UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2014
Commission File Number 1-8052
TORCHMARK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE | 63-0780404 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
3700 South Stonebridge Drive, McKinney, Texas | 75070 | |
Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code (972) 569-4000
NONE
Former name, former address and former fiscal year, if changed since last report.
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.
Yes x 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding for each of the issuers classes of common stock, as of the last practicable date.
CLASS |
OUTSTANDING AT October 27, 2014 | |
Common Stock, $1.00 Par Value |
128,643,163 |
Index of Exhibits (Page 58).
Total number of pages included are 59.
TORCHMARK CORPORATION
Item 1. | Financial Statements |
TORCHMARK CORPORATION
(Dollar amounts in thousands except per share data)
September 30, 2014 |
December 31, 2013 * |
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Assets | (Unaudited) | |||||||
Investments: |
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Fixed maturities, available for sale, at fair value (amortized cost: 2014$12,728,196 ; 2013$12,488,875) |
$ | 14,153,044 | $ | 12,879,133 | ||||
Equity securities, at fair value (cost: 2014$776 ; 2013$875) |
1,417 | 1,884 | ||||||
Policy loans |
464,999 | 448,887 | ||||||
Other long-term investments |
11,613 | 13,207 | ||||||
Short-term investments |
79,097 | 76,890 | ||||||
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Total investments |
14,710,170 | 13,420,001 | ||||||
Cash |
66,998 | 36,943 | ||||||
Accrued investment income |
211,250 | 200,038 | ||||||
Other receivables |
499,876 | 331,103 | ||||||
Deferred acquisition costs |
3,433,890 | 3,337,649 | ||||||
Goodwill |
441,591 | 441,591 | ||||||
Other assets |
506,732 | 424,419 | ||||||
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Total assets |
$ | 19,870,507 | $ | 18,191,744 | ||||
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Liabilities and Shareholders Equity |
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Liabilities: |
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Future policy benefits |
$ | 11,638,992 | $ | 11,256,155 | ||||
Unearned and advance premiums |
74,202 | 74,174 | ||||||
Policy claims and other benefits payable |
227,421 | 223,380 | ||||||
Other policyholders funds |
96,558 | 94,286 | ||||||
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Total policy liabilities |
12,037,173 | 11,647,995 | ||||||
Current and deferred income taxes payable |
1,695,854 | 1,285,574 | ||||||
Other liabilities |
325,458 | 261,898 | ||||||
Short-term debt |
290,422 | 229,070 | ||||||
Long-term debt (fair value: 2014$1,144,199 ; 2013$1,131,391) |
991,808 | 990,865 | ||||||
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Total liabilities |
15,340,715 | 14,415,402 | ||||||
Shareholders equity: |
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Preferred stock, par value $1 per shareAuthorized 5,000,000 shares; outstanding: -0- in 2014 and in 2013 |
0 | 0 | ||||||
Common stock, par value $1 per shareAuthorized 320,000,000 shares; outstanding: (2014139,218,183 issued, less 9,950,088 held in treasury and 2013151,218,183 issued, less 16,965,802 held in treasury) |
139,218 | 151,218 | ||||||
Additional paid-in capital |
460,022 | 462,058 | ||||||
Accumulated other comprehensive income (loss) |
882,827 | 210,981 | ||||||
Retained earnings |
3,443,803 | 3,495,533 | ||||||
Treasury stock, at cost |
(396,078 | ) | (543,448 | ) | ||||
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Total shareholders equity |
4,529,792 | 3,776,342 | ||||||
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Total liabilities and shareholders equity |
$ | 19,870,507 | $ | 18,191,744 | ||||
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* | Derived from audited financial statements |
See accompanying Notes to Consolidated Financial Statements.
