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 $2.0 million per life. Life insurance ceded represented .5% of total life insurance in force at December 31, 2013. Insurance ceded on life and accident and health products represented .3% of premium income for 2013. Torchmark would be liable for the reinsured risks ceded to other companies to the extent that such reinsuring companies are unable to meet their obligations.

Insurance affiliates also assume insurance risks of other companies. Life reinsurance assumed represented 2.5% of life insurance in force at December 31, 2013 and reinsurance assumed on life and accident and health products represented .9% of premium income for 2013.

Leases: Torchmark leases office space and office equipment under a variety of operating lease arrangements. Rental expense for operating leases was $4.1 million in 2013, $3.6 million in 2012, and $4.8 million in 2011. Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 2013 were as follows: 2014, $3.4 million; 2015, $3.3 million; 2016, $1.9 million; 2017, $1.1 million; 2018, $1.0 million and in the aggregate, $11.4 million.

Low-Income Housing Tax Credit Interests: As described in Note 1, Torchmark had $290 million invested in entities which provide certain tax benefits at December 31, 2013. As of December 31, 2013, Torchmark remained obligated under these commitments for $58 million, of which $41 million is due in 2014, $8 million in 2015, $0 million in 2016, and $9 million thereafter.

Investment Commitment: As of December 31, 2013, Torchmark had committed to purchase $33.8 million of private placement investments.

Concentrations of Credit Risk: Torchmark maintains a diversified investment portfolio with limited concentration in any given issuer. At December 31, 2013, the investment portfolio, at fair value, consisted of the following:


Investment-grade corporate securities	79	%
Securities of state and municipal governments	10
Below-investment-grade securities	4
Policy loans, which are secured by the underlying insurance policy values	3
Government-sponsored enterprises	2
Other fixed maturities, equity securities, mortgages, real estate, other long-term investments, and short-term investments	2

	100	%

As of December 31, 2013, securities of state and municipal governments represented 10% of invested assets at fair value. Such investments are made throughout the U.S. At year-end 2013, 5% or more of the state and municipal bond portfolio at fair value was invested in securities issued within the following states: Texas (31%), Ohio (7%), Washington (7%), Illinois (6%), and Alabama (5%). Otherwise, there was no significant concentration within any given state.

Corporate debt and equity investments are made in a wide range of industries. Below are the ten largest industry concentrations held in the corporate portfolio at December 31, 2013, based on fair value:


Insurance	17	%
Electric utilities and services	17	%
Pipelines	7	%
Banks	6	%
Oil and gas extraction	6	%
Transportation	5	%
Mining	4	%
Chemicals	4	%
Telecommunications	3	%
REITs	3	%

At year-end 2013, 4% of invested assets at fair value was represented by fixed maturities rated below investment grade (BB or lower as determined by the weighted average of available ratings from rating services). Par value of these investments was $681 million, amortized cost was $566 million, and fair value was $523 million. While these investments could be subject to additional credit risk, such risk should generally be reflected in their fair value.

Collateral Requirements: Torchmark requires collateral for investments in instruments where collateral is available and is typically required because of the nature of the investment. Torchmark’s mortgages are secured by the underlying real estate.

Guarantees: At December 31, 2013, Torchmark had in place three 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, 2013, 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. 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 2015. The maximum amount of letters of credit available is $250 million. Torchmark (parent company) would be liable to the extent that TMK Re, Ltd. does not pay the reinsured party. At December 31, 2013, $198 million of letters of credit were outstanding.

Equipment leases: Torchmark has guaranteed performance of a subsidiary as lessee under two leasing arrangements for aviation equipment. One of the leases expires in January, 2017 and the other expires in August, 2019. At December 31, 2013, total remaining undiscounted payments under the leases were approximately $6.5 million. 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 Company liability. These audits are wide-ranging, and seek large amounts of data regarding claims handling, procedures, and payments of contract benefits arising from unreported death claims. Additionally, the Torchmark subsidiary companies are the subject of multiple regulatory departments’ inquiries and examinations with similar focus on abandoned property and unreported claims, but also which deal with the accounting for general expenses, commissions, and other payments. These audits and examinations could result in additional payments to insurance beneficiaries, the escheatment of abandoned property to various states, and/or possible administrative penalties. Amounts that could be payable to insurance beneficiaries and to the states for the escheatment of abandoned property represent insurance liabilities and are included in the Company’s estimate of policy benefits under the caption “Total policy liabilities” on the Consolidated Balance Sheets. No estimate of range can be made for loss contingencies related to possible administrative penalties at this time.

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.

In January 2013, the West Virginia Treasurer filed actions against Torchmark subsidiaries, United American, Globe and American Income in the Circuit Court of Putnam County, West Virginia (State of West Virginia ex rel. John D. Perdue v. United American Insurance Company, et al, Civil Action No. 12-C-439). The actions, which also name numerous other unaffiliated insurance companies, allege violations of the West Virginia Uniform Unclaimed Property Act and seek to compel compliance with that Act through the reporting and remittance of unclaimed life insurance proceeds to the State Treasurer as administrator of the West Virginia Unclaimed Property Fund. This litigation was stayed as to these Torchmark subsidiaries pending completion of the unclaimed property audits being conducted by various State Departments of Revenue, discussed more fully under the caption Unclaimed Property Audits in this footnote, and a motion to dismiss the West Virginia litigation was subsequently granted as to all defendants in the case by the Court in January 2014. West Virginia has filed an appeal of this decision and thus, the stay of the litigation against the Torchmark subsidiaries has been reinstated.

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.