for 2017 expense and 3.75% for the projected benefit obligation at December 31, 2017.
(2) The expected return rate assumed was 6.96%.
The Company determines mortality assumptions through the use of published mortality tables that reflect broad-based
studies of mortality and published longevity improvement scales.
The criteria used to determine the primary assumptions are discussed in Note 9—Postretirement Benefits. 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—Postretirement Benefits also contains information about pension plan assets,
investment policies, and other related data.
48
TMK 2017 FORM 10-K
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
TMK 2017 FORM 10-K
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements Index
Report of Independent Registered Public Accounting Firm ..........................................................................
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2017 and 2016 .............................................................
Consolidated Statements of Operations for each of the three years in the period ended December 31,
2017 .........................................................................................................................................................
Consolidated Statements of Comprehensive Income for each of the three years in the period ended
December 31, 2017 .................................................................................................................................
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended
December 31, 2017 .................................................................................................................................
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
2017 .........................................................................................................................................................
Notes to Consolidated Financial Statements ...........................................................................................
Page
51
52
53
54
55
56
57
50
TMK 2017 FORM 10-K
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Torchmark Corporation (McKinney, Texas)
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Torchmark Corporation and subsidiaries (the
“Company”) as of December 31, 2017 and 2016, 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, 2017, and
the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as
of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 26, 2018, expressed an unqualified opinion on the
Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
February 26, 2018
We have served as the Company's auditor since 1999.
51
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
December 31,
2017
2016
Assets:
Investments:
Fixed maturities-available for sale, at fair value (amortized cost: 2017—$14,995,101;
2016—$14,188,050)
Policy loans ..........................................................................................................................
............................................................................................................. $ 16,969,325
529,529
Other long-term investments .................................................................................................
Short-term investments .........................................................................................................
108,559
127,071
$ 15,245,861
507,975
53,852
72,040
Total investments ...........................................................................................................
17,734,484
15,879,728
Cash .......................................................................................................................................
Accrued investment income ....................................................................................................
Other receivables ....................................................................................................................
118,563
233,453
391,775
76,163
223,148
384,454
Deferred acquisition costs .......................................................................................................
3,958,063
3,783,158
Goodwill
..................................................................................................................................
Other assets ...........................................................................................................................
441,591
528,536
Assets related to discontinued operations ...............................................................................
68,520
Total assets ................................................................................................................... $ 23,474,985
Liabilities:
Future policy benefits .............................................................................................................. $ 13,439,472
Unearned and advance premiums ..........................................................................................
61,430
Policy claims and other benefits payable ................................................................................
Other policyholders' funds .......................................................................................................
333,294
97,635
441,591
520,313
127,532
$ 21,436,087
$ 12,825,837
64,017
299,565
96,993
Total policy liabilities ......................................................................................................
13,931,831
13,286,412
Current and deferred income taxes payable ............................................................................
1,312,002
1,743,990
Other liabilities ........................................................................................................................
Short-term debt
.......................................................................................................................
489,609
328,067
413,760
264,475
Long-term debt (estimated fair value: 2017—$1,228,392; 2016—$1,233,019) .......................
1,132,201
1,133,165
Liabilities related to discontinued operations ...........................................................................
49,854
27,424
Total liabilities ................................................................................................................
17,243,564
16,869,226
Commitments and Contingencies (Note 15)
Shareholders' equity:
Preferred stock, par value $1 per share—Authorized 5,000,000 shares; outstanding: 0 in
2017 and 2016 ........................................................................................................................
Common stock, par value $1 per share—Authorized 320,000,000 shares; outstanding:
(2017—124,218,183 issued, less 9,625,104 held in treasury and 2016—127,218,183
issued, less 9,187,075 held in treasury) ..................................................................................
Additional paid-in capital
.........................................................................................................
Accumulated other comprehensive income (loss) ...................................................................
Retained earnings ...................................................................................................................
—
—
124,218
508,476
1,424,274
4,806,208
127,218
490,421
577,574
3,890,798
Treasury stock ........................................................................................................................
(631,755)
(519,150)
Total shareholders’ equity ..............................................................................................
6,231,421
Total liabilities and shareholders’ equity ......................................................................... $ 23,474,985
4,566,861
$ 21,436,087
See accompanying Notes to Consolidated Financial Statements.
52
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
Year Ended December 31,
2017
2016
2015
Revenue:
Life premium ................................................................................................ $
Health premium ...........................................................................................
Other premium .............................................................................................
2,306,547
$
2,189,333
$
2,073,065
976,373
947,663
15
38
925,520
135
Total premium ..................................................................................
3,282,935
3,137,034
2,998,720
Net investment income ................................................................................
Realized investment gains (losses) ..............................................................
Other income ...............................................................................................
847,885
23,611
1,142
806,903
(10,683)
1,375
773,951
(8,791)
2,185
Total revenue ...................................................................................
4,155,573
3,934,629
3,766,065
Benefits and expenses:
Life policyholder benefits ..............................................................................
1,558,261
1,479,272
1,374,608
Health policyholder benefits .........................................................................
Other policyholder benefits ..........................................................................
633,778
35,836
612,725
36,751
602,610
38,994
Total policyholder benefits ................................................................
2,227,875
2,128,748
2,016,212
Amortization of deferred acquisition costs ....................................................
Commissions, premium taxes, and non-deferred acquisition expenses .......
Other operating expense ..............................................................................
Interest expense ..........................................................................................
490,403
264,860
257,255
84,532
469,063
249,174
232,064
83,345
445,625
237,541
223,858
76,642
Total benefits and expenses .............................................................
3,324,925
3,162,394
2,999,878
Income before income taxes ..........................................................................
Income tax benefit (expense) .........................................................................
Income from continuing operations .................................................................
830,648
627,615
1,458,263
772,235
(232,645)
539,590
766,187
(249,894)
516,293
Discontinued operations:
Income (loss) from discontinued operations, net of tax ................................
(3,769)
10,189
10,807
Net income ...................................................................................... $
1,454,494
$
549,779
$
527,100
Basic net income per common share:
Continuing operations .................................................................................. $
Discontinued operations ..............................................................................
Total basic net income per common share ....................................... $
Diluted net income per common share:
Continuing operations .................................................................................. $
Discontinued operations ..............................................................................
Total diluted net income per common share ..................................... $
12.53
$
(0.03)
12.50
$
12.26
$
(0.04)
12.22
$
4.50
0.08
4.58
4.41
0.08
4.49
$
$
$
$
4.13
0.08
4.21
4.07
0.09
4.16
See accompanying Notes to Consolidated Financial Statements.
53
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
Net income ...................................................................................................... $
1,454,494
$
549,779
$
527,100
Year Ended December 31,
2017
2016
2015
Other comprehensive income (loss):
Unrealized investment gains (losses):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period .............................
950,088
544,886
(1,163,417)
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.............
(34,954)
(47)
1,326
10,645
(4,185)
312
9,478
(6,346)
(3,010)
Unrealized gains (losses) on securities ..........................................................
916,413
551,658
(1,163,295)
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 .............................................
5,008
—
5,008
2,503
(360)
2,143
(1,635)
(1,102)
(2,737)
Total unrealized investment gains (losses) ...................................................
921,421
553,801
(1,166,032)
Less applicable (taxes) benefits .................................................................
(322,553)
(193,820)
408,092
Unrealized gains (losses) on investments, net of tax ......................................
598,868
359,981
(757,940)
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 .....................................................................
(538)
188
(350)
11,389
(2,937)
8,452
12,436
—
(31,933)
(19,497)
6,827
(12,670)
(2,412)
845
8,682
(3,039)
(1,567)
5,643
2,178
(838)
1,340
10,168
—
(31,902)
(21,734)
7,607
(14,127)
(20,651)
6,892
(13,759)
14,586
(2,104)
(11,632)
850
(299)
551
Other comprehensive income (loss) .................................................................
594,300
345,627
(765,505)
Comprehensive income (loss) ................................................................ $
2,048,794
$
895,406
$
(238,405)
See accompanying Notes to Consolidated Financial Statements.
54
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollar amounts in thousands, except per share data)
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Treasury
Stock
Total
Shareholders’
Equity
Year Ended December 31, 2015
Balance at January 1, 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 ............
— $ 134,218
$
457,613
$
997,452
$ 3,376,846
$ (268,663) $
4,697,466
(765,505)
527,100
(67,182)
(2,132)
(36,322)
(418,526)
8,983
72,280
21,813
17,577
(4,000)
(14,719)
(183,941)
202,660
(238,405)
(67,182)
(418,526)
28,664
53,535
—
Balance at December 31, 2015.....
—
130,218
482,284
231,947
3,614,369
(403,266)
4,055,552
Year Ended December 31, 2016
Comprehensive income (loss) .........
Common dividends declared
($.56 per share) ...............................
Acquisition of treasury stock ............
Stock-based compensation..............
Exercise of stock options .................
Retirement of treasury stock ............
345,627
549,779
(66,968)
(404,784)
(2,224)
8,891
(53,845)
115,174
(150,313)
164,835
895,406
(66,968)
(404,784)
26,326
61,329
—
19,659
(3,000)
(11,522)
Balance at December 31, 2016.....
—
127,218
490,421
577,574
3,890,798
(519,150)
4,566,861
Year Ended December 31, 2017
Comprehensive income (loss) .........
Common dividends declared
($.60 per share) ...............................
Acquisition of treasury stock ............
Stock-based compensation..............
Exercise of stock options .................
Reclassifications, Tax Reform(1) .......
Retirement of treasury stock ............
594,300
1,454,494
2,048,794
30,190
(69,494)
(606)
(38,333)
(412,989)
7,450
99,548
(3,000)
(12,135)
(178,251)
193,386
252,400
(252,400)
(69,494)
(412,989)
37,034
61,215
—
—
Balance at December 31, 2017..... $
— $ 124,218
$
508,476
$
1,424,274
$ 4,806,208
$ (631,755) $
6,231,421
(1)
Income tax effects of certain items were reclassified from accumulated other comprehensive income to retained earnings to remove stranded
tax effects as a result of early adoption of ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income. See further discussion in Note 1—Significant Accounting Policies.
See accompanying Notes to Consolidated Financial Statements.
55
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Year Ended December 31,
2017
1,454,494
2016
2015
$
549,779
$
527,100
Net income .............................................................................................................................. $
Adjustments to reconcile net income from continuing operations to cash provided from
continuing operations:
Loss (Income) from discontinued operations, net of income taxes .........................................
Increase (decrease) in future policy benefits ..........................................................................
Increase (decrease) in other policy benefits ...........................................................................
Deferral of policy acquisition costs .........................................................................................
Amortization of deferred policy acquisition costs ....................................................................
Change in current and deferred income taxes .......................................................................
Realized (gains) losses on sale of investments and properties ..............................................
Other, net
...............................................................................................................................
Net cash provided from (used for) continuing operations ....................................................
Net cash provided from (used for) discontinued operations ................................................
Cash provided from (used for) 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) decrease in policy loans .................................................................................
Net (increase) decrease in short-term investments ................................................................
Additions to properties ...........................................................................................................
Sale of other assets ...............................................................................................................
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 ......................................................................
Acquisition of treasury stock ..................................................................................................
Net receipts (payments) from deposit-type product ................................................................
Cash provided from (used for) financing activities .............................................................
Effect of foreign exchange rate changes on cash .....................................................................
Increase (decrease) in cash .....................................................................................................
Cash at beginning of year .........................................................................................................
3,769
687,407
31,784
(660,134)
490,403
(700,660)
(23,611)
67,933
1,351,385
77,673
1,429,058
67,246
488,843
3,534
559,623
(1,314,609)
(55,096)
(1,369,705)
(21,554)
(55,031)
(20,285)
18
(19,890)
(926,824)
61,215
(68,831)
(126,875)
125,000
(1,661)
61,092
—
(412,989)
(90,932)
(453,981)
(5,853)
42,400
76,163
(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
61,383
Cash at end of year .................................................................................................................. $
118,563
$
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
See accompanying Notes to Consolidated Financial Statements.
56
TMK 2017 FORM 10-K
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 supplemental 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
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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, mortgage
participations, 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. Mortgage participations, a type of investment
where the mortgage loan is shared among investors, are accounted for as financing receivables. Investments in limited
partnerships are primarily accounted for using the cost method of accounting as Torchmark's partnership interest is
minor as 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”). As further discussed below in Accounting Pronouncements Not Yet
Adopted, the Company will adopt ASU 2016-01 on January 1, 2018 which removes the cost method for certain
investments and replaces it with fair value through net income method. Under the new guidance, limited partnerships
will be reported at fair value and all fluctuations in fair value will be reported through realized gains and losses. Short-
term investments include investments in interest-bearing assets 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, 2017, 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, 2017 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
58
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TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 1—Significant Accounting Policies (continued)
vendors monitor and review their pricing data continuously with current market and economic data feeds, augmented
by ongoing communication within the dealer community.