1
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands except per share data)
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenue: |
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Life premium |
$ | 491,724 | $ | 470,936 | $ | 1,472,734 | $ | 1,416,859 | ||||||||
Health premium |
293,879 | 279,948 | 931,533 | 884,403 | ||||||||||||
Other premium |
112 | 114 | 334 | 401 | ||||||||||||
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Total premium |
785,715 | 750,998 | 2,404,601 | 2,301,663 | ||||||||||||
Net investment income |
182,101 | 176,656 | 545,978 | 531,459 | ||||||||||||
Realized investment gains (losses) |
(1,483 | ) | 4,459 | 15,713 | 9,143 | |||||||||||
Other-than-temporary impairments |
0 | 0 | 0 | (2,678 | ) | |||||||||||
Other income |
668 | 676 | 1,812 | 1,757 | ||||||||||||
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Total revenue |
967,001 | 932,789 | 2,968,104 | 2,841,344 | ||||||||||||
Benefits and expenses: |
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Life policyholder benefits |
328,116 | 305,931 | 972,484 | 921,921 | ||||||||||||
Health policyholder benefits |
196,901 | 199,983 | 673,173 | 638,971 | ||||||||||||
Other policyholder benefits |
10,515 | 10,869 | 31,599 | 32,393 | ||||||||||||
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Total policyholder benefits |
535,532 | 516,783 | 1,677,256 | 1,593,285 | ||||||||||||
Amortization of deferred acquisition costs |
103,834 | 98,444 | 313,128 | 302,646 | ||||||||||||
Commissions, premium taxes, and non-deferred acquisition costs |
63,636 | 53,791 | 185,034 | 166,490 | ||||||||||||
Other operating expense |
55,402 | 53,245 | 168,758 | 160,845 | ||||||||||||
Interest expense |
19,033 | 19,676 | 57,119 | 61,381 | ||||||||||||
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Total benefits and expenses |
777,437 | 741,939 | 2,401,295 | 2,284,647 | ||||||||||||
Income before income taxes |
189,564 | 190,850 | 566,809 | 556,697 | ||||||||||||
Income taxes |
(57,152 | ) | (58,728 | ) | (170,618 | ) | (171,042 | ) | ||||||||
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Net income |
$ | 132,412 | $ | 132,122 | $ | 396,191 | $ | 385,655 | ||||||||
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Basic net income per share |
$ | 1.02 | $ | 0.97 | $ | 3.01 | $ | 2.78 | ||||||||
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Diluted net income per share |
$ | 1.00 | $ | 0.95 | $ | 2.97 | $ | 2.75 | ||||||||
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Dividends declared per common share |
$ | 0.13 | $ | 0.11 | $ | 0.38 | $ | 0.34 | ||||||||
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See accompanying Notes to Consolidated Financial Statements.
2
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited and in thousands)
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2014 | 2013 | 2014 | 2013 | |||||||||||||
Net income |
$ | 132,412 | $ | 132,122 | $ | 396,191 | $ | 385,655 | ||||||||
Other comprehensive income (loss): |
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Unrealized gains (losses) on securities: |
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Unrealized holding gains (losses) arising during period |
(2,627 | ) | (152,039 | ) | 1,057,710 | (1,077,967 | ) | |||||||||
Reclassification adjustment for (gains) losses on securities included in net income |
1,261 | (4,520 | ) | (15,935 | ) | (7,871 | ) | |||||||||
Reclassification adjustment for amortization of (discount) and premium |
(2,354 | ) | (1,478 | ) | (6,898 | ) | (4,939 | ) | ||||||||
Foreign exchange adjustment on securities recorded at fair value |
(523 | ) | (4,097 | ) | (654 | ) | 6,036 | |||||||||
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Unrealized gains (losses) on securities |
(4,243 | ) | (162,134 | ) | 1,034,223 | (1,084,741 | ) | |||||||||
Unrealized gains (losses) on other investments |
63 | 1,754 | 2,766 | (1,115 | ) | |||||||||||
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Total unrealized investment gains (losses) |
(4,180 | ) | (160,380 | ) | 1,036,989 | (1,085,856 | ) | |||||||||
Less applicable taxes |
1,478 | 56,150 | (362,872 | ) | 381,262 | |||||||||||
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Unrealized investment gains (losses), net of tax |
(2,702 | ) | (104,230 | ) | 674,117 | (704,594 | ) | |||||||||
Unrealized gains (losses) attributable to deferred acquisition costs |
693 | 2,565 | (6,580 | ) | 13,128 | |||||||||||
Less applicable taxes |
(243 | ) | (898 | ) | 2,303 | (4,595 | ) | |||||||||
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Unrealized gains (losses) attributable to deferred acquisition costs, net of tax |
450 | 1,667 | (4,277 | ) | 8,533 | |||||||||||
Foreign exchange translation adjustments, other than securities |
(6,650 | ) | 4,138 | (4,642 | ) | (1,698 | ) | |||||||||
Less applicable taxes |
2,084 | (1,324 | ) | 1,334 | 686 | |||||||||||
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Foreign exchange translation adjustments, other than securities, net of tax |
(4,566 | ) | 2,814 | (3,308 | ) | (1,012 | ) | |||||||||
Pension adjustments |
2,571 | 4,605 | 8,176 | 13,756 | ||||||||||||
Less applicable taxes |
(900 | ) | (1,613 | ) | (2,862 | ) | (4,815 | ) | ||||||||
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Pension adjustments, net of tax |
1,671 | 2,992 | 5,314 | 8,941 | ||||||||||||
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Other comprehensive income (loss) |
(5,147 | ) | (96,757 | ) | 671,846 | (688,132 | ) | |||||||||
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Comprehensive income (loss) |
$ | 127,265 | $ | 35,365 | $ | 1,068,037 | $ | (302,477 | ) | |||||||
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See accompanying Notes to Consolidated Financial Statements.
