Note F—Adoption of New Accounting Standard

The FASB has issued and Torchmark has adopted new guidance concerning policy acquisition costs (ASU 2010-26) as of January 1, 2012. This accounting guidance amends the accounting for costs associated with acquiring or renewing insurance contracts in order to address the diversity in practice surrounding the capitalization and deferral of these costs. As a result of this new standard, certain costs that have been deferred and amortized through deferred acquisition costs are no longer allowed to be deferred and are expensed as incurred. The new guidance limits the deferral of costs to those direct incremental costs related to the successful issuance of an insurance contract, and includes primarily sales commissions, policy issue, and underwriting costs for policies that are successfully issued. Previously, the Company was allowed to defer any cost that varied with and related to the production of new business. For Torchmark, the costs that are no longer deferrable primarily relate to agent distribution systems, and include such costs as training, recruiting, office space, and certain management and underwriting expenses.

Torchmark has adopted the new guidance retroactively, as permitted, meaning the deferred acquisition cost has been written down to a level as if the new guidance had been in effect in prior periods. The reduction in acquisition cost deferrals have caused commissions and expenses to increase. However, as a result of the retroactive writedown, the amortization of previously deferred costs decreased, offsetting the impact of the increased expenses. The method of amortization has not changed due to the adoption. The retroactive adoption of the standard caused the deferred acquisition cost asset to be reduced by $537 million at January 1, 2011 and $568 million at December 31, 2011, while stockholders’ equity was reduced by $349 million and $369 million at January 1, 2011 and December 31, 2011, respectively. Net income for the first six months of 2011 was reduced by $12 million and 2011 first six months earnings per diluted share were reduced by $0.10. The adoption of this guidance causes a delay in the recognition of underwriting profit on newly issued business, but not the ultimate profitability of that business. The adoption had no impact on Torchmark’s cash flows, liquidity, or the statutory earnings of its insurance subsidiaries.

The new guidance further limits the deferral of certain advertising costs associated with the Direct Response operation. Costs related to advertising are generally charged to expense as incurred. However, certain 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. Direct Response advertising costs consist primarily of the production and distribution costs of direct mail advertising materials, and when capitalized are included as a component of deferred acquisition costs. They are amortized in the same manner as other deferred acquisition costs. Direct response advertising costs charged to earnings and included in other operating expense were $8.2 million in the first six months of 2012, compared with $7.3 million in the same period of 2011. Capitalized advertising costs were $1.02 billion at June 30, 2012, compared with $1.00 billion at December 31, 2011.

A roll forward presenting an analysis of the changes in the deferred acquisition costs balances for the 2012 and 2011 periods is as follows:

Deferred Acquisition Costs


	Six months ended June 30,
	2012			2011⁽¹⁾
Balance at beginning of year	$	2,916,732		$	2,869,546
Additions:
Deferred during period:
Commissions		151,360			139,699
Other expenses		84,632			79,290

Total deferred		235,992			218,989
Adjustment attributable to unrealized investment losses ⁽²⁾		6,571			0
Foreign exchange adjustment		76			1,667

Total additions		242,639			220,656
Deductions:
Amortized during period		(193,099	)		(184,127	)
Adjustment attributable to unrealized investment gains ⁽²⁾		0			(5,999	)

Total deductions		(193,099	)		(190,126	)

Balance at end of period	$	2,966,272		$	2,900,076

(1)

The 2011 balances have been retroactively adjusted to give effect to the adoption of the new accounting guidance.

(2)

Represents amounts pertaining to investments relating to universal life-type products.