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, 2013 and 2012 is as follows:


2013:	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	$	428,106	$	362	$	(75,295	)	$	353,173	$	353,173		3	%
States, municipalities, and political subdivisions		1,278,434		69,817		(12,947	)		1,335,304		1,335,304		10
Foreign governments		43,811		411		(67	)		44,155		44,155		0
Corporates		10,133,868		702,867		(300,389	)		10,536,346		10,536,346		82
Collateralized debt obligations		66,173		0		(7,968	)		58,205		58,205		1
Other asset-backed securities		35,568		2,699		(98	)		38,169		38,169		0
Redeemable preferred stocks		502,915		25,064		(14,198	)		513,781		513,781		4

Total fixed maturities		12,488,875		801,220		(410,962	)		12,879,133		12,879,133		100	%

Equity securities		875		1,009		0			1,884		1,884

Total fixed maturities and equity securities	$	12,489,750	$	802,229	$	(410,962	)	$	12,881,017	$	12,881,017


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

At fair value

A schedule of fixed maturities by contractual maturity at December 31, 2013 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	$	102,473	$	104,065
Due from one to five years		494,066		538,995
Due from five to ten years		911,559		979,502
Due from ten to twenty years		3,109,054		3,303,084
Due after twenty years		7,766,780		7,853,621
Mortgage-backed and asset-backed securities		104,943		99,866

	$	12,488,875	$	12,879,133

Analysis of investment operations:


	Year Ended December 31,
	2013			2012			2011

Net investment income is summarized as follows:
Fixed maturities	$	709,756		$	691,229		$	683,101
Equity securities		323			1,178			1,558
Policy loans		33,471			30,717			29,293
Other long-term investments		1,281			2,320			2,439
Short-term investments		138			311			165

		744,969			725,755			716,556
Less investment expense		(35,226	)		(32,111	)		(23,528	)

Net investment income	$	709,743		$	693,644		$	693,028

An analysis of realized gains (losses) from investments is as follows:
Realized investment gains (losses):
Fixed maturities:
Sales and other	$	13,138		$	47,345		$	27,790
Other-than-temporary impairments		0			(5,600	)		(20	)
Equity securities		0			0			0
Loss on redemption of debt		0			(4,109	)		0
Other		(5,148	)		197			(1,866	)

		7,990			37,833			25,904
Applicable tax		(4,025	)		(13,242	)		(9,066	)

Realized gains (losses) from investments, net of tax	$	3,965		$	24,591		$	16,838

An analysis of the net change in unrealized investment gains (losses) is as follows:
Equity securities	$	317		$	(1,489	)	$	(98	)
Fixed maturities available for sale		(1,187,529	)		613,826			856,424

Net change in unrealized gains (losses) on securities		(1,187,212	)		612,337			856,326
Other investments		3,560			2,517			366

Net change in unrealized gains (losses)	$	(1,183,652	)	$	614,854		$	856,692

Additional information about securities sold is as follows:


	At December 31,
	2013			2012			2011
Fixed maturities:
Proceeds from sales	$	133,463		$	345,601		$	236,662	*
Gross realized gains		5,948			40,851			28,249
Gross realized losses		(1,310	)		(2,477	)		(24,323	)

Includes $12.3 million of unsettled trades

Fair value measurements: The following tables represent the fair value of assets measured on a recurring basis at December 31, 2013 and 2012:



	Fair Value Measurements at December 31, 2013 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		$	353,173		$	0		$	353,173
States, municipalities, and political subdivisions		0			1,335,304			0			1,335,304
Foreign governments		0			44,155			0			44,155
Corporates		47,058			10,188,988			300,300			10,536,346
Collateralized debt obligations		0			0			58,205			58,205
Other asset-backed securities		0			38,169			0			38,169
Redeemable preferred stocks		22,220			491,561			0			513,781

Total fixed maturities		69,278			12,451,350			358,505			12,879,133
Equity securities		1,108			0			776			1,884

Total fixed maturities and equity securities	$	70,386		$	12,451,350		$	359,281		$	12,881,017

Percentage of total		0.5	%		96.7	%		2.8	%		100.0	%



Description	Fair Value Measurements at December 31, 2012 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		$	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	%		100.0	%

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*			Equities		Total
Balance at January 1, 2011	$	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 into Level 3		0			0			43,794			0		43,794

Balance at December 31, 2012		7,981			46,571			231,072			739		286,363
Total gains or losses:
Included in realized gains/losses		0			0			0			0		0
Included in other comprehensive income		426			10,083			(17,243	)		37		(6,697	)
Acquisitions		0			0			129,755			0		129,755
Sales		0			0			0			0		0
Amortization		(57	)		2,838			5			0		2,786
Other **		0			(1,287	)		(834	)		0		(2,121	)
Transfers out of Level 3		(8,350	)		0			(42,455	)		0		(50,805	)

Balance at December 31, 2013	$	0		$	58,205		$	300,300		$	776	$	359,281

Includes redeemable preferred stocks

Includes capitalized interest and foreign exchange adjustments.

