Investments

12 Months Ended

Dec. 31, 2012

Investments

Note 4—Investments

Portfolio Composition:

A summary of fixed maturities available for sale and equity securities by cost or amortized cost and estimated fair value at December 31, 2012 and 2011 is as follows:

2012:	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amount per the Balance Sheet		% of Total Fixed Maturities*
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	492,928	$	1,948	$	(4,773	)	$	490,103	$	490,103		4	%
States, municipalities, and political subdivisions		1,283,883		173,649		(189	)		1,457,343		1,457,343		11
Foreign governments		33,577		988		0			34,565		34,565		0
Corporates		9,309,408		1,442,638		(55,023	)		10,697,023		10,697,023		79
Collateralized debt obligations		64,622		0		(18,051	)		46,571		46,571		0
Other asset-backed securities		43,560		3,708		(401	)		46,867		46,867		0
Redeemable preferred stocks		735,428		43,897		(10,604	)		768,721		768,721		6
Total fixed maturities		11,963,406		1,666,828		(89,041	)		13,541,193		13,541,193		100	%
Equity securities		14,875		692		0			15,567		15,567
Total fixed maturities and equity securities	$	11,978,281	$	1,667,520	$	(89,041	)	$	13,556,760	$	13,556,760
2011:	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amount per the Balance Sheet		% of Total Fixed Maturities*
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	65,283	$	1,756	$	(4	)	$	67,035	$	67,035		1	%
States, municipalities, and political subdivisions		1,213,082		118,636		(1,896	)		1,329,822		1,329,822		11
Foreign governments		21,832		1,327		0			23,159		23,159		0
Corporates		8,357,809		1,051,019		(137,908	)		9,270,920		9,270,920		78
Collateralized debt obligations		60,437		0		(30,117	)		30,320		30,320		0
Other asset-backed securities		42,862		3,210		(1,392	)		44,680		44,680		0
Redeemable preferred stocks		1,162,939		27,184		(67,854	)		1,122,269		1,122,269		10
Total fixed maturities		10,924,244		1,203,132		(239,171	)		11,888,205		11,888,205		100	%
Equity securities		14,875		2,244		(63	)		17,056		17,056
Total fixed maturities and equity securities	$	10,939,119	$	1,205,376	$	(239,234	)	$	11,905,261	$	11,905,261

* At fair value

A schedule of fixed maturities by contractual maturity at December 31, 2012 is shown below on an amortized cost basis and on a fair value basis. Actual maturities could differ from contractual maturities due to call or prepayment provisions.

	Amortized Cost		Fair Value
Fixed maturities available for sale:
Due in one year or less	$	113,013	$	116,074
Due from one to five years		436,514		473,976
Due from five to ten years		876,057		991,262
Due from ten to twenty years		2,742,186		3,163,562
Due after twenty years		7,683,337		8,698,281
Mortgage-backed and asset-backed securities		112,299		98,038
	$	11,963,406	$	13,541,193

Analysis of investment operations:

	Year Ended December 31,
	2012			2011			2010
Net investment income is summarized as follows:
Fixed maturities	$	691,229		$	683,101		$	662,202
Equity securities		1,178			1,558			1,183
Policy loans		30,717			29,293			27,248
Other long-term investments		2,320			2,439			3,064
Short-term investments		311			165			762
		725,755			716,556			694,459
Less investment expense		(32,111	)		(23,528	)		(18,095	)
Net investment income	$	693,644		$	693,028		$	676,364
An analysis of realized gains (losses) from investments is as follows:
Realized investment gains (losses):
Fixed maturities:
Sales and other	$	47,345		$	27,790		$	43,022
Writedowns		(5,600	)		(20	)		(4,850	)
Equity securities		0			0			1
Loss on redemption of debt		(4,109	)		0			(1,646	)
Other		197			(1,866	)		813
		37,833			25,904			37,340
Applicable tax		(13,242	)		(9,066	)		(13,070	)
Realized gains (losses) from investments, net of tax	$	24,591		$	16,838		$	24,270
An analysis of the net change in unrealized investment gains (losses) is as follows:
Equity securities	$	(1,489	)	$	(98	)	$	432
Fixed maturities available for sale		613,826			856,424			562,921
Net change in unrealized gains (losses) on securities	$	612,337		$	856,326		$	563,353