3
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
Nine Months Ended September 30, |
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2014 | 2013 | |||||||
Cash provided from operations |
$ | 644,398 | $ | 771,143 | ||||
Cash provided from (used for) investment activities: |
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Long-term investments sold or matured: |
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Fixed maturities available for salesold |
56,447 | 78,751 | ||||||
Fixed maturities available for salematured, called, and repaid |
217,929 | 453,216 | ||||||
Equity securities |
700 | 14,000 | ||||||
Other long-term investments |
70 | 67 | ||||||
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Total long-term investments sold or matured |
275,146 | 546,034 | ||||||
Long-term investments acquired: |
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Fixed maturities |
(499,950 | ) | (792,562 | ) | ||||
Other long-term investments |
0 | (571 | ) | |||||
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Total long-term investments acquired |
(499,950 | ) | (793,133 | ) | ||||
Net increase in policy loans |
(16,112 | ) | (17,817 | ) | ||||
Net (increase) decrease in short-term investments |
(2,207 | ) | (41,128 | ) | ||||
Net change in payable or receivable for securities |
0 | (43,989 | ) | |||||
Disposition of properties |
54 | 557 | ||||||
Additions to properties |
(14,482 | ) | (4,364 | ) | ||||
Investment in low-income housing interests |
(39,279 | ) | (34,463 | ) | ||||
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Cash used for investment activities |
(296,830 | ) | (388,303 | ) | ||||
Cash provided from (used for) financing activities: |
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Proceeds from exercise of stock options |
39,557 | 73,122 | ||||||
Repayment of 7.375% Notes |
0 | (94,050 | ) | |||||
Net borrowings (repayments) of commercial paper |
61,352 | 2,840 | ||||||
Excess tax benefit from stock option exercises |
12,484 | 14,669 | ||||||
Acquisition of treasury stock |
(342,084 | ) | (342,820 | ) | ||||
Cash dividends paid to shareholders |
(48,628 | ) | (45,487 | ) | ||||
Net receipts (withdrawals) from deposit-type products |
(49,431 | ) | (16,734 | ) | ||||
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Cash provided by (used for) financing activities |
(326,750 | ) | (408,460 | ) | ||||
Effect of foreign exchange rate changes on cash |
9,237 | 2,702 | ||||||
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Net increase (decrease) in cash |
30,055 | (22,918 | ) | |||||
Cash at beginning of year |
36,943 | 61,710 | ||||||
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Cash at end of period |
$ | 66,998 | $ | 38,792 | ||||
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See accompanying Notes to Consolidated Financial Statements.
4
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note AAccounting Policies
The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all of the annual disclosures required by accounting principles generally accepted in the United States of America (GAAP). However, in the opinion of management, these statements include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the consolidated financial position at September 30, 2014, and the consolidated results of operations, comprehensive income, and cash flows for the periods ended September 30, 2014 and 2013. The interim period condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements that are included in the Form 10-K filed on February 28, 2014.
Note BEarnings Per Share
Stock Split: Torchmark declared a three-for-two stock split paid in the form of a 50% stock dividend on all of the Companys outstanding common stock, having a record date of June 2, 2014. On July 1, 2014, the payment date, holders of Torchmark common stock received one additional share of stock for every two shares held. Upon completion of the transaction, Torchmark had 139,218,183 shares issued at a par value of $1 per share and 131,031,843 shares outstanding after giving effect to the purchase of $26 thousand in fractional shares on July 1, 2014. Shareholders equity component amounts as of December 31, 2013 were retrospectively adjusted to reflect this stock dividend. All share and per share amounts have been adjusted to reflect this stock split for all periods presented in these consolidated financial statements.