Acquisitions of Level 3 investments in 2013 and 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, 2013

Fair Value

Valuation
Techniques

Unobservable
Input

Range

Weighted
Average

Collateralized debt obligations

58,205

Discounted
cash flows

Discount
rate

15%

Private placement fixed maturities

300,300

Discounted
cash flows

Credit
rating

BBB- to A+

BBB

Other investments

776

Third-party
pricing without
adjustment

N/A

359,281

The collateral underlying collateralized debt obligations for which fair values are reported as Level 3 consists primarily of trust preferred securities issued by banks and insurance companies. None of the collateral is subprime or Alt-A mortgages (loans for which the typical documentation was not provided by the borrower). Collateralized debt obligations are valued at the present value of expected future cash flows using an unobservable discount rate. Expected cash flows are determined by scheduling the projected repayment of the collateral assuming no future defaults, deferrals, or recoveries. The discount rate is risk-adjusted to take these items into account. A significant increase (decrease) in the discount rate will produce a significant decrease (increase) in fair value. Additionally, a significant increase (decrease) in the cash flow expectations would result in a significant increase (decrease) in fair value.

The private 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 considered unobservable inputs, as they are assigned by the third party investment manager based on a quantitative and qualitative assessment of the credit underwritten. A higher (lower) credit rating would result in a higher (lower) valuation. For more information regarding valuation procedures, please refer to Note 1 — Significant Accounting Policies under the caption Fair Value Measurements, Investments in Securities.

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


	2013								2012								2011
	In		Out			Net			In		Out			Net			In		Out			Net
Level 1	$	19,416	$	0		$	19,416		$	48,536	$	0		$	48,536		$	0	$	0		$	0
Level 2		50,805		(19,416	)		31,389			0		(92,330	)		(92,330	)		51,886		0			51,886
Level 3		0		(50,805	)		(50,805	)		43,794		0			43,794			0		(51,886	)		(51,886	)

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, 2013. 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


	2013				2012				2011
	Net Income		Other Comprehensive Income		Net Income		Other Comprehensive Income		Net Income		Other Comprehensive Income
Collateralized debt obligations	$	0	$	0	$	0	$	0	$	0	$	0
Corporate bonds		0		0		5,600		0		20		0

Total pre-tax	$	0	$	0	$	5,600	$	0	$	20	$	0

After tax	$	0	$	0	$	3,640	$	0	$	13	$	0

As of year end 2013, previously written down securities remaining in the portfolio were carried at a fair value of $42 million. Otherwise, as of December 31, 2013, 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, 2013, December 31, 2012, and December 31, 2011. There was no change in this balance since January 1, 2011.

Unrealized gains/loss analysis. Conditions in financial markets improved during 2011 and 2012, resulting in increases in net unrealized gains in the portfolio in both years. In 2011, net unrealized gains rose from $108 million in the beginning of the year to $964 million at December 31, and then further increased to $1.6 billion at December 31, 2012. In 2013, however, increases in interest rates in financial markets caused the net unrealized gain balances to decline to $390 million at December 31, 2013. At December 31, 2013, investments in securities in the financial sector were in a $180 million net unrealized gain position. These investments in the financial sector represented 25% of the portfolio at amortized cost and 26% at fair value. This is compared with a net unrealized gain position of $339 million at the end of the prior year. Investments and securities in the other sectors had net unrealized gains of $210 million at year end 2013 and $1.2 billion at year end 2012. The following tables disclose gross unrealized investment losses by class of investment at December 31, 2013 and December 31, 2012 for the period of time in a loss position. Torchmark considers these investments to be only temporarily impaired.

ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES

At December 31, 2013


	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:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	242,144	$	(42,885	)	$	87,977	$	(32,410	)	$	330,121	$	(75,295	)
States, municipalities and political subdivisions		167,660		(12,807	)		1,619		(140	)		169,279		(12,947	)
Foreign governments		11,966		(67	)		0		0			11,966		(67	)
Corporates		2,692,494		(196,139	)		600,350		(104,250	)		3,292,844		(300,389	)
Collateralized debt obligations		0		0			58,080		(7,968	)		58,080		(7,968	)
Other asset-backed securities		6,974		(26	)		3,873		(72	)		10,847		(98	)
Redeemable preferred stocks		106,229		(3,694	)		82,287		(10,504	)		188,516		(14,198	)

Total fixed maturities	$	3,227,467	$	(255,618	)	$	834,186	$	(155,344	)	$	4,061,653	$	(410,962	)

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:
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	)

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, 2013		462		130		592
As of December 31, 2012		195		95		290

Torchmark’s entire fixed-maturity and equity portfolio consisted of 1,619 issues at December 31, 2013 and 1,630 issues at December 31, 2012. The weighted-average quality rating of all unrealized loss positions as of December 31, 2013 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,
	2013		2012
Mortgage loans, at cost	$	0	$	514
Investment real estate, at depreciated cost		203		2,816
Low-income housing interests		7,589		9,875
Other		5,415		5,334

Total	$	13,207	$	18,539

The fair value for mortgages was approximately $0.5 million at December 31, 2012. Accumulated depreciation on investment real estate was $1.7 million at December 31, 2013 and $2.1 million at December 31, 2012.

Torchmark had $125 thousand in fixed maturities at book value ($126 thousand at fair value) that were non-income producing during the twelve months ended December 31, 2013. Torchmark did not have any other invested assets that were non-income producing during the twelve months ended December 31, 2013.