Using the observable market inputs described above, spreads to an appropriate benchmark yield are further developed
by the vendors for each security based on security-specific and/or sector-specific risk factors, such as a security’s
terms and conditions (coupon, maturity, and call features), credit rating, sector, liquidity, collateral or other cash flow
options, and other factors that could impact the risk of the security. Embedded repayment options, such as call and
redemption features, are also taken into account in the pricing models. When the spread is determined, it is added to
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. 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.
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,
mortgage participations, 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. At December 31, 2017, observable inputs were available for these debt securities
and as such were classified as Level 2 in the valuation hierarchy. The fair value for each debt instrument as of
December 31, 2017 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 (COLI) and exchange traded funds (ETFs). The fair value of the insurance cash values approximates carrying
value. Fair values for the ETFs are derived from direct quotes and are considered Level 1 in the valuation hierarchy.
Impairment of Investments: Torchmark’s portfolio of fixed maturities fluctuates in value due to changes in interest rates
in the financial markets as well as other factors. Fluctuations caused by market interest rate changes have little bearing
on whether or not the investment will be ultimately recoverable. Therefore, Torchmark considers these declines in value
resulting from changes in market interest rates to be temporary. In certain circumstances, however, Torchmark
determines that the decline in the value of a security is other-than-temporary and writes the book value of the security
59
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 1—Significant Accounting Policies (continued)
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 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 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.
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.
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TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 1—Significant Accounting Policies (continued)
Cash: Cash consists of balances on hand and on deposit in banks and financial institutions.
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 mostly of agent debit balances, which primarily 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 balances were $378 million and $353 million at December 31, 2017 and 2016, 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 (DAC) include the value of business acquired (VOBA), 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.
DAC and VOBA 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.
DAC 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 DAC
asset. These cash flows consist primarily of premium income, less benefits and expenses taking inflation into account.
The present value of these cash flows, less the benefit reserve, is then compared with the unamortized deferred
acquisition cost balance. In the event the estimated present value of net cash flows is less, the deficiency would be
recognized by a charge to earnings and either a reduction of unamortized acquisition costs or an increase in the liability
for future benefits, as described under the caption Future Policy Benefits.
Advertising Costs: Costs related to advertising are generally charged to expense as incurred. However, certain Globe
Life Direct Response advertising costs are capitalized when there is a reliable and demonstrated relationship between
total costs and future benefits that is a direct result of incurring these costs. Globe Life Direct Response advertising
costs consist primarily of the production and distribution costs of direct mail advertising materials, and when capitalized
are included as a component of DAC. They are amortized in the same manner as other DAC. Globe Life Direct Response
advertising costs charged to earnings and included in other operating expense were $9.3 million, $9.3 million, and
$9.7 million in 2017, 2016, and 2015, respectively. At December 31, 2017, unamortized capitalized advertising costs
included within DAC were $1.28 billion at December 31, 2017 and $1.25 billion at December 31, 2016.
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 would proceed to the two-step quantitative analysis.
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TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 1—Significant Accounting Policies (continued)
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 2015 through 2017. 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 benefits to Torchmark. The carrying value of Torchmark’s investment
in these entities was $228 million and $280 million at December 31, 2017 and 2016, respectively and was included in
"Other assets" on the Consolidated Balance Sheets. As of December 31, 2017, Torchmark was obligated under future
commitments of $34 million, which are recorded in "Other liabilities". 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 benefit (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 five years for equipment and ten 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 $217 million at December 31, 2017 and $196 million at December 31, 2016.
Accumulated depreciation was $109 million at year end 2017 and $99 million at the end of 2016. Depreciation expense
was $10.5 million in 2017, $9.8 million in 2016, and $8.0 million in 2015. Internally generated software costs are
expensed as incurred in the preliminary project phase and post-implementation phase, and will be capitalized during
the application development stage.
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 87%
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 5.80%. 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
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TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 1—Significant Accounting Policies (continued)
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.
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Legislation) was enacted into law which changed existing tax
law, including a reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018. The Company
recorded $877 million of tax benefits in net income in 2017 as a result of re-measuring its deferred assets and liabilities
using the lower corporate tax rate as of the date of enactment. Based on the analysis of the Tax Legislation, the
Company was able to determine that this amount is a reasonable estimate of the impact of the Tax Legislation in
accordance with SEC Staff Accounting Bulletin (SAB) No. 118. However, the Company will continue to analyze relevant
information to complete the accounting for income taxes which may result in an adjustment to tax expense in 2018.
The accounting is expected to be complete when the 2017 U.S. corporate income tax returns are filed later in 2018.
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.
Recognition of Premium Revenue and Related Expenses: Premium income for traditional long-duration life and health
insurance products is recognized evenly over the contract period and 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 $17 million, $18 million, and $19
million for the years ended December 31, 2017, 2016, and 2015, 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 DAC 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.
63
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TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 1—Significant Accounting Policies (continued)
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 2015 through 2017 is as follows:
Volatility factor ................................................................................................
Dividend yield .................................................................................................
Expected term (in years) ................................................................................
Risk-free rate .................................................................................................
14.8%
0.7%
5.71
2.0%
19.2%
1.1%
5.78
1.3%
23.6%
0.9%
5.66
1.6%
2017
2016
2015
The expected term is generally derived from Company experience. However, expected terms are determined based
on the simplified method as permitted under the ASC 718 Stock Compensation topic when Company experience is
insufficient. The Torchmark Corporation 2011 Incentive Plan replaced all previous plans and allows for option grants
for employees with a ten-year contractual term which vest over five years in addition to seven-year grants which vest
over three years as permitted by the previous plans. Director grants vest over six months. The Company has sufficient
experience with seven-year grants that vest in three years, but insufficient historical experience with five-year vesting.
Therefore, Torchmark has used the simplified method to determine the expected term for the ten-year grants with five-
year vesting and will do so until adequate experience is developed. Volatility and risk-free interest rates are assumed
over a period of time consistent with the expected term of the option. Volatility is measured on a historical basis. Monthly
data points are utilized to derive volatility for periods greater than three years. Expected dividend yield is based on
current dividend yield held constant over the expected term. Once the fair value of an option has been determined, it
is amortized on a straight-line basis over the employee’s service period for that grant (from the grant date to the date
the grant is fully vested). Expenses for restricted stock and restricted stock units are based on the grant date fair value
allocated on a straight-line basis over the service period. Performance share expense is recognized based on
management’s estimate of the probability of meeting the metrics identified in the performance share award agreement,
assigned to each service period as these estimates develop.
Torchmark management views all stock-based compensation expense as a corporate or Parent Company expense
and, therefore, presents it as such in its segment analysis (See Note 14—Business Segments). It is included in “Other
operating expense” in the Consolidated Statements of Operations.
Earnings Per Share: Torchmark presents basic and diluted earnings per common share (EPS) on the face of the
Consolidated Statements of Operations for income from continuing operations and income from discontinued
operations. Basic EPS is computed by dividing income available to common shareholders by the weighted average
common shares outstanding for the period. Diluted EPS is calculated by adding to shares outstanding the additional
net effect of potentially dilutive securities or contracts, such as stock options, which could be exercised or converted
into common shares. For more information on earnings per share, see Note 12—Shareholders’ Equity.
Accounting Pronouncements Adopted in the Current Year:
ASU 2018-02: In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI).
This guidance was issued to allow the reclassification of taxes from AOCI to retained earnings as a result of the reduction
in corporate income tax rates due to Tax Legislation. Current accounting requires the effect of changes in tax rates
used to measure deferred tax assets and liabilities to be reported in net income as of the date of enactment even
though deferred taxes were previously recognized in AOCI (stranded taxes). This guidance, however, allows a company
to elect to reclassify the stranded taxes in AOCI to retained earnings and is effective for years beginning after December
15, 2018, with early adoption permitted. The Company elected to early adopt this guidance resulting in a reclassification
of $252 million from AOCI to retained earnings for the period ended December 31, 2017. See Consolidated Statements
of Shareholders' Equity and Note 3—Supplemental Information about Changes to Accumulated Other Comprehensive
Income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 1—Significant Accounting Policies (continued)
Accounting Pronouncements Not Yet Adopted:
ASU 2016-01: In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities, which primarily revises the classification and measurement of certain equity
investments such that they will be measured at fair value through net income. Additionally, it eliminates the cost method
for partnerships and joint ventures and requires these types of investments to be accounted for under the fair value
through net income method or equity method. Lastly, the guidance will require certain disclosures associated with fair
value of financial instruments. This standard became effective for the Company on January 1, 2018. The adoption will
result in a $6 million positive adjustment to the opening balance of retained earnings as we have minimal ownership
interests in equity investments and partnerships.
ASU 2016-02: In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires all lessees
to report a right-of-use asset and a lease liability for leases with a term life greater than 12 months. Operating and
financing leases will be recognized on the balance sheet going forward. Additional qualitative and quantitative
disclosures will be required. This standard will become effective for the Company beginning January 1, 2019 and will
require recognizing and measuring leases at the beginning of the earliest period presented using a modified
retrospective approach. Early adoption is permitted. The Company does not expect the adoption to have a significant
impact on the financial statements. Refer to Note 15—Commitments and Contingencies for consideration of the
noncancelable operating lease commitments. The Company is not a lessor.
ASU 2016-13: In June 2016, the FASB issued ASU 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 by use of an allowance rather than a direct write-down. This standard
will become effective on January 1, 2020. The applicable section of the standard related to debt securities requires a
prospective transition. The Company does not expect the adoption to have a significant impact on the financial
statements as we have limited credit losses with respect to our available-for-sale portfolio.
ASU 2016-15: In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification
of Certain Cash Receipts and Cash Payments to provide uniformity in the classification of cash receipts and payments
recorded in the statement of cash flows including debt prepayment or debt extinguishment costs, settlement of zero-
coupon bonds, and proceeds from the settlement of insurance claims. This standard became effective on January 1,
2018 and will not have a significant impact to the classification on our Statement of Cash Flows.
ASU 2016-16: In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer
of Assets Other Than Inventory. This guidance was issued to improve the accounting for income tax consequences of
intra-entity transfers of assets other than inventory by allowing the immediate recognition of the current and deferred
income tax effects. Current guidance prohibits the recognition of current and deferred income taxes for an intra-entity
transfer until the asset has been sold to an outside party. This new guidance should be applied on a modified retrospective
approach and became effective on January 1, 2018. This adoption will not have a significant impact on the financial
statements.
ASU 2017-04: In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment. This guidance was issued to simplify the subsequent measurement of
goodwill through the elimination of Step 2 from the goodwill impairment test which required a hypothetical purchase
price allocation. It will become effective on January 1, 2020 and should be applied on a prospective basis. This adoption
will not have an impact to the financial statements.
65
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 1—Significant Accounting Policies (continued)
ASU 2017-07: In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715):
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This guidance
was issued to simplify the reporting of pension costs by disaggregating the service-cost component from the other
components of net benefit costs and reporting it separately on the income statement. The service-cost component is
the only component of net benefit cost that will be eligible for capitalization. The guidance became effective on January
1, 2018 with a retrospective transition method for separation of net benefit costs and a prospective transition method
for the capitalization of service costs. The Company expects the adoption to add an additional $3 to $5 million in
expense to the 2018 Consolidated Statements of Operations due to the elimination of the ability to capitalize a portion
of the benefit costs.
ASU 2017-08: In March 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs
(Topic 310-20): Premium Amortization on Purchased Callable Debt Securities. This guidance was issued to shorten
the amortization period for certain callable debt securities held at a premium. The guidance requires the premium to
be amortized to the earliest call date. It will become effective on January 1, 2019 with early adoption permitted, including
during interim periods. The adoption is to be applied on a modified retrospective basis through an adjustment to retained
earnings. This adoption will not have a significant impact on the financial statements.
ASU 2017-09: In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718):
Scope of Modification Accounting. This guidance was issued to provide clarity and guidance regarding changes to the
terms or conditions of a share-based payment award that requires an entity to apply modification accounting. It became
effective on January 1, 2018 with early adoption permitted, including adoption in any interim periods. The adoption will
have a minimal impact on the financial statements as modifications to stock compensation are infrequent.
66
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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,
2017
426,285 $
2016
2015
2017
2016
429,563 $
393,466 $ 1,254,875 $ 1,335,070
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
$458 million at December 31, 2017. 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
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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 2015 through 2017.
Components of Accumulated Other Comprehensive Income
For the 12 months ended December 31,
2015:
Available
for Sale
Assets
Deferred
Acquisition
Costs
Foreign
Exchange
Pension
Adjustments
Total
Balance at January 1, 2015 ..................... $ 1,090,273 $
Other comprehensive income (loss)
before reclassifications, net of tax ............
Reclassifications, net of tax......................
Other comprehensive income (loss) ........
(759,976)
2,036
(757,940)
332,333
Balance at December 31, 2015................
For the 12 months ended December 31,
2016:
Other comprehensive income (loss)
before reclassifications, net of tax ............
Reclassifications, net of tax......................