A reconciliation of basic and diluted weighted-average shares outstanding is as follows.
For the three months ended September 30, |
For the nine months ended September 30, |
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2014 | 2013 | 2014 | 2013 | |||||||||||||
Basic weighted average shares outstanding |
129,969,902 | 136,903,754 | 131,529,818 | 138,509,957 | ||||||||||||
Weighted average dilutive options outstanding |
1,907,303 | 2,106,307 | 1,901,522 | 1,977,579 | ||||||||||||
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Diluted weighted average shares outstanding |
131,877,205 | 139,010,061 | 133,431,340 | 140,487,536 | ||||||||||||
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Antidilutive shares |
0 | 0 | 0 | 52,500 | ||||||||||||
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5
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note CPostretirement Benefit Plans
The following tables present a summary of post-retirement benefit costs by component.
Components of Post-Retirement Benefit Costs
Three Months ended September 30, | ||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Service cost |
$ | 3,231 | $ | 3,746 | $ | 25 | $ | 69 | ||||||||
Interest cost |
4,695 | 4,260 | (63 | ) | 258 | |||||||||||
Expected return on assets |
(4,768 | ) | (4,357 | ) | 0 | 0 | ||||||||||
Amortization: |
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Prior service cost |
529 | 569 | 0 | 0 | ||||||||||||
Actuarial (gain) loss |
2,035 | 4,060 | 3 | 74 | ||||||||||||
Actuarial valuation adjustment |
0 | 0 | 460 | 0 | ||||||||||||
Direct recognition of expense |
131 | 0 | 114 | 0 | ||||||||||||
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Net periodic benefit cost |
$ | 5,853 | $ | 8,278 | $ | 539 | $ | 401 | ||||||||
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Nine Months ended September 30, | ||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Service cost |
$ | 9,694 | $ | 11,238 | $ | 74 | $ | 271 | ||||||||
Interest cost |
14,333 | 12,783 | 234 | 775 | ||||||||||||
Expected return on assets |
(14,273 | ) | (13,072 | ) | 0 | 0 | ||||||||||
Amortization: |
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Prior service cost |
1,586 | 1,707 | 0 | 0 | ||||||||||||
Actuarial (gain)/loss |
6,127 | 12,184 | 3 | 149 | ||||||||||||
Actuarial valuation adjustment |
0 | 0 | 460 | 0 | ||||||||||||
Direct recognition of expense |
131 | 0 | 10 | 0 | ||||||||||||
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Net periodic benefit cost |
$ | 17,598 | $ | 24,840 | $ | 781 | $ | 1,195 | ||||||||
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6
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note CPostretirement Benefit Plans (continued)
The following chart presents assets at fair value for the defined-benefit pension plans at September 30, 2014 and the prior-year end.
Pension Assets by Component
September 30, 2014 | December 31, 2013 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Corporate debt |
$ | 165,079 | 52 | $ | 147,445 | 51 | ||||||||||
Other fixed maturities |
277 | 0 | 267 | 0 | ||||||||||||
Equity securities |
123,690 | 39 | 115,287 | 38 | ||||||||||||
Short-term investments |
10,403 | 3 | 13,318 | 5 | ||||||||||||
Guaranteed annuity contract |
14,934 | 5 | 13,769 | 5 | ||||||||||||
Other |
3,706 | 1 | 1,667 | 1 | ||||||||||||
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Total |
$ | 318,089 | 100 | $ | 291,753 | 100 | ||||||||||
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The liability for the funded defined-benefit pension plans was $342 million at September 30, 2014 and $322 million at December 31, 2013. Cash contributions of $12.8 million were made to the qualified pension plans during the nine months ended September 30, 2014. Torchmark does not expect to make further cash contributions to these plans during 2014. With respect to the Companys non-qualified supplemental retirement plan, life insurance policies on the lives of plan participants have been established with an unaffiliated carrier to fund a portion of the Companys obligations under the plan. These policies, as well as investments deposited with an unaffiliated trustee, were previously placed in a Rabbi Trust to provide for payment of the plan obligations. At September 30, 2014, the combined value of the insurance policies and investments in the Rabbi Trust to support plan liabilities were $70 million, compared with $66 million at year-end 2013. Since this plan is non-qualified, the values of the insurance policies and investments are recorded as other assets in the Consolidated Balance Sheets and are not included in the chart of plan assets above. The liability for the non-qualified pension plan was $61 million at September 30, 2014 and $58 million at December 31, 2013.
7
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note DInvestments
Portfolio Composition:
A summary of fixed maturities and equity securities available for sale by cost or amortized cost and estimated fair value at September 30, 2014 is as follows.
Portfolio Composition as of September 30, 2014
Cost or Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | % of Total Fixed Maturities* |
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Fixed maturities available for sale: |
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Bonds: |
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U.S. Government direct, guaranteed, and government-sponsored enterprises |
$ | 367,261 | $ | 310 | $ | (21,059 | ) | $ | 346,512 | 2 | % | |||||||||
States, municipalities, and political subdivisions |
1,277,882 | 147,783 | (1,438 | ) | 1,424,227 | 10 | ||||||||||||||
Foreign governments |
32,441 | 939 | (1 | ) | 33,379 | 0 | ||||||||||||||
Corporates |
10,455,610 | 1,334,690 | (83,030 | ) | 11,707,270 | 83 | ||||||||||||||
Collateralized debt obligations |
66,889 | 4,313 | (8,352 | ) | 62,850 | 1 | ||||||||||||||
Other asset-backed securities |
30,996 | 3,033 | (31 | ) | 33,998 | 0 | ||||||||||||||
Redeemable preferred stocks |
497,117 | 53,677 | (5,986 | ) | 544,808 | 4 | ||||||||||||||
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Total fixed maturities |
12,728,196 | 1,544,745 | (119,897 | ) | 14,153,044 | 100 | % | |||||||||||||
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Equity securities |
776 | 641 | 0 | 1,417 | ||||||||||||||||
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Total fixed maturities and equity securities |
$ | 12,728,972 | $ | 1,545,386 | $ | (119,897 | ) | $ | 14,154,461 | |||||||||||
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* | At fair value |
8
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note DInvestments (continued)
A schedule of fixed maturities by contractual maturity date at September 30, 2014 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.
Amortized Cost |
Fair Value | |||||||
Fixed maturities available for sale: |
||||||||
Due in one year or less |
$ | 208,876 | $ | 213,937 | ||||
Due from one to five years |
507,648 | 571,735 | ||||||
Due from five to ten years |
928,917 | 1,014,462 | ||||||
Due from ten to twenty years |
3,480,370 | 3,953,820 | ||||||
Due after twenty years |
7,501,878 | 8,299,386 | ||||||
Mortgage-backed and asset-backed securities |
100,507 | 99,704 | ||||||
|
|
|
|
|||||
$ | 12,728,196 | $ | 14,153,044 | |||||
|
|
|
|
Selected information about sales of fixed maturities is as follows.
For the nine months ended September 30, |
||||||||
2014 | 2013 | |||||||
Proceeds from sales |
$ | 56,447 | $ | 78,751 | ||||
Gross realized gains |
16,473 | 4,310 | ||||||
Gross realized losses |
(1,701 | ) | (788 | ) |
9
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note DInvestments (continued)
Fair Value Measurements:
The following table represents assets measured at fair value on a recurring basis.
Fair Value Measurements at September 30, 2014 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 | $ | 346,512 | $ | 0 | $ | 346,512 | ||||||||
States, municipalities, and political subdivisions |
0 | 1,424,227 | 0 | 1,424,227 | ||||||||||||
Foreign governments |
0 | 33,379 | 0 | 33,379 | ||||||||||||
Corporates |
51,852 | 11,150,849 | 504,569 | 11,707,270 | ||||||||||||
Collateralized debt obligations |
0 | 0 | 62,850 | 62,850 | ||||||||||||
Other asset-backed securities |
0 | 33,998 | 0 | 33,998 | ||||||||||||
Redeemable preferred stocks |
23,073 | 521,735 | 0 | 544,808 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturities |
74,925 | 13,510,700 | 567,419 | 14,153,044 | ||||||||||||
Equity securities |
584 | 0 | 833 | 1,417 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturities and equity securities |
$ | 75,509 | $ | 13,510,700 | $ | 568,252 | $ | 14,154,461 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Percent of total |
0.5 | % | 95.5 | % | 4.0 | % | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
10
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note DInvestments (continued)
The following table represents an analysis of changes in fair value measurements using significant unobservable inputs (Level 3).
Analysis of Changes in Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
For the nine months ended September 30, 2014 | ||||||||||||||||||||
Asset- backed securities |
Collateralized debt obligations |
Corporates (1) | Equities | Total | ||||||||||||||||
Balance at January 1, 2014 |
$ | 0 | $ | 