Additional information about securities sold is as follows:

	At December 31,
	2012			2011			2010
Fixed maturities:
Proceeds from sales	$	345,601		$	236,662	*	$	314,904	**
Gross realized gains		40,851			28,249			29,821
Gross realized losses		(2,477	)		(24,323	)		(13,361	)
Equities:
Proceeds from sales		0			0			1
Gross realized gains		0			0			1
Gross realized losses		0			0			0

* Includes $12.3 million of unsettled trades

** Proceeds from sales including discontinued operations were $326 million in 2010.

Fair value measurements: The following tables represent the fair value of assets measured on a recurring basis at December 31, 2012 and 2011:

Description	Fair Value Measurements at December 31, 2012 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
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	0		$	490,103		$	0		$	490,103
States, municipalities and political subdivisions		0			1,457,343			0			1,457,343
Foreign governments		0			34,565			0			34,565
Corporates		31,976			10,443,526			221,521			10,697,023
Collateralized debt obligations		0			0			46,571			46,571
Other asset-backed securities		0			38,886			7,981			46,867
Redeemable preferred stocks		128,473			630,697			9,551			768,721
Total fixed maturities		160,449			13,095,120			285,624			13,541,193
Equity securities		14,828			0			739			15,567
Total fixed maturities and equity securities	$	175,277		$	13,095,120		$	286,363		$	13,556,760
Percent of total		1.3	%		96.6	%		2.1	%		100	%

	Fair Value Measurements at December 31, 2011 Using:
Description	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Fixed maturities available for sale:
Bonds:		`
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	0		$	67,035		$	0		$	67,035
States, municipalities, and political subdivisions		0			1,329,822			0			1,329,822
Foreign governments		0			23,159			0			23,159
Corporates		28,092			9,231,578			11,250			9,270,920
Collateralized debt obligations		0			0			30,320			30,320
Other asset-backed securities		0			37,558			7,122			44,680
Redeemable preferred stocks		217,613			904,656			0			1,122,269
Total fixed maturities		245,705			11,593,808			48,692			11,888,205
Equity securities		16,346			0			710			17,056
Total fixed maturities and equity securities	$	262,051		$	11,593,808		$	49,402		$	11,905,261
Percentage of total		2.2	%		97.4	%		0.4	%		100.0	%

The following table represents changes in assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

	Analysis of Changes in Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Asset- backed securities			Collateralized debt Obligations			Corporates*			Other			Total
Balance at January 1, 2010	$	7,981		$	18,037		$	71,764		$	5,836		$	103,618
Total gains or losses:
Included in realized gains/losses		0			(1,712	)		1,504			708			500
Included in other comprehensive income		255			2,445			14,711			(534	)		16,877
Sales		0			0			(5,862	)		(2,331	)		(8,193	)
Amortization		(194	)		2,333			2,536			(1	)		4,674
Other **		0			1,353			0			0			1,353
Transfers out of Level 3		0			0			(10,980	)		(3,008	)		(13,988	)
Balance at December 31, 2010		8,042			22,456			73,673			670		$	104,841
Total gains or losses:
Included in realized gains/losses		0			0			(12,542	)		0			(12,542	)
Included in other comprehensive income		(714	)		3,952			14,578			40			17,856
Sales		0			0			(13,875	)		0			(13,875	)
Amortization		(206	)		2,470			1,302			0			3,566
Other **		0			1,442			0			0			1,442
Transfers out of Level 3		0			0			(51,886	)		0			(51,886	)
Balance at December 31, 2011		7,122			30,320			11,250			710			49,402
Total gains or losses:
Included in realized gains/losses		0			0			1,482			0			1,482
Included in other comprehensive income		1,078			12,067			3,600			29			16,774
Acquisitions		0			0			183,676			0			183,676
Sales		0			0			(13,429	)		0			(13,429	)
Amortization		(219	)		2,648			699			0			3,128
Other **		0			1,536			0			0			1,536
Transfers out of Level 3		0			0			43,794			0			43,794
Balance at December 31, 2012	$	7,981		$	46,571		$	231,072		$	739		$	286,363

* Includes redeemable preferred stocks

** Includes capitalized interest and foreign exchange adjustments.

The collateral underlying collateralized debt obligations for which fair values are reported as Level 3 consists primarily of trust preferred securities issued by banks and insurance companies. None of the collateral is subprime or Alt-A mortgages (loans for which the typical documentation was not provided by the borrower). Acquisitions in 2012 are comprised of private-placement fixed maturities managed by an unaffiliated third-party.