Other comprehensive income (loss) ........
Balance at December 31, 2016................
For the 12 months ended December 31,
2017:
Other comprehensive income (loss)
before reclassifications, net of tax ............
Reclassifications, net of tax......................
Other comprehensive income (loss) ........
Reclassifications, Tax reform(1).................
Balance at December 31, 2017................ $ 1,569,289 $
356,016
3,965
359,981
692,314
621,619
(22,751)
598,868
278,107
(10,758) $
17,386 $
(99,449) $
997,452
5,643
—
5,643
(13,759)
—
(13,759)
(8,930)
9,481
551
(777,022)
11,517
(765,505)
(5,115)
3,627
(98,898)
231,947
(1,567)
—
(1,567)
(6,682)
(350)
—
(350)
(1,515)
1,340
—
1,340
4,967
(20,736)
6,609
(14,127)
(113,025)
335,053
10,574
345,627
577,574
8,452
—
8,452
2,883
(20,753)
608,968
8,083
(14,668)
(12,670)
(27,075)
594,300
252,400
(8,547) $
16,302 $ (152,770) $ 1,424,274
(1)
Income tax effects of certain items were reclassified from accumulated other comprehensive income to retained earnings to remove stranded
tax effects as a result of early adoption of ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income. See further discussion in Note 1—Significant Accounting Policies.
68
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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)
Reclassification adjustments out of Accumulated Other Comprehensive Income are presented below for each of the
years 2015 through 2017.
Reclassification Adjustments
Component Line Item
Unrealized gains (losses) on available for sale
assets:
Year Ended December 31,
2017
2016
2015
Affected line items in the
Statement of Operations
Realized (gains) losses ................................ $ (34,954) $
10,285
$
9,478 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 .......................................................
(47)
(35,001)
12,250
(22,751)
476
11,960
12,436
(4,353)
8,083
(4,185)
6,100
(2,135)
3,965
477
9,691
10,168
(3,559)
6,609
(6,346) Net investment income
3,132
(1,096)
Income taxes
2,036
377 Other operating expenses
14,209 Other operating expenses
14,586
(5,105)
Income taxes
9,481
Total reclassifications (after tax) ........................... $ (14,668) $
10,574
$
11,517
69
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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,
2017 and 2016 is as follows:
2017:
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:
390,646
$
18,173
$
(1,373) $
407,446
1,091,960
20,236
127,890
1,782
(135)
—
1,219,715
22,018
Financial ..............................................................
Utilities .................................................................
Energy .................................................................
Other corporate sectors .......................................
3,282,526
1,955,737
1,619,349
6,065,803
Total corporates ................................................. 12,923,415
Collateralized debt obligations ..................................
Other asset-backed securities ..................................
Redeemable preferred stocks, by sector:
Financial ..............................................................
Utilities .................................................................
Total redeemable preferred stocks ....................
365,174
Total fixed maturities ................................................... $14,995,101
59,150
144,520
336,621
28,553
475,961
369,406
226,140
747,612
1,819,119
20,084
4,835
(23,392)
(1,298)
(25,392)
(20,616)
(70,698)
(7,653)
—
3,735,095
2,323,845
1,820,097
6,792,799
14,671,836
71,581
149,355
62,892
2,132
(2,727)
(97)
396,786
30,588
65,024
$ 2,056,907
$
(2,824)
427,374
(82,683) $ 16,969,325
2
7
—
22
14
11
40
87
—
1
3
—
3
100
(1) Amount reported in the balance sheet.
(2) At fair value.
70
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 4—Investments (continued)
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.
Securities, cash, and short-term investments held on deposit with various state and federal regulatory authorities had
an amortized cost and fair value, respectively, of $657 million and $753 million at December 31, 2017 and $600 million
and $663 million at December 31, 2016.
A schedule of fixed maturities available for sale by contractual maturity date at December 31, 2017 is shown below on
an amortized cost basis and on a fair value basis. Actual maturity dates could differ from contractual maturities due to
call or prepayment provisions.
Fixed maturities available for sale:
Amortized
Cost
Fair
Value
Due in one year or less .............................................................................................. $
Due after one year through five years ........................................................................
Due after five years through ten years .......................................................................
Due after ten years through twenty years ..................................................................
Due after twenty years ...............................................................................................
Mortgage-backed and asset-backed securities ..........................................................
147,457 $
682,932
1,397,473
4,701,591
7,861,000
204,648
149,495
720,186
1,567,972
5,519,917
8,789,769
221,986
$ 14,995,101 $ 16,969,325
71
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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,
2016
2015
2017
Net investment income is summarized as follows:
Fixed maturities available for sale ..................................................... $
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 available for sale:
Sales and other ............................................................................. $
Other-than-temporary impairments ...............................................
Other investments ...........................................................................
Loss on redemption on debt ............................................................
Applicable tax ....................................................................................
Realized gains (losses) from investments, net of tax ........................ $
An analysis of the net change in unrealized investment gains (losses)
is as follows:
817,213 $
778,912 $
39,578
4,991
948
862,730
(14,845)
847,885 $
38,436
2,786
447
820,581
(13,678)
806,903 $
747,663
36,763
2,021
95
786,542
(12,591)
773,951
35,199 $
(10,645) $
(9,479)
(245)
(7,302)
(4,041)
23,611
(6,021)
—
(38)
—
(10,683)
3,739
17,590 $
(6,944) $
—
688
—
(8,791)
3,077
(5,714)
Fixed maturities available for sale ..................................................... $
Other investments .............................................................................
Net change in unrealized gains (losses) ........................................... $
916,413 $
5,008
921,421 $
551,658 $ (1,163,295)
(2,737)
553,801 $ (1,166,032)
2,143
Additional information about securities sold is as follows:
Fixed maturities available for sale:
Proceeds from sales(1) ....................................................................... $
Gross realized gains .........................................................................
Gross realized losses ........................................................................
67,246 $
5,079
(1,100)
358,285 $
6,133
(32,608)
226,792
259
(16,894)
(1)
Includes unsettled sales of $17.9 million at December 31, 2016. There were no unsettled sales in 2017 or 2015.
At December 31,
2016
2015
2017
72
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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, 2017 and 2016:
Description
Fixed maturities available for sale:
Fair Value Measurements at December 31, 2017 Using:
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total Fair
Value
U.S. Government direct, guaranteed, and
government-sponsored enterprises ..................... $
States, municipalities, and political subdivisions..
Foreign governments ..........................................
Corporates, by sector:
Financial ...........................................................
Utilities ..............................................................
Energy ..............................................................
Other corporate sectors ....................................
Total corporates ..................................................
Collateralized debt obligations ............................
Other asset-backed securities .............................
Redeemable preferred stocks, by sector:
Financial ...........................................................
Utilities ..............................................................
Total redeemable preferred stocks ......................
Total fixed maturities ....................................... $
Percentage of total .........................................
— $
407,446
$
— $
407,446
44
—
—
—
—
—
—
—
—
—
—
—
44
—%
$
1,219,671
22,018
3,673,089
2,168,115
1,779,281
6,468,541
14,089,026
—
135,306
396,786
30,588
427,374
16,300,841
$
—
—
1,219,715
22,018
62,006
155,730
40,816
324,258
582,810
71,581
14,049
—
—
—
668,440
3,735,095
2,323,845
1,820,097
6,792,799
14,671,836
71,581
149,355
396,786
30,588
427,374
$16,969,325
96.1%
3.9%
100.0%
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%
73
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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)
Asset-
backed
securities
Collateralized
debt
Obligations
Corporates
Total
Balance at January 1, 2015 .................................. $
— $
63,232 $
512,714 $
575,946
Total gains or losses:
Included in realized gains/losses .................
Included in other comprehensive income ....
Acquisitions ........................................................
Sales ..................................................................
Amortization .......................................................
Other(1) ...............................................................
Transfers into (out of) Level 3(2)..........................
Balance at December 31, 2015 ............................
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(2)..........................
Balance at December 31, 2016 ............................
Total gains or losses:
Included in realized gains/losses .................
Included in other comprehensive income ....
Acquisitions ........................................................
Sales ..................................................................
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
410
14,000
—
Amortization .......................................................
Other(1) ...............................................................
Transfers into (out of) Level 3(2)..........................
Balance at December 31, 2017 ............................ $
—
(361)
—
14,049 $
(1) Includes foreign exchange adjustments and principal repayments.
(2) There were no transfers in or out of Level 3 during the three years ended 2017.
—
11,365
—
—
5,536
(9,751)
—
70,382
—
(3,943)
—
—
5,186
(8,122)
—
63,503
—
9,654
—
—
4,914
(6,490)
—
1,182
(11,925)
38,600
—
17
(9,782)
—
1,182
(560)
38,600
—
5,553
(19,533)
—
530,806
601,188
788
6,403
33,662
—
17
788
2,460
33,662
—
5,203
(12,076)
(20,198)
—
—
559,600
623,103
—
10,900
21,666
—
17
(9,373)
—
—
20,964
35,666
—
4,931
(16,224)
—
71,581 $
582,810 $
668,440
Acquisitions of Level 3 investments in each of the years 2015 through 2017 are comprised of private-placement fixed
maturities managed by an unaffiliated third-party.
74
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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, 2017
Asset-backed securities ......................... $
Fair Value
14,049
Collateralized debt obligations ...............
71,581
Private placement fixed maturities ......... $
582,810
$
668,440
Valuation
Techniques
Determination of
credit spread
Significant
Unobservable
Input
Credit
rating
Discounted
cash flows
Discounted
cash flows
Determination of
credit spread
Discounted
cash flows
Discount
rate
Discount
rate
Credit
rating
Discount
rate
Range
BBB
Weighted
Average
BBB
5.35%
5.35%
7.0 - 8.25%
8.03%
A+ to BB-
BBB
2.97 - 7.27%
3.93%
The private placement fixed maturities and asset-backed securities reported as Level 3 are managed by third party
investment managers. These securities 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 securities 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.
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. 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
2017
Out
Net
Level 1 ............ $ 42,372
Level 2 ............
597
$
(597) $ 41,775
(42,372)
(41,775)
Level 3 ............
—
—
—
In
$ 45,344
2016
Out
Net
$
— $ 45,344
In
$ 17,252
2015
Out
Net
$ (49,744) $ (32,492)
—
—
(45,344)
(45,344)
49,744
(17,252)
32,492
—
—
—
—
—
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.
75
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 4—Investments (continued)
Other-than-temporary impairments (OTTI): Based on the Company's evaluation of its fixed maturities available for sale
in an unrealized loss position in accordance with the OTTI policy as described in Note 1—Significant Accounting
Policies, the Company concluded that there was an other-than-temporary impairment of $245 thousand ($159 thousand,
net of tax) during the year ended December 31, 2017. For the two years ended December 31, 2016, there were no
other-than-temporary impairments.
As of year end 2017, previously written down securities remaining in the portfolio were carried at a fair value of $59
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
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.
76
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 4—Investments (continued)
Unrealized gains/loss analysis: The following tables disclose gross unrealized investment losses by class and major
sector of investments at December 31, 2017 and December 31, 2016 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, 2017
Description of Securities
Fixed maturities available for sale:
Investment grade securities:
Less than
Twelve Months
Twelve Months
or Longer
Total
Fair
Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
U.S. Government direct, guaranteed, and
government-sponsored enterprises ...................... $
States, municipalities and political subdivisions....
Foreign governments ............................................
Corporates, by sector:
Financial ............................................................
Utilities ...............................................................
Energy ...............................................................
Metals and mining ..............................................
Other corporate sectors .....................................
Total corporates ....................................................
Other asset-backed securities
Redeemable preferred stocks, by sector:
Utilities ............................................................
Total redeemable preferred stocks........................
34,388
$
(422) $
47,514
$
(951) $
81,902
$
(1,373)
4,561
—
133,080
48,562
23,463
—
220,661
425,766
—
—
—
(21)
—
(652)
(569)
(81)
—
(2,312)
(3,614)
—
—
—
1,771
—
35,302
32,345
67,775
—
163,886
299,308
—
5,953
5,953
(9)
—
6,332
—
(1,429)
168,382
(729)
(3,682)
—
80,907
91,238
—
(30)
—
(2,081)
(1,298)
(3,763)
—
(4,257)
384,547
(6,569)
(10,097)
725,074
(13,711)
—
(97)
(97)
—
5,953
5,953
—
(97)
(97)
Total investment grade securities ............................
464,715
(4,057)
354,546
(11,154)
819,261
(15,211)
Below investment grade securities:
States, municipalities and political subdivisions....
200
(105)
—
—
200
(105)
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........................
—
8,114
—
25,334
33,448
—
—
—
—
(104)
—
(5,066)
(5,170)
—
—
—
84,432
75,204
—
54,383
214,019
12,347
24,376
24,376
(21,311)
(21,525)
—
84,432
83,318
—
(8,981)
79,717
(51,817)
247,467
(7,653)
12,347
(2,727)
(2,727)
24,376
24,376
(21,311)
(21,629)
—
(14,047)
(56,987)
(7,653)
(2,727)
(2,727)
Total below investment grade securities ..................
33,648
(5,275)
250,742
(62,197)
284,390
(67,472)
Total fixed maturities .......................................... $
498,363
$
(9,332) $
605,288
$
(73,351) $ 1,103,651
$
(82,683)
77
TMK 2017 FORM 10-K
(9,151)
(1,133)
(62)
(23,293)
(12,604)
(19,203)
(418)
TORCHMARK CORPORATION
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, 2016
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 ...................... $
321,133
$
(8,553) $
1,404
$
(598) $
322,537
$
States, municipalities and political subdivisions....
Foreign governments ............................................
32,178
4,416
(1,114)
(62)
683
—
(19)
—
32,861
4,416
Corporates, by sector:
Financial ............................................................
Utilities ...............................................................
Energy ...............................................................
Metals and mining ..............................................
Other corporate sectors .....................................
Total corporates ....................................................
Other asset-backed securities ..............................
Redeemable preferred stocks, by sector:
479,669
290,732
83,064
5,936
1,564,273
2,423,674
41,498
Utilities ...............................................................
Total redeemable preferred stocks........................
5,857
5,857
(18,666)
(11,000)
64,335
16,977
(4,627)
(1,604)
(1,076)
154,908
(18,127)
544,004
307,709
237,972
11,725
(231)
(65,131)
(96,104)
(337)
(244)
(244)
5,789
68,968
(187)
(6,495)
1,633,241
(71,626)
310,977
(31,040)
2,734,651
(127,144)
—
—
—
—
—
—
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
(194)
357
(194)
83,174
91,165
34,463
95,679
304,481
9,714
19,912
19,912
(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
Total fixed maturities ............................................. $ 2,928,441
(848)
334,464
(77,065)
434,149
(77,913)
$ (107,262) $
647,528
$ (108,722) $ 3,575,969
$ (215,984)
Gross unrealized losses decreased from $216 million at year end 2016 to $83 million at year end 2017, a decrease of
$133 million. The decrease in the gross unrealized losses from prior year was primarily attributable to the improved
conditions during 2017 in the energy sector and broadly across all sectors.
78
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 4—Investments (continued)
Additional information about fixed maturities available for sale 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, 2017 .............................................................
As of December 31, 2016 .............................................................
92
407
102
94
194
501
Torchmark’s entire fixed maturity portfolio consisted of 1,502 issues at December 31, 2017 and 1,565 issues at
December 31, 2016. The weighted-average quality rating of all unrealized loss positions at amortized cost was BBB-
for 2017 and BBB+ for 2016.
Other investment information:
Other long-term investments consist of the following:
Year Ended December 31,
2017
2016
Investment in limited partnerships ................................................................................ $
Commercial mortgage participations(1) .........................................................................
Other ............................................................................................................................
Total ....................................................................................................................... $
66,522 $
39,489
2,548
108,559 $
51,509
—
2,343
53,852
(1) A mortgage participation is a legal right to a prorata interest in a mortgage loan.
Torchmark did not have any invested assets that were non-income producing during the twelve months ended
December 31, 2017.
Concentrations of Credit Risk: Torchmark maintains a diversified investment portfolio with limited concentration in any
given issuer. At December 31, 2017, 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 .........................................................................................................................................
82%
7
2
1
3
1
3
1
100%
As of December 31, 2017, securities of state and municipal governments represented 7% of invested assets at fair
value. Such investments are made throughout the U.S. At yearend 2017, the state and municipal bond portfolio at fair
value was invested in securities issued within the following states: Texas (29%), Ohio (9%), Washington (8%), Illinois
(7%), Michigan (5%), and Georgia (5%). Otherwise, there was no concentration within any given state greater than
5%.
79
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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 85% 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, 2017, based on
fair value:
Insurance ...................................................................................................................................
Electric utilities ...........................................................................................................................
Oil and natural gas pipelines ......................................................................................................
Banks .........................................................................................................................................
Transportation ............................................................................................................................
Oil and natural gas exploration and production ..........................................................................
Chemicals ..................................................................................................................................
Real estate investment trusts .....................................................................................................
Food ...........................................................................................................................................
Metals and mining ......................................................................................................................
16%
12
7
6
4
4
4
4
3
3
At yearend 2017, 4% of invested assets at fair value were represented by fixed maturities rated below investment
grade. Par value of these investments was $790 million, amortized cost was $702 million, and fair value was $679
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 DAC is as follows:
Year Ended December 31,
2016
2015
2017
Balance at beginning of year ........................................................... $ 3,783,158 $ 3,617,135 $ 3,457,397
Additions:
Deferred during period:
Commissions ............................................................................
Other expenses ........................................................................
Total deferred .........................................................................
Foreign exchange adjustment .......................................................
Adjustment attributable to unrealized investment losses(1)...........
Total additions ........................................................................
465,920
194,214
660,134
5,712
—
665,846
436,252
199,066
635,318
2,180
—
637,498
401,166
211,015
612,181
—
8,682
620,863
Deductions:
Amortized during period ................................................................
Foreign exchange adjustment .......................................................
Adjustment attributable to unrealized investment gains(1) ............
Total deductions .....................................................................
(445,625)
(15,500)
—
(461,125)
Balance at end of year ...................................................................... $ 3,958,063 $ 3,783,158 $ 3,617,135
(469,063)
—
(2,412)
(471,475)
(490,403)
—
(538)
(490,941)
(1) Represents amounts pertaining to investments relating to universal life-type products.
80
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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.
The sale resulted in a net gain of $1.8 million ($1.2 million net of tax) in 2016. The operating results from discontinued
operations are reflected in income for the twelve months ended December 31, 2017. The remaining assets and liabilities
reflected on the Torchmark balance sheet related to discontinued operations are receivables and payables associated
with the 2016 and prior plan years that are expected to be settled in the ordinary course of business during 2018.
The net assets related to discontinued operations at December 31, 2017 and 2016 were as follows:
At December 31,
2017
2016
Assets:
Due premiums ................................................................................................................ $
Other receivables(1) ........................................................................................................
Total assets related to discontinued operations .....................................................
3,945 $
64,575
68,520
8,840
118,692
127,532
Liabilities:
Risk sharing payable ......................................................................................................
Current and deferred income taxes payable ..................................................................
Other(2) ...........................................................................................................................
Total liabilities related to discontinued operations .................................................
8,731
1,077
40,046
49,854
8,374
3,820
15,230
27,424
Net assets ....................................................................................................................... $
18,666 $ 100,108
(1) At December 31, 2017, other receivables included $65 million from Centers for Medicare and Medicaid Services (CMS). At December 31,
2016, the comparable amounts were $50 million from CMS and $69 million from drug manufacturer rebates.
(2) At December 31, 2017, the balance included $37.3 million due to CMS. At December 31, 2016, the balance includes $3.6 million contingent
sale price reserve.
81
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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, 2017 is as follows:
Year Ended December 31,
2017
2016
2015
Revenue:
Health premium ............................................................................... $
— $
222,840 $
260,657
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 ............................................... $
3,827
—
763
1,209
5,799
(5,799)
—
2,030
183,423
3,747
16,396
5,377
208,943
13,897
1,779
(5,487)
(3,769) $
10,189 $
213,114
3,506
20,909
6,502
244,031
16,626
—
(5,819)
10,807
Income taxes paid related to discontinued operations for the three years ended December 31, 2017 were as follows:
Year Ended December 31,
2016
2015
2017
Income taxes paid ............................................................................. $
714 $
15,271 $
3,409
Note 7—Liability for Unpaid Claims
Activity in the liability for unpaid health claims is summarized as follows:
Year Ended December 31,
2016
2015
2017
Balance at beginning of year ......................................................... $
Incurred related to:
143,128 $
137,120 $
128,265
Current year ..................................................................................
Prior years ....................................................................................
Total incurred ............................................................................
520,528
(8,048)
512,480
510,075
(1,127)
508,948
Paid related to:
Current year ..................................................................................
Prior years ....................................................................................
Total paid ..................................................................................
Balance at end of year .................................................................... $
394,506
114,237
508,743
146,865 $
386,278
116,662
502,940
143,128 $
502,009
(7,845)
494,164
379,037
106,272
485,309
137,120
82
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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 within “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 following table illustrates the total incurred claims for short-duration products over the last five years for the year
ended December 31, 2017. Claim frequency is determined by duration and incurred date.
For the years ended December 31, 2017
As of December 31, 2017
Cumulative incurred claims(1)
2013
2014
2015
2016
2017
Total of
incurred-but-
not-reported
liabilities plus
expected
development on
reported claims
Cumulative
number of
reported claims(1)
(In thousands)
$ 84,111 $ 82,644 $ 83,151 $ 83,119 $ 83,103 $
99,876
141,667
101,407
141,460
141,259
99,777
99,810
140,944
138,899
134,677
Total $ 597,715 $
—
—
17
431
24,259
24,707
1,337
1,600
2,224
2,158
1,765
Accident
Year
2013
2014
2015
2016
2017
(1) The incurred claims and cumulative number of reported claims for all years prior to 2017 are unaudited.
83
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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 for the year ended December 31, 2017.
Cumulative paid claims(1)
For the years ended December 31,
Accident Year
2013 ................................................................................ $ 68,159 $ 82,408 $ 83,131 $ 83,119 $ 83,103
2014 ................................................................................
99,777
2015 ................................................................................
2016 ................................................................................
2017 ................................................................................
140,982
115,922
114,720
110,418
141,242
138,468
99,791
99,545
81,054
2013
2016
2015
2014
2017
Short-duration claim liability as of December 31, 2017
24,707
Total incurred claims & IBNR $597,715
Total
573,008
(1) The cumulative paid claims for all years prior to 2017 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 ..............................................
Total health .......................................................................................................
Insurance lines other than short duration—life ...................................................
Total policy claims and other benefits payable ................................................ $
24,707 $
122,158
146,865
186,429
333,294 $
26,721
116,407
143,128
156,437
299,565
December 31,
2017
December 31,
2016
Note 8—Income Taxes
The components of income taxes were as follows:
Income tax expense (benefit) from continuing operations ........................ $ (627,615) $
2017
Year Ended December 31,
2016
232,645 $
2015
249,894
Shareholders’ equity:
Other comprehensive income (loss) .......................................................
Tax basis compensation expense (from the exercise of stock options and
vesting of restricted stock awards) in excess of amounts recognized for
financial reporting purposes ...................................................................
318,475
186,206
(411,646)
—
$ (309,140) $
—
(17,577)
418,851 $ (179,329)
84
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 8—Income Taxes (continued)
Income tax (benefit) expense from continuing operations consists of:
Year Ended December 31,
2016
2015
2017
Current income tax (benefit) expense ....................................................... $
Deferred income tax (benefit) expense .....................................................
138,262 $
132,806 $
174,284
(765,877)
99,839
75,610
$ (627,615) $
232,645 $
249,894
In each of the years 2015 through 2017, deferred income tax (benefit) 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.
As discussed in Note 1—Significant Accounting Policies, due to the passage of the Tax Legislation before December
31, 2017, the Company recorded $877 million reduction in deferred income tax expense related to a one-time adjustment
to reduce its net deferred tax liability as of December 22, 2017, as required by ASC 740 Income Taxes, due to the
reduction in the income tax rate. This adjustment to the Company's net deferred tax liability included $252 million
related to items included in AOCI.
Although many aspects of the Tax Legislation are not effective until 2018, the Company recorded a reasonable estimate
for the tax reform adjustment in accordance with SAB 118. We will continue to analyze relevant information to complete
our accounting for income taxes which may result in an adjustment to our estimate in 2018. The accounting is expected
to be complete when the 2017 U.S. corporate income tax return is filed later in 2018.
The effective income tax rate differed from the expected 35% rate as shown below:
Year Ended December 31,
2017
%
2016
%
2015
%
Expected income taxes ............................................ $ 290,727
Increase (reduction) in income taxes resulting
from:
35.0 $ 270,282
35.0 $ 268,165
35.0
Tax reform adjustment ...........................................
(877,400)
(105.6)
Low income housing investments ..........................
Share-based awards .............................................
Other .....................................................................
(18,515)
(19,549)
(2,878)
(2.2)
(2.4)
(0.4)
—
(18,202)
(18,653)
(782)
—
(2.4)
(2.4)
(0.1)
—
—
(19,031)
(2.5)
—
760
—
0.1
Income tax expense (benefit) from continuing
operations ................................................................ $ (627,615)
(75.6) $ 232,645
30.1 $ 249,894
32.6
85
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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 ..................................................................................
8,692 $
4,760
13,452
15,004
3,906
18,910
Deferred tax liabilities:
December 31,
2017
2016
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 ...............................................................................
315,509
92,131
975,873
391,451
3,987
1,778,951
Net deferred tax liability ............................................................................................ $ 1,311,305 $ 1,760,041
380,251
65,576
618,889
248,752
11,289
1,324,757
Income Tax Return: 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. The statutes of limitations for the Internal Revenue Service's examination and assessment
of additional tax are closed for all tax years prior to 2014 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.
Valuations: Torchmark has net operating loss carryforwards of approximately $22.7 million at December 31, 2017 which
will begin to expire in 2033 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 2015 through 2017, Torchmark did not have any uncertain tax positions which
resulted in unrecognized tax benefits.
Tax penalties: 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 $5 thousand, $9 thousand, and $11 thousand, net
of federal income tax expense, in its Consolidated Statements of Operations for 2017, 2016, and 2015, respectively.
The Company had no accrued interest or penalties at December 31, 2017 or 2016.
86
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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 executive retirement 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,
2017 ............................................................................................................. $
2016 .............................................................................................................
2015 .............................................................................................................
(1) 401K plans
(2) Qualified pension plans and SERPs
Defined
Contribution
Plans(1)
Defined
Benefit
Pension Plans(2)
28,828
24,202
29,230
4,145 $
3,614
3,429
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 31st 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 $21.3 million in 2017, $15.8 million in 2016, and $15.5 million in 2015. Torchmark
estimates as of December 31, 2017 that it will contribute an amount in the range of $30 million to $40 million to these
plans in 2018. 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.
Since 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. Pension cost for both supplemental defined benefit plans is determined in the same manner as for the
qualified defined benefit plans.
87
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 9—Postretirement Benefits (continued)
The following table includes activity for the SERPs for the three years ended December 31, 2017.
Premiums paid for insurance coverage .......................................... $
2,050 $
2,050 $
10,068
Year Ended December 31,
2017
2016
2015
December 31,
2017
2016
Total investments:
Company owned life insurance .................................................... $
Exchange traded funds ................................................................
40,273 $
55,442
$
95,715 $
37,267
48,999
86,266
Liability:
Active plan ................................................................................... $
Closed plan ..................................................................................
81,457 $
3,008
74,687
3,220
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, 2017 and
2016.
Pension Assets by Component at December 31, 2017
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 ...................................
Other long-term investments ..........
Guaranteed annuity contract(2) .......
Short-term investments ..................
Other ..............................................
—
164,351
3,984
5,021
$
43,451
$
$
46,144
25,023
65,888
180,506
256
2,304
21,202
—
43,451
46,144
25,023
65,888
180,506
164,351
256
2,304
21,202
3,984
5,021
12
12
7
17
48
43
—
1
6
1
1
Grand Total ..................................... $
173,356
$
204,268
$
— $
377,624
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.
88
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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, 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.
Torchmark’s investment objectives for its plan assets include preservation of capital, preservation of purchasing power,
and long-term growth. Torchmark seeks to preserve capital through investments made in high quality securities with
adequate diversification by issuer and industry sector to minimize risk. The portfolio is monitored continuously for
changes in quality and diversification mix. The preservation of purchasing power is intended to be accomplished through
asset growth, exclusive of contributions and withdrawals, in excess of the rate of inflation. Torchmark intends to maintain
investments that when combined with future plan contributions will produce adequate long-term growth to provide for
all plan obligations. It is also Torchmark’s objective that the portfolio’s investment return will meet or exceed the return
of a balanced market index.
The majority of the securities in the portfolio are highly marketable so that there will be adequate liquidity to meet
projected payments. There are no specific policies calling for asset durations to match those of benefit obligations.
Allowed investments are limited to equities, fixed maturities, and short-term investments (invested cash). The assets
are to be invested in a mix of equity and fixed income investments that best serve the objectives of the pension plan.
Factors to be considered in determining the asset mix include funded status, annual pension expense, annual pension
contributions, and balance sheet liability. Equities can include common and preferred stocks, securities convertible
into equities, mutual funds and exchange traded funds that invest in equities, equity interests in limited partnerships,
and other equity-related investments. Primarily, equities are listed on major exchanges and adequate market liquidity
is required. Fixed maturities primarily 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.
89
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 9—Postretirement Benefits (continued)
Torchmark's equity securities include an exchange traded fund that mirrors the S&P 500 index which better aligns with
a passive approach rather than an actively managed portfolio. At December 31, 2017, 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, 2017.
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:
2017
2016
Discount Rate ...............................................................................
Rate of Compensation Increase ...................................................
3.75%
4.37
4.27%
4.31
For Periodic Benefit Cost for the Year:
2017
2016
2015
Discount Rate ...............................................................................
Expected Long-Term Returns .......................................................
Rate of Compensation Increase ...................................................
4.27%
6.96
4.31
4.64%
7.19
4.33
4.23%
6.96
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.
Net periodic pension cost for the defined benefit plans by expense component was as follows:
Year Ended December 31,
2016
2015
2017
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 .............................................................. $
17,942 $
22,124
(23,597)
12,281
78
28,828 $
15,502 $
21,631
(23,127)
10,135
61
24,202 $
15,902
19,887
(21,204)
14,465
180
29,230
90
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 9—Postretirement Benefits (continued)
An analysis of the impact on other comprehensive income (loss) concerning pensions and other postretirement benefits
is as follows:
Balance at January 1 ......................................................................... $
Amortization of:
Year Ended December 31,
2016
(152,149) $
2017
(173,883) $
2015
(152,999)
Prior service cost ............................................................................
Net actuarial (gain) loss(1) ...............................................................
Total amortization ..............................................................................
Plan amendments .............................................................................
Experience gain (loss) .......................................................................
Balance at December 31 ................................................................... $
476
11,960
12,436
—
(31,933)
(193,380) $
477
9,691
10,168
—
(31,902)
(173,883) $
377
14,209
14,586
(2,104)
(11,632)
(152,149)
(1)
Includes amortization of postretirement benefits other than pensions of $155 thousand in 2017, $33 thousand in 2016, and $120 thousand in
2015.
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,
2017
2016
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 ..............................................................................................
527,522 $
17,942
22,124
—
55,369
(20,351)
602,606
476,581
15,502
21,631
—
34,667
(20,859)
527,522
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 ......................................................................................... $
328,871
47,832
21,272
(20,351)
377,624
(224,982) $
307,596
26,377
15,757
(20,859)
328,871
(198,651)
Amounts recognized in accumulated other comprehensive income consist of:
Net loss (gain) ............................................................................................................ $
Prior service cost .......................................................................................................
Net amounts recognized at year end ........................................................................... $
186,563 $
4,135
190,698 $
167,313
4,611
171,924
91
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 9—Postretirement Benefits (continued)
The portion of other comprehensive income that is expected to be reflected in pension expense in 2018 is as follows:
Amortization of prior service cost .......................................................................................................... $
Amortization of net actuarial loss ..........................................................................................................
Total
............................................................................................................................................... $
476
14,543
15,019
The accumulated benefit obligation (ABO) for Torchmark’s funded defined benefit pension plans was $466 million and
$411 million at December 31, 2017 and 2016, respectively. In the nonqualified plans, the ABO was $75 million at
December 31, 2017 and $69 million at 2016.
Torchmark has estimated its expected pension benefits to be paid over the next ten years as of December 31, 2017.
These estimates use the same assumptions that measure the benefit obligation at December 31, 2016, taking estimated
future employee service into account. Those estimated benefits are as follows:
For the year(s)
2018 .......................................................................................................................................................... $ 20,375
22,143
2019 ..........................................................................................................................................................
23,840
2020 ..........................................................................................................................................................
25,239
2021 ..........................................................................................................................................................
27,090
2022 ..........................................................................................................................................................
160,075
2023-2027 .................................................................................................................................................
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,
2016
2015
2017
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 ................................................. $
— $
1,132
—
155
167
1,454 $
— $
1,139
—
33
(132)
1,040 $
—
1,075
—
120
367
1,562
92
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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,
2017
2016
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 ......................................................................................... $
23,721 $
—
1,132
1,045
(285)
25,613
—
—
285
(285)
—
(25,613) $
22,479
—
1,139
412
(309)
23,721
—
—
309
(309)
—
(23,721)
Amounts recognized in accumulated other comprehensive income:
Net loss(1) ..................................................................................................................... $
Net amounts recognized at year end ......................................................................... $
2,682 $
2,682 $
1,959
1,959
(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:
2017
2016
Discount Rate ...............................................................................
3.76%
4.29%
For Periodic Benefit Cost for the Year:
2017
2016
2015
Discount Rate ...............................................................................
4.29%
4.66%
4.23%
93
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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)
2018 ..................................................................................................................................................... $
2019 .....................................................................................................................................................
2020 .....................................................................................................................................................
2021 .....................................................................................................................................................
2022 .....................................................................................................................................................
2023-2027 ............................................................................................................................................
1,228
1,278
1,311
1,344
1,386
7,515
Note 10—Supplemental Disclosures of Cash Flow Information
The following table summarizes Torchmark’s noncash transactions, which are not reflected on the Consolidated
Statements of Cash Flows:
Stock-based compensation not involving cash ........................................... $
Commitments for low-income housing interests .........................................
Exchanges of fixed maturity investments ....................................................
Net unsettled security trades ......................................................................
37,034 $
33,846
84,312
—
26,326 $
56,818
224,901
15,020
28,664
68,949
—
—
The following table summarizes certain amounts paid during the period:
Year Ended December 31,
2016
2015
2017
Year Ended December 31,
2016
2015
2017
Interest paid ................................................................................................ $
Income taxes paid .......................................................................................
82,494 $
74,379
81,338 $
79,790
74,792
110,650
94
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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,
2017
2016
9/12
5/93
6/09
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(4,8,12). 5.875%
Junior Subordinated
Debentures due 3/15/36(4,6,12)... 4.888% (13)
Junior Subordinated
Debentures due 6/15/56(4,9) ...... 6.125%
Junior Subordinated
Debentures due 11/17/57(4,10) ... 5.275%
11/17
Term loan due 5/17/21(1,6)......... 2.600% (14) 6/16
4/16
9/12
(11)
5/15 & 11/15
$
165,612
$
164,284
$
195,786
$
164,095
6/15 & 12/15
3/15 & 9/15
292,647
150,000
291,888
148,477
320,697
155,000
291,424
148,189
quarterly
—
—
—
120,929
quarterly
20,000
20,000
20,000
20,000
quarterly
300,000
290,460
321,120
290,403
6/15 & 12/15
monthly
125,000
98,125
123,342
98,125
122,039
98,125
—
100,000
1,151,384
1,136,576
1,232,767
1,135,040
Less current maturity of term loan ....................................................
4,375
4,375
4,375
1,875
Total long-term debt .....................................................................
1,147,009
1,132,201
1,228,392
1,133,165
Short-term debt:
Current maturity of term loan ............................................................
Commercial paper(2)
.........................................................................
Total short-term debt ....................................................................
4,375
324,250
328,625
4,375
323,692
328,067
4,375
323,692
328,067
1,875
262,600
264,475
Total debt
................................................................................ $ 1,475,634
$ 1,460,268
$ 1,556,459
$ 1,397,640
(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) Redeemed on December 22, 2017.
(9) Callable at any time on or after June15, 2021, and prior to this date upon the occurrence of a Tax Event or Rating Agency Event.
(10) Callable at any time on or after November 17, 2022, and prior to this date upon the occurrence of a Tax Event or Rating Agency Event.
(11) Assumed upon November 1, 2012 acquisition of Family Heritage.
(12) Quarterly payments on the 15th of March, June, September, and December.
(13) Interest paid at 3 Month LIBOR plus 330 basis points, resets each quarter.
(14) Interest paid at 1 Month LIBOR plus 125 basis points, resets each month.
95
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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 ............................. $ 328,625 $ 299,522 $
9,375 $
77,500 $ 150,000 $ 610,612
2018
2019
2020
2021
2022
Thereafter
Year Ended December 31,
Funded debt: On November 17, 2017, Torchmark completed the issuance and sale of $125 million in aggregate principal
of Torchmark’s 5.275% Junior Subordinated Debentures due 2057. The debentures were sold in a private placement
pursuant to exemptions from the registration requirements of the Securities Act of 1933. The initial purchaser of the
debentures was outside the United States. The net proceeds from the sale of the debentures were $123.3 million, after
giving effect to the discount payable to the initial purchaser and expenses of the offering of the debentures. Torchmark
used the net proceeds from the offering of the debentures to repay the $125 million outstanding principal, plus accrued
interest of $143 thousand on the 5.875% Junior Subordinated Debentures on December 22, 2017. The Debentures
were due December 15, 2052 and were callable beginning December 15, 2017.
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 that began 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, 2017, 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,
2017
324,250
1.78%
177,000
248,750
$
$
2016
262,850
0.96%
177,000
310,150
96
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 11—Debt (continued)
Average balance outstanding during period ........................................ $
Daily-weighted average interest rate (annualized) ..............................
Maximum daily amount outstanding during period .............................. $
Note 12—Shareholders’ Equity
Year Ended December 31,
2016
301,550
2017
323,429
$
$
2015
350,851
1.30%
0.83%
455,912
$
412,676
$
0.43%
458,110
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
2015:
Balance at January 1, 2015 ............................................................
—
—
134,218,183
(6,287,907)
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 ................................................................
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 ...........................................................
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)
2017:
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 ...........................................................
9,135
119,896
1,661,808
(5,228,868)
(3,000,000)
3,000,000
Balance at December 31, 2017 ..................................................
—
—
124,218,183
(9,625,104)
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 4.1 million shares at a cost of $325 million in 2017, 5.2 million
shares at a cost of $311 million in 2016, and 6.3 million shares at a cost of $359 million in 2015. 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 1.1 million shares
at a cost of $88 million in 2017, 1.5 million shares at a cost of $93 million in 2016, and 1.0 million shares at a cost of
$60 million in 2015.
97
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12—Shareholders’ Equity (continued)
Retirement of Treasury Stock: Torchmark retired 3.0 million shares of treasury stock in 2017, 3.0 million in 2016, and
4.0 million in 2015.
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 states 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 $454
million in 2017, $438 million in 2016, and $466 million in 2015. As of December 31, 2017, dividends and transfers from
insurance subsidiaries to parent available to be paid in 2018 are limited to the amount of $315 million without regulatory
approval, such that $940 million 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, 2017
were restricted by lenders’ covenants which require the Company to maintain and not distribute $3.5 billion from its
total consolidated retained earnings of $4.8 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 ...................................... 116,342,529
2,640,965
Weighted average dilutive options outstanding ..................................
Diluted weighted average shares outstanding.................................... 118,983,494
2017
Year Ended December 31,
2016
120,001,191
2,366,594
122,367,785
2015
125,094,628
1,662,607
126,757,235
For the three years ended December 31, 2017, there were no anti-dilutive shares. Income available to common
shareholders for basic earnings per share is equivalent to income available to common shareholders for diluted earnings
per share.
Note 13—Stock-Based Compensation
Torchmark’s stock-based compensation consists of stock options, restricted stock, restricted stock units, and
performance shares. Certain employees 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
are either seven or ten year terms. Options generally vest in accordance with the following schedule:
Contract
Period
7 years
Directors .................................
Employees .............................
7 years
Employees(1) .......................... 10 years
6 Months
Year 1
Year 2
Year 3
Year 4
Year 5
100%
—%
—%
—%
—%
50%
25%
50%
25%
25%
25%
Shares vested by period
(1) Grant offered through the Torchmark Corporation 2011 Incentive Plan only.
98
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Stock-Based Compensation (continued)
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.
An analysis of shares available for grant is as follows:
Balance at January 1, .............................................................................
Options expired and forfeited during year(1) ..............................................
Restricted stock expired and forfeited during year(2) .................................
Options granted during year(1) ..................................................................
Restricted stock, restricted stock units, and performance shares granted
under the Torchmark Corporation 2011 Incentive Plan(2) ..........................
Balance at December 31, .......................................................................
Available for Grant
2016
6,872,282
2017
5,088,461
26,488
46,500
8,518
—
2015
8,458,593
90,371
89,745
(1,328,513)
(1,306,306)
(1,334,514)
(868,616)
(486,033)
(431,913)
2,964,320
5,088,461
6,872,282
(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, 2017 is presented below:
Stock-based compensation expense recognized(1)................................... $
Tax benefit recognized ..............................................................................
37,034 $
32,511
26,326 $
27,867
28,664
10,033
2017
2016
2015
(1) No stock-based compensation expense was capitalized in any period.
Additional stock compensation information is as follows at December 31:
Unrecognized compensation(1) ........................................................................................ $
Weighted average period of expected recognition (in years)(1) ........................................
(1)
Includes restricted stock and performance shares.
No equity awards were cash settled during the three years ended December 31, 2017.
2017
2016
31,309 $
27,334
0.86
0.89
Options: The following table summarizes information about stock options outstanding at December 31, 2017.
Range of
Exercise Prices
$29.59 - $37.40
50.64
50.69 - 51.62
53.61 - 56.32
73.92 - 77.26
$29.59 - $77.26
Options Outstanding
Weighted-
Average
Remaining
Contractual
Life (Years)
Weighted-
Average
Exercise
Price
2.20 $
6.39
3.69
4.63
7.23
4.89 $
34.54
50.64
50.70
53.65
77.24
53.59
99
Number
Outstanding
1,421,268
1,405,725
1,090,703
1,384,582
1,451,523
6,753,801
Options Exercisable
Number
Exercisable
Weighted-
Average
Exercise
Price
1,366,689 $
—
958,463
594,184
9,643
2,928,979 $
34.42
—
50.70
53.71
73.92
43.79
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Stock-Based Compensation (continued)
An analysis of option activity for each of the three years ended December 31, 2017 is as follows:
2017
2016
2015
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Options
6,973,591 $
44.64
7,734,841 $
38.84
7,889,321 $
32.91
933,286
535,220
(1,661,808)
(26,488)
6,753,801 $
77.19
77.26
36.84
57.94
53.59
834,212
597,225
(2,184,169)
(8,518)
6,973,591 $
50.78
50.64
28.08
39.35
44.64
1,220,751
296,875
(1,576,485)
(95,621)
7,734,841 $
53.62
53.61
22.81
48.85
38.84
Outstanding—beginning of
year ..............................................
Granted:
7-year term .................................
10-year term ...............................
Exercised ......................................
Expired and forfeited ....................
Outstanding—end of year..........
Exercisable at end of year .........
2,928,979 $
43.79
3,115,847 $
36.81
3,774,061 $
29.37
Additional information about Torchmark’s stock option activity as of December 31, 2017 and 2016 is as follows:
Outstanding options:
Weighted-average remaining contractual term (in years) ..........................................
Aggregate intrinsic value ........................................................................................... $
4.89
231,277 $
4.70
87,286
Exercisable options:
Weighted-average remaining contractual term (in years) ..........................................
Aggregate intrinsic value ........................................................................................... $
2.99
137,424 $
2.96
63,395
2017
2016
Selected stock option activity for the three years ended December 31, 2017 is presented below:
Weighted-average grant-date fair value of options granted
(per share) ........................................................................................... $
Intrinsic value of options exercised .....................................................
Cash received from options exercised ................................................
Actual tax benefit received ..................................................................
2017
2016
2015
12.88 $
9.04 $
70,948
61,215
24,832
73,995
61,329
25,898
11.97
54,854
35,958
24,470
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 ..................................................................... $
2017
3,824,822
61.10 $
6.34
113,246 $
2016
3,857,744
50.97
6.11
23,891
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
100
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Stock-Based Compensation (continued)
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 2017, 2016, and 2015 were 120,326, 112,591, and 105,679,
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 2013 to 2015:
Year of grants
2013 ..................................................................................................
2014 ..................................................................................................
2015 ..................................................................................................
Final settlement of
shares
Final settlement
date
159,020
119,896
149,898
February 24, 2016
February 21, 2017
February 27, 2018
For the 2016 and 2017 performance share grants, actual shares that could be distributed range from 0 to 335 thousand
for the 2016 grants and 0 to 306 thousand shares for the 2017 grants.
A summary of restricted stock grants for each of the years in the three-year period ended December 31, 2017 is
presented in the table below.
2017
2016
2015
Directors restricted stock:
Shares ....................................................................................................
Price per share ....................................................................................... $
Aggregate value ..................................................................................... $
Percent vested as of December 31, 2017 ..............................................
Directors restricted stock units (including dividend equivalents):
Shares ....................................................................................................
Price per share ....................................................................................... $
Aggregate value ..................................................................................... $
Percent vested as of December 31, 2017 ..............................................
9,135
73.92
675
100%
7,735
74.45
576
100%
Performance shares:
Target shares ..........................................................................................
Target price per share ............................................................................. $
Assumed adjustment for performance objectives (in shares) .................
Aggregate value ..................................................................................... $
Percent vested as of December 31, 2017 ..............................................
153,000
77.26
106,084
11,821
12,549
57.39
720
85%
6,912
56.74
392
100%
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
—%
—%
—%
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.
101
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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
2015:
Balance at January 1, 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 .....
2017:
Grants ..............................................
Additional performance shares(1) .....
Restriction lapses ............................
Forfeitures .......................................
Balance at December 31, 2017 .....
263,430
—
(61,815)
(13,950)
187,665
—
(130,215)
—
57,450
—
(14,700)
(7,500)
35,250
556,360
179,500
(58,056)
(211,287)
(7,500)
459,017
167,500
(35,073)
(159,020)
—
432,424
153,000
106,084
(119,896)
(7,500)
564,112
Total
819,790
193,788
(58,056)
—
6,648
—
7,640
(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
—
9,135
7,735
169,870
106,084
(11,029)
(7,735)
(153,360)
—
—
(15,000)
599,362
(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 2017:
Executive
Restricted
Stock
Executive
Performance
Shares
Directors
Restricted
Stock
Directors
Restricted
Stock Units
Grant-date fair value per share at
January 1, 2017 .................................................. $
Grants ..................................................................
Estimated additional performance shares ...........
Restriction lapses ................................................
Forfeitures ...........................................................
Grant-date fair value per share at
December 31, 2017 ............................................
38.46 $
—
(30.69)
(37.40)
49.79 $
63.39
77.26
71.76
(72.42)
(43.85)
73.92 $
73.92
(72.11)
(73.92)
41.93
56.64
102
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Note 14—Business Segments
Torchmark is organized into four segments: life insurance, supplemental health insurance, annuities, and investments.
We also have other administrative expenses reported in "Corporate & Other."
Torchmark’s reportable segments are based on the insurance product lines it markets and administers: life insurance,
supplemental 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 distribution channels.
Torchmark Corporation
Premium Income by Distribution Channel
Distribution Channel
United American Independent... $
Liberty National Exclusive .........
American Income Exclusive ......
Family Heritage Exclusive .........
Direct Response .......................
Other ........................................
For the Year 2017
Life
Health
Annuity
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
12,547
274,635
999,279
3,193
812,907
203,986
1
$
364,128
196,207
89,036
253,534
73,468
12
43
—
35
9
37
20
9
26
8
$
15
100
$
376,690
470,842
1,088,315
256,727
886,375
203,986
12
14
33
8
27
6
$ 2,306,547
100
$
976,373
100
$
15
100
$ 3,282,935
100
Life
Health
Annuity
Total
For the Year 2016
Distribution Channel
United American Independent... $
Liberty National Exclusive .........
American Income Exclusive ......
Amount
13,733
270,476
913,355
Family Heritage Exclusive .........
Direct Response .......................
Other ........................................
2,866
782,765
206,138
$ 2,189,333
Amount
355,015
201,798
84,382
236,075
70,393
% of
Total
38
21
9
25
7
% of
Total
1
12
$
42
—
36
9
100
Amount
$
38
% of
Total
100
$
Amount
368,786
472,274
997,737
% of
Total
12
15
32
8
27
6
100
238,941
853,158
206,138
$ 3,137,034
$
947,663
100
$
38
100
103
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
Life
Health
Annuity
Total
For the Year 2015
Distribution Channel
United American Independent... $
Liberty National Exclusive .........
American Income Exclusive ......
Family Heritage Exclusive .........
Direct Response .......................
Other ........................................
Amount
15,036
271,113
830,903
2,334
746,693
206,986
$ 2,073,065
Amount
345,330
209,150
80,339
221,091
69,610
% of
Total
37
23
9
24
7
% of
Total
1
13
$
40
—
36
10
100
Amount
$
135
% of
Total
100
$
Amount
360,501
480,263
911,242
223,425
816,303
206,986
$ 2,998,720
$
925,520
100
$
135
100
% of
Total
12
16
30
8
27
7
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 & Other” 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 also included in the “Corporate & Other” segment category.
Torchmark holds a sizable 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.
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.
In 2017, Torchmark recorded $8.7 million in administrative settlements ($5.6 million after tax) where claims were not
properly filed or information to support the validity of the claim had not been properly submitted. These administrative
settlements were included in "Policyholder benefits" in the Consolidated Statements of Operations in 2017.
104
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
As further discussed in Note 15—Commitments and Contingencies, the Company received an assessment from various
state guaranty fund associations for the liquidation of Penn Treaty and its affiliate. The total estimated assessment for
Torchmark's subsidiaries is approximately $9.6 million of which $1.8 million is estimated to be unrecoverable. We are
anticipating the remaining amount of the assessments to be recovered through premium tax credits. The assessment
expenses were considered a non-operational event and therefore were excluded from the core underwriting operations
of the Company.
As a result of the Tax Legislation, which is discussed in Note 1—Significant Accounting Policies, we recorded a one-
time increase in stock-based compensation expense of 3.4 million ($2.2 million after tax) due to the impact the Tax
Legislation had on certain performance based equity awards.
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
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
The following tables set forth a reconciliation of Torchmark’s revenues and operations by segment to its 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
Corporate
& Other
Adjustments Consolidated
For the year 2017
Revenue:
Premium ........................................................... $2,306,547
$ 976,373
$
15
Net investment income .....................................
Other income ....................................................
$
847,885
$
1,270
$
Total revenue ........................................
2,306,547
976,373
15
847,885
1,270
$
3,282,935
847,885
1,142
4,131,962
(2)
(128)
(128)
Expenses:
Policy benefits...................................................
1,549,602
628,640
35,836
13,797
(3,4)
2,227,875
Required interest on:
Policy reserves ...........................................
(607,007)
(77,792)
(49,571)
734,370
(4,850)
1,673
(4)
(2,5)
3,380
(6)
210,590
9,631
33,654
—
—
490,403
264,860
210,590
9,631
37,034
84,532
253,875
14,000
3,324,925
(252,605)
(14,128)
14,128 (3,4,5,6)
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 ...............................................
186,236
396,268
23,454
96,519
690
2,466
(210,380)
177,111
86,044
32
Total expenses......................................
1,702,210
Subtotal ................................................................
604,337
756,865
219,508
(10,547)
10,562
Non-operating items..........................................
84,532
608,522
239,363
Measure of segment profitability (pretax) ... $ 604,337
$ 219,508
$
10,562
$
239,363
$
(252,605) $
—
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 ...................................................................................................................................................................
Deduct non-operating expenses ......................................................................................................................................................................
Deduct guaranty fund assessments .................................................................................................................................................................
Deduct increase in stock-based compensation expense due to Tax Legislation .............................................................................................
807,037
14,128
821,165
(247,484)
573,681
247,484
23,611
(8,659)
(288)
(1,801)
(3,380)
Income before income taxes per Consolidated Statement of Operations...............................................................................................
$
830,648
(1) Administrative expense is not allocated to insurance segments.
(2) Elimination of intersegment commission.
(3) Administrative settlements.
(4) Non-operating expense.
(5) Guaranty fund assessments.
(6) Recognition of a one-time increase in stock-based compensation expense due to Tax Legislation.
106
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
For the year 2016
Life
Health
Annuity
Investment
Corporate
& Other
Adjustments
Consolidated
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
$
3,137,034
806,903
1,375
3,945,312
(2)
(159)
(159)
Expenses:
Policy benefits...................................................
1,475,477
612,725
36,751
3,795
(3)
2,128,748
Required interest on:
Policy reserves .........................................
(577,827)
(73,382)
(51,131)
702,340
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 ...............................................
178,946
374,499
23,060
90,385
807
4,179
(202,813)
164,476
84,819
38
Total expenses..................................
1,615,571
Subtotal ................................................................
573,762
737,607
210,056
(9,356)
9,394
Non-operating items.......................................
Measure of segment profitability (pretax) ... $ 573,762
$ 210,056
$
9,394
$
224,031
$
(229,977) $
—
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 ...................................................................................................................................................................
Deduct non-operating fees ...............................................................................................................................................................................
(159)
553
(2)
(4)
196,598
8,587
26,326
231,511
4,189
(229,977)
(4,348)
4,348
(3,4)
83,345
582,872
224,031
—
—
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)
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.
107
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
Revenue:
Premium ........................................................... $2,073,065
$ 925,520
$
135
$
2,998,720
Life
Health
Annuity
Investment
Corporate
& Other
Adjustments
Consolidated
For the Year 2015
Net investment income .....................................
Other income ....................................................
$
773,951
$
2,379
$
Total revenue .............................................
2,073,065
925,520
135
773,951
2,379
(2)
(194)
(194)
Expenses:
Policy benefits...................................................
1,374,608
602,610
38,994
Required interest on:
Policy reserves ............................................
(552,298)
(69,057)
(53,295)
674,650
172,947
353,595
22,760
83,341
1,138
8,689
(196,845)
154,811
81,489
41
1,200 (2,3)
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 ...............................................
186,191
9,003
28,664
76,642
554,447
219,504
223,858
1,200
(221,479)
(1,394)
1,394
(3)
Total expenses..................................
1,503,663
Subtotal ................................................................
569,402
721,143
204,377
(4,433)
4,568
Non-operating items.......................................
Measure of segment profitability (pretax) ... $ 569,402
$ 204,377
$
4,568
$
219,504
$
(221,479) $
—
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 ...................................................................................................................................................................
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.
Assets for each segment are reported based on a specific identification basis. The insurance segments’ assets contain
DAC. The investment segment includes the investment portfolio, cash, and accrued investment income. Goodwill is
assigned to the insurance segments at the time of purchase. 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
Cash and invested assets ....
Accrued investment income .
Life
Health
At December 31, 2017
Investment
Annuity
$ 17,853,047
233,453
Deferred acquisition costs .... $ 3,423,296
Goodwill ...............................
309,609
Other assets .........................
$
529,068
$
5,699
131,982
Total assets ..................... $ 3,732,905
$
661,050
$
5,699
$ 18,086,500
Other
Consolidated
$
17,853,047
233,453
3,958,063
441,591
988,831
988,831
988,831
$
23,474,985
$
$
108
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
Cash and invested assets ....
Accrued investment income .
Life
Health
At December 31, 2016
Investment
Annuity
$ 15,955,891
223,148
Deferred acquisition costs .... $ 3,261,220
Goodwill ...............................
309,609
Other assets .........................
$
512,701
$
9,237
131,982
Other
Consolidated
$
15,955,891
223,148
3,783,158
441,591
1,032,299
$ 1,032,299
Total assets ........................ $ 3,570,829
$
644,683
$
9,237
$ 16,179,039
$ 1,032,299
$
21,436,087
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
At December 31, 2017
Investment
Annuity
Future policy benefits ........... $ 10,353,286
Unearned and advance
premiums .............................
16,927
$ 1,831,338
$ 1,254,848
44,503
Policy claims and other
benefits payable ...................
Debt .....................................
Other ....................................
186,429
146,865
Other
Consolidated
$
13,439,472
$ 1,460,268
$ 1,949,100
61,430
333,294
1,460,268
1,949,100
Total liabilities .................... $ 10,556,642
$ 2,022,706
$ 1,254,848
$ 1,460,268
$ 1,949,100
$
17,243,564
Life
Health
At December 31, 2016
Investment
Annuity
Future policy benefits ........... $ 9,825,776
Unearned and advance
premiums .............................
16,828
$ 1,706,870
$ 1,293,191
47,189
Policy claims and other
benefits payable ...................
Debt .....................................
Other ....................................
156,437
143,128
Other
Consolidated
$
12,825,837
$ 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
109
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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, 2017. Insurance ceded on life and accident and health products
represented 0.2% of premium income for 2017. 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 external companies. Life reinsurance assumed represented
1.8% of life insurance in force at December 31, 2017 and reinsurance assumed on life and accident and health products
represented 0.7% of premium income for 2017.
Leases: Torchmark leases office space, office equipment, and aviation equipment under a variety of operating lease
arrangements. The Company does not have any capital leases.
Rental expense for operating leases for each of the three years ended December 31, 2017 is as follows:
Year Ended December 31,
2017
2016
2015
Rental expense ............................................................................................................ $ 6,446 $ 6,520 $ 6,722
Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in
excess of one year at December 31, 2017 were as follows:
Operating lease commitments ............................... $ 3,483 $ 3,298 $ 3,124 $ 2,886 $ 1,943 $
1,830
Year Ended December 31,
2018
2019
2020
2021
2022
Thereafter
Purchase Commitments: Torchmark has various long-term noncancelable purchase commitments as well as
commitments to provide capital for low-income housing tax credit interests. See further discussion related to tax credits
in Note 1—Significant Accounting Policies.
Year Ended December 31,
Thereafter
Purchase commitments ......................................... $27,326 $ 9,198 $ 3,257 $ 2,213 $ 2,169 $ 246,836
2021
2018
2022
2019
2020
Investments: As of December 31, 2017, Torchmark is committed to purchase $210 million of commercial mortgage
loan participations from a third party.
Guarantees: At December 31, 2017, 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, 2017, 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,
2017 and 2016.
110
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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 expired in December 2017. At December 31, 2017, total remaining undiscounted payments
under the leases were approximately $10 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.
On February 1, 2018, a putative class action litigation was filed against American Income Life Insurance Company in
U.S. District Court for the Northern District of Texas, Dallas Division (Bruce v. American Income Life Insurance Company,
et al., Case No. 3:18-cv-00258-G). The plaintiff, a former insurance sales agent of American Income who is suing on
behalf of all current and former American Income sales agents contracted through State General Agent Stephen
Jubrey’s agency office at any time since January 31, 2015 through the final disposition of this matter, asserts that such
agents are employees rather than independent contractors as they are classified by American Income. He alleges
failure to pay minimum wages, overtime wages and other applicable monies in accordance with the Fair Labor Standards
Act. The plaintiff seeks, in a jury trial, actual and punitive damages, pre- and post-judgment interest, attorney fees,
costs and other relief, including injunctive relief.
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.
Guaranty Fund Assessment: In 2017, the Commonwealth Court of Pennsylvania issued orders placing Penn Treaty
Network America Insurance Company (Penn Treaty) and affiliate American Network Insurance Company (ANIC) in
liquidation due to financial difficulties. In such instances, the various state guaranty fund associations employ funding
mechanisms, through assessments to their member companies, to cover the obligations of the insolvent entities.
Consequently, the Company continues to receive guaranty fund assessments from the state associations related to
these companies. The Company has projected its share of the ultimate assessments from these insolvencies based
on assumptions about future events and its market share of premiums by state. The total estimated assessment for
Torchmark's subsidiaries is approximately $9.6 million of which $7.8 million is estimated to be recoverable through
state premium tax credit offsets. We anticipate the remaining $1.8 million will be unrecoverable.
111
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
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, 2017. 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.
2017:
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 common share ....
Diluted net income per common share:
Continuing operations ......................................
Discontinued operations ..................................
Total diluted net income per common share ..
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 .........................................................
Basic net income per common share:
Continuing operations ......................................
Discontinued operations ..................................
Total basic net income per common share ....
Diluted net income per common share:
Continuing operations ......................................
Discontinued operations ..................................
Total diluted net income per common share ..
March 31,
June 30,
September 30,
December 31,
Three Months Ended
820,631 $
208,282
(5,748)
1,023,581
557,776
125,908
191,741
137,178
(3,637)
133,541
816,614 $
212,776
(705)
1,029,078
556,415
122,121
201,926
140,363
(90)
140,273
819,217 $
213,872
12,595
1,046,015
551,219
122,334
220,610
153,346
(12)
153,334
826,473
212,955
17,469
1,056,899
562,465
120,040
216,371
1,027,376
(30)
1,027,346
1.16
(0.03)
1.13
1.14
(0.03)
1.11
1.20
—
1.20
1.18
—
1.18
1.32
—
1.32
1.29
—
1.29
8.93
—
8.93
8.71
—
8.71
March 31,
June 30,
September 30,
December 31,
Three Months Ended
779,860 $
197,053
293
977,627
524,973
118,806
195,448
133,574
(9,541)
124,033
1.10
(0.08)
1.02
1.08
(0.07)
1.01
112
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
1.16
(0.01)
1.15
1.13
—
1.13
1.19
0.08
1.27
1.16
0.09
1.25
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
TMK 2017 FORM 10-K
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, 2017, an evaluation was performed under the supervision
and with the participation of Torchmark management, including the Co-Chairmen and Chief Executive Officers and the
Executive Vice President and Chief Financial Officer, of Torchmark’s disclosure controls and procedures (as those
terms are defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon their evaluation, the Co-
Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer have concluded
that Torchmark’s disclosure controls and procedures are effective as of the date of this Form 10-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, 2017, there have not been any changes in Torchmark’s internal control over
financial reporting or in other factors that could significantly affect this control over financial reporting subsequent to
the date of their evaluation which have materially affected, or are reasonably likely to materially affect, Torchmark’s
internal control over financial reporting. No material weaknesses in such internal controls were identified in the evaluation
and as a consequence, no corrective action was required to be taken.
There were no items required.
Item 9B. Other Information
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TMK 2017 FORM 10-K
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, 2017. The
Company’s independent registered public accounting firm has issued an attestation report on the Company’s internal
control over financial reporting as stated in their report which is included herein.
/s/ Gary L. Coleman
Gary L. Coleman
Co-Chairman and Chief Executive Officer
/s/ Larry M. Hutchison
Larry M. Hutchison
Co-Chairman and Chief Executive Officer
/s/ Frank M. Svoboda
Frank M. Svoboda
Executive Vice President and Chief Financial Officer
February 26, 2018
114
TMK 2017 FORM 10-K
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Torchmark Corporation (McKinney, Texas)
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Torchmark Corporation and subsidiaries (Torchmark)
as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, Torchmark maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control - Integrated Framework issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements and financial statement schedules as of and for the year ended
December 31, 2017 of Torchmark and our report dated February 26, 2018 expressed an unqualified opinion on those
financial statements and financial statement schedules.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
February 26, 2018
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TMK 2017 FORM 10-K
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 Shareholders,” and “Section 16(a)
Beneficial Ownership Reporting Compliance” in the Proxy Statement for the Annual Meeting of Shareholders to be
held April 26, 2018 (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”, “2017 Grants of Plan-based
Awards”, “Outstanding Equity Awards at Fiscal Year End 2017”, “Option Exercises and Stock Vested during Fiscal Year
Ended December 31, 2017”, “Pension Benefits at December 31, 2017”, “Potential Payments upon Termination or
Change in Control”, “2017 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, 2017
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
6,753,801 $
—
6,753,801 $
53.59
—
53.59
2,964,320
—
2,964,320
(b)
Security ownership of certain beneficial owners:
Information required by this item is incorporated by reference from the section entitled “Principal Shareholders”
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 for Accounting Fees” in the Proxy Statement, which is to be filed with the SEC.
116
TMK 2017 FORM 10-K
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, 2017 and 2016 ..........................................................
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 2017 ..............................................................................................................................
Consolidated Statements of Comprehensive Income for each of the three years in the period ended
December 31, 2017 .............................................................................................................................
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended
December 31, 2017 .............................................................................................................................
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2017 ..............................................................................................................................
Notes to Consolidated Financial Statements ........................................................................................
Schedules Supporting Financial Statements for each of the three years in the period ended
December 31, 2017:
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
123
127
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EXHIBITS
Page of
this
Report
3.1 Restated Certificate of Incorporation of Torchmark Corporation, filed with the Delaware Secretary
of State on April 30, 2010 (incorporated by reference from Exhibit 3.1.2 to Form 8-K dated May 5,
2010)
3.2 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)
4.1 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))
4.2 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)
4.3 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)
4.4 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)
4.5 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)
4.6 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)
4.7 Third Supplemental Indenture dated as of November 17, 2017 between Torchmark Corporation
and Regions Bank, as Trustee, supplementing the Junior Subordinated Indenture dated as of
November 2, 2011 (incorporated by reference from Exhibit 4.4 to Form 8-K dated November 17,
2017)
4.8 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)
4.9 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)
4.10 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)
10.1 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)*
10.2 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)*
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Report
10.3 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)*
10.4 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)*
10.5 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)*
10.6 Torchmark Corporation Supplemental Executive Retirement Plan (incorporated by reference from
Exhibit 10.1 to Form 8-K dated January 25, 2007)*
10.7 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)*
10.8 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)*
10.9 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)*
10.10 Amendment Five to the Torchmark Corporation Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10.1 to Form 8-K dated May 5, 2015)*
10.11 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)*
10.12 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)*
10.13 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)*
10.14 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)
10.15 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)
10.16 Torchmark Corporation 2011 Incentive Plan (incorporated by reference from Exhibit 10.1 to Form
8-K dated May 4, 2011)*
10.17 First Amendment to Torchmark Corporation 2011 Incentive Plan (incorporated by reference from
Exhibit 10.1 to Form 8-K dated April 29, 2014)*
10.18 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)*
10.19 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)*
10.20 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)*
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this
Report
10.21 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)*
10.22 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)*
10.23 Form of Seven Year Stock Option Grant Agreement under Torchmark Corporation 2011 Incentive
Plan, as amended with Non-Compete, Non-Solicit and Confidentiality Provisions (incorporated by
reference from Exhibit 10.75 to Form 10-K for the fiscal year ended December 31, 2016)*
10.24 Form of Ten Year Stock Option Grant Agreement under Torchmark Corporation 2011 Incentive
Plan, as amended with Non-Compete, Non-Solicit and Confidentiality Provisions (incorporated by
reference from Exhibit 10.76 to Form 10-K for the fiscal year ended December 31, 2016)*
10.25 Form of Performance Share Award Certificate under Torchmark Corporation 2011 Incentive Plan,
as amended with Non-Compete, Non-Solicit and Confidentiality Provisions (incorporated by
reference from Exhibit 10.77 to Form 10-K for the fiscal year ended December 31, 2016)*
10.26 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
(incorporated by reference from Exhibit 10.78 to Form 10-K for the fiscal year ended December
31, 2016) *
10.27 Torchmark Corporation Amended 2011 Non-Employee Director Compensation Plan, effective
January, 2017 (incorporated by reference to Exhibit 10. 55 to Form 10-K for the fiscal year ended
December 31, 2016)
10.28 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)*
10.29 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)*
10.30 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)*
10.31 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)*
10.32 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)
10.33 Torchmark Corporation Pension Plan 2016 Amendment to Limit Eligibility (effective December 31,
2016) (incorporated by reference to Exhibit 10.80 to Form 10-K for the fiscal year ended December
31, 2016)*
10.34 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)
10.35 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)
10.36 2016 Amendment to the Torchmark Corporation Savings and Investment Plan (effective December
31, 2016) (incorporated by reference from Exhibit 10-79 to Form 10-K for the fiscal year ended
December 31, 2016)*
10.37 Payments to Directors (incorporated by reference from Exhibit 10.23 to Form 10-K for the fiscal
year ended December 31, 2016)*
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122
10.38 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)
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, 2017.
121
TMK 2017 FORM 10-K
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
State of
Incorporation
Indiana
Nebraska
Nebraska
Name Under Which
Company Does
Business
American Income Life Insurance
Company
Globe Life And Accident Insurance
Company
Liberty National Life Insurance
Company
While United American Life Insurance Company and Family Heritage Life Insurance Company of America do not qualify
as significant subsidiaries in accordance with Regulation S-X, management views these subsidiaries as significant to
our operations.
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.
122
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Dollar amounts in thousands)
December 31,
2017
2016
Assets:
Investments:
Long-term investments .............................................................................................. $
Short-term investments .............................................................................................
Total investments ...........................................................................................................
Cash ..............................................................................................................................
Investment in affiliates ...................................................................................................
Due from affiliates .........................................................................................................
Taxes receivable from affiliates .....................................................................................
Other assets ..................................................................................................................
33,586
—
33,586
—
6,004,429
96,005
88,406
119,801
Total assets ........................................................................................................... $ 8,100,533 $ 6,342,227
5,624
41,186
1,008
7,763,704
95,920
63,099
135,616
35,562 $
Liabilities and shareholders’ equity:
Liabilities:
Short-term debt ......................................................................................................... $
Long-term debt ..........................................................................................................
Due to affiliates .........................................................................................................
Other liabilities ..........................................................................................................
Total liabilities ........................................................................................................
328,067 $
1,281,971
8,002
251,072
1,869,112
264,475
1,282,891
—
228,000
1,775,366
Shareholders’ equity:
351
Preferred stock ..........................................................................................................
127,218
Common stock ..........................................................................................................
840,932
Additional paid-in capital ...........................................................................................
577,574
Accumulated other comprehensive income ..............................................................
3,890,798
Retained earnings .....................................................................................................
(870,012)
Treasury stock ...........................................................................................................
Total shareholders’ equity .....................................................................................
4,566,861
Total liabilities and shareholders’ equity ................................................................ $ 8,100,533 $ 6,342,227
351
124,218
858,987
1,424,274
4,806,208
(982,617)
6,231,421
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
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TMK 2017 FORM 10-K
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands)
Year Ended December 31,
2016
2015
2017
Net investment income ............................................................................. $
Realized investment gains (losses) ..........................................................
Total revenue ....................................................................................
26,130 $
(2,791)
23,339
25,352 $
—
25,352
23,715
8
23,723
General operating expenses .....................................................................
Reimbursements from affiliates ................................................................
Interest expense .......................................................................................
Total expenses .................................................................................
61,447
(52,776)
88,474
97,145
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 ........................................................................................
(73,806)
(9,874)
(83,680)
1,538,174
1,454,494
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
Other comprehensive income (loss):
Attributable to Parent Company .............................................................
Attributable to affiliates ...........................................................................
(8,409)
602,709
Comprehensive income (loss) ............................................................ $ 2,048,794 $
(3,539)
(11,314)
356,941
(761,966)
895,406 $ (238,405)
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
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TMK 2017 FORM 10-K
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(continued)
CONDENSED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Year Ended December 31,
2017
2016
2015
Net income ............................................................................................... $ 1,454,494 $
Equity in earnings of affiliates ...................................................................
(1,538,174)
549,779 $
527,100
(586,126)
(568,176)
Cash dividends from subsidiaries .............................................................
Other, net ..................................................................................................
Cash provided from operations ............................................................
453,904
52,957
423,181
437,566
(6,718)
394,501
466,416
20,371
445,711
Cash provided from (used for) investing activities:
Net decrease (increase) in short-term investments ................................
Investment in subsidiaries ......................................................................
Additions to properties ...........................................................................
(5,624)
(31,000)
(7,230)
(3,466)
(35,000)
(21,965)
17,338
(2)
(468)
Loaned money to affiliates ......................................................................
(180,000)
(363,056)
(282,508)
Repayments from affiliates .....................................................................
180,000
318,056
Cash provided from (used for) investing activities .............................
(43,854)
(105,431)
Cash provided from (used for) financing activities:
Repayment of debt .................................................................................
(126,875)
(250,000)
Proceeds from issuance of debt .............................................................
125,000
400,000
Payment for debt issuance costs ............................................................
Net issuance (repayment) of commercial paper .....................................
Issuance of stock ....................................................................................
(1,661)
61,092
61,215
(9,638)
22,224
61,329
282,508
16,868
—
—
—
1,978
35,958
Acquisitions of treasury stock .................................................................
(412,989)
(404,784)
(418,526)
Borrowed money from affiliate ................................................................
Repayments to affiliates .........................................................................
Excess tax benefit on stock option exercises .........................................
278,500
(270,500)
—
60,000
(78,000)
—
15,000
(15,000)
8,180
Payment of dividends .............................................................................
(92,101)
(90,201)
(90,169)
Cash provided from (used for) financing activities .............................
(378,319)
(289,070)
(462,579)
Net increase (decrease) in cash ...............................................................
Cash balance at beginning of period ........................................................
Cash balance at end of period .................................................................. $
1,008
—
—
—
1,008 $
— $
—
—
—
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
125
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollar 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,
2016
437,566 $
2017
453,904 $
2015
466,416
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,
2016
2015
2017
Stock-based compensation not involving cash ......................................... $
Borrowed money from affiliate ..................................................................
Investment in subsidiaries ........................................................................
Purchase of agent debit balances ............................................................
37,034 $
—
317,027
—
26,326 $
—
—
—
28,664
56,503
39,206
17,297
The following table summarizes certain amounts paid (received) during the period:
Year Ended December 31,
2016
2015
2017
Interest paid .............................................................................................. $
Income taxes paid (received) ....................................................................
86,606 $
(19,961)
84,952 $
(20,838)
77,920
(22,009)
Note C—Preferred Stock
As of December 31, 2017, 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.
126
TMK 2017 FORM 10-K
TORCHMARK CORPORATION
SCHEDULE IV. REINSURANCE (CONSOLIDATED)
(Dollar 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,
2017
Life insurance in force ....................... $ 179,902,605 $
Premiums:(2)
705,152 $
3,211,423 $ 182,408,876
Life insurance .................................. $
Health insurance .............................
2,272,038 $
4,437 $
21,912 $
2,289,513
980,082
3,709
—
976,373
Total premium ............................. $
3,252,120 $
8,146 $
21,912 $
3,265,886
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
1.8
1.0
—
0.7
1.9
1.1
—
0.7
2.1
1.2
—
0.8
(1) No amounts have been netted against ceded premium.
(2) Excludes policy charges of $17.0 million, $18.3 million, and $19.3 million in each of the years 2017, 2016, and 2015, respectively.
See accompanying Report of Independent Registered Public Accounting Firm.
127
TMK 2017 FORM 10-K
Pursuant to the requirements of Section 12 or 15(d) of the Securities Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
By:
By:
By:
TORCHMARK CORPORATION
/s/ GARY L. COLEMAN
Gary L. Coleman
Co-Chairman and Chief Executive Officer and Director
/s/ LARRY M. HUTCHISON
Larry M. Hutchison
Co-Chairman and Chief Executive Officer and Director
/s/ FRANK M. SVOBODA
Frank M. Svoboda, Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
Date: February 26, 2018
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:
By:
By:
/s/ CHARLES E. ADAIR *
Charles E. Adair
Director
/s/ LINDA L. ADDISON *
Linda L. Addison
Director
/S/ MARILYN A. ALEXANDER *
Marilyn A. Alexander
Director
/S/ CHERYL D. ALSTON *
Cheryl D. Alston
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
By:
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/ MARY E. THIGPEN *
Mary E. Thigpen
Director
/s/ PAUL J. ZUCCONI *
Paul J. Zucconi
Director
128
TMK 2017 FORM 10-K
Date: February 26, 2018
*By:
/s/ FRANK M. SVOBODA
Frank M. Svoboda
Attorney-in-fact
129
TMK 2017 FORM 10-K
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3700 S. STONEBRIDGE DRIVE
MCKINNEY, TEXAS 75070
WWW.TORCHMARKCORP.COM