Quantitative Information about Level 3

Fair Value Measurements

As of December 31, 2012

	Fair Value		Valuation Techniques	Unobservable Input	Range	Weighted Average
Collateralized debt obligations	$	46,571	Discounted cash flows	Discount rate	15%	15%
Private placement fixed maturities		182,946	Discounted cash flows	Credit rating	BBB-to BBB+	BBB
Other investments		56,846	Third-party pricing without adjustment	N/A	N/A	N/A
	$	286,363

Collateralized debt obligations are valued at the present value of expected future cash flows using an unobservable discount rate. Expected cash flows are determined by scheduling the projected repayment of the collateral assuming no future defaults, deferrals, or recoveries. The discount rate is risk-adjusted to take these items into account. A significant increase (decrease) in the discount rate will produce a significant decrease (increase) in fair value. Additionally, a significant increase (decrease) in the cash flow expectations would result in a significant increase (decrease) in fair value. The private placements are also valued based on discounted cash flows, resulting from the contractual cash flows discounted by a yield determined as a treasury benchmark adjusted for a credit spread. The credit spread is developed from observable indices for similar public fixed maturities and unobservable indices for private fixed maturities for corresponding credit ratings. However, the credit ratings for the private placements are unobservable inputs, and are assigned by the third party provider based on a quantitative and qualitative assessment of the credit underwritten. A higher (lower) credit rating would result in a higher (lower) valuation. For more information regarding valuation procedures, please refer to Note 1 — Significant Accounting Policies under the caption Fair Value Measurements, Investments in Securities.

The following table presents transfers in and out of each of the valuation levels of fair values.

	2012								2011								2010
	In		Out			Net			In		Out			Net			In		Out			Net
Level 1	$	48,536	$	0		$	48,536		$	0	$	0		$	0		$	54	$	(4,848	)	$	(4,794	)
Level 2		0		(92,330	)		(92,330	)		51,886		0			51,886			18,836		(54	)		18,782
Level 3		43,794		0			43,794			0		(51,886	)		(51,886	)		0		(13,988	)		(13,988	)

Transfers into Level 2 from Level 3 result from the availability of observable market data when a security is valued at the end of a period. Transfers into Level 3 occur when there is a lack of observable market information. Transfers into Level 1 from Level 2 occur when direct quotes are available; transfers from Level 1 into Level 2 result when only observable market data and no direct quotes are available.

Other-than-temporary impairments: Torchmark has determined that certain of its holdings in fixed maturity investments were other-than-temporarily impaired during the three years ended December 31, 2012. The following table presents the writedowns recorded due to these impairments in accordance with accounting guidance and whether the writedown was charged to earnings or other comprehensive income.

Writedowns for Other-Than-Temporary Impairments

	2012				2011				2010
	Net Income		Other Comprehensive Income		Net Income		Other Comprehensive Income		Net Income		Other Comprehensive Income
Collateralized debt obligations	$	0	$	0	$	0	$	0	$	1,712	$	0
Corporate bonds		5,600		0		20		0		3,138		0
Total pre-tax	$	5,600	$	0	$	20	$	0	$	4,850	$	0
After tax	$	3,640	$	0	$	13	$	0	$	3,152	$	0

As of year end 2012, previously written down securities remaining in the portfolio were carried at a fair value of $48 million. Otherwise, as of December 31, 2012, Torchmark has no information available to cause it to believe that any of its investments are other-than-temporarily impaired. Torchmark has the ability and intent to hold these investments to recovery, and does not intend to sell nor expects to be required to sell its other impaired securities.

Bifurcated credit losses result when there is an other-than-temporary impairment for which a portion of the loss is recognized in other comprehensive income. Torchmark’s balances related to bifurcated credit loss positions included in other comprehensive income were $22 million at December 31, 2012, December 31, 2011, and December 31, 2010. There was no change in this balance since January 1, 2010.

Unrealized gain/loss analysis.    As conditions in financial markets have improved since 2009, unrealized gains in the portfolio have occurred and losses have declined. Net unrealized losses on fixed maturities of $455 million at December 31, 2009 became net unrealized gains of $108 million at December 31, 2010. During 2011, net unrealized gains rose to $964 million at December 31, 2011 and to $1.6 billion at December 31, 2012. At December 31, 2012, investments in securities in the financial sector were in a $339 million unrealized gain position compared with an unrealized gain position of $14 million at December 31, 2011. Investments in securities in the other sectors had net unrealized gains of $1.2 billion in 2012 and $950 million in 2011. The following tables disclose gross unrealized investment losses by class of investment at December 31, 2012 and December 31, 2011. Torchmark considers these investments to be only temporarily impaired.

ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES

At December 31, 2012

	Less than Twelve Months					Twelve Months or Longer					Total
Description of Securities	Fair   Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	316,596	$	(4,770	)	$	199	$	(3	)	$	316,795	$	(4,773	)
States, municipalities and political subdivisions		26,206		(189	)		0		0			26,206		(189	)
Foreign governments		0		0			0		0			0		0
Corporates		761,477		(15,339	)		343,987		(39,684	)		1,105,464		(55,023	)
Collateralized debt obligations		0		0			46,446		(18,051	)		46,446		(18,051	)
Other asset-backed securities		7,940		(88	)		7,981		(313	)		15,921		(401	)
Redeemable preferred stocks		44,132		(310	)		171,852		(10,294	)		215,984		(10,604	)
Total fixed maturities		1,156,351		(20,696	)		570,465		(68,345	)		1,726,816		(89,041	)
Equity securities		0		0			0		0			0		0
Total fixed maturities and equity securities	$	1,156,351	$	(20,696	)	$	570,465	$	(68,345	)	$	1,726,816	$	(89,041	)

ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES

At December 31, 2011

	Less than Twelve Months					Twelve Months or Longer					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	279	$	(3	)	$	34	$	(1	)	$	313	$	(4	)
States, municipalities and political subdivisions		0		0			17,609		(1,896	)		17,609		(1,896	)
Foreign governments		0		0			0		0			0		0
Corporates		585,265		(38,249	)		612,338		(99,659	)		1,197,603		(137,908	)
Collateralized debt obligations		0		0			30,320		(30,117	)		30,320		(30,117	)
Other asset-backed securities		0		0			7,122		(1,392	)		7,122		(1,392	)
Redeemable preferred stocks		205,449		(14,250	)		367,450		(53,604	)		572,899		(67,854	)
Total fixed maturities		790,993		(52,502	)		1,034,873		(186,669	)		1,825,866		(239,171	)
Equity securities		386		(63	)		0		0			386		(63	)
Total fixed maturities and equity securities	$	791,379	$	(52,565	)	$	1,034,873	$	(186,669	)	$	1,826,252	$	(239,234	)

Additional information about investments in an unrealized loss position is as follows:

	Less than Twelve Months		Twelve Months or Longer		Total
Number of issues (Cusip numbers) held:
As of December 31, 2012		195		95		290
As of December 31, 2011		117		93		210

Torchmark’s entire fixed-maturity and equity portfolio consisted of 1,630 issues at December 31, 2012 and 1,373 issues at December 31, 2011. The weighted-average quality rating of all unrealized loss positions as of December 31, 2012 was BBB+, compared with BBB- a year earlier. The weighted-average quality ratings are based on amortized cost.

Other investment information:

Other long-term investments consist of the following:

	December 31,
	2012		2011
Mortgage loans, at cost	$	514	$	551
Investment real estate, at depreciated cost		2,816		3,165
Low-income housing interests		9,875		12,188
Collateral loans		0		7,598
Other		5,334		2,665
Total	$	18,539	$	26,167

The fair value for mortgages was approximately $0.5 million at December 31, 2012 and $0.6 million at December 31, 2011. The fair value for collateral loans was approximately $7 million at December 31, 2011. Accumulated depreciation on investment real estate was $2.1 million at December 31, 2012 and $1.8 million at December 31, 2011.

Torchmark had $125 thousand in fixed maturities at book value ($150 thousand at fair value) that were non-income producing during the twelve months ended December 31, 2012. Torchmark had $2.6 million in investment real estate at December 31, 2012 which was non-income producing during the previous twelve months. Torchmark did not have any other invested assets that were non-income producing during the twelve months ended December 31, 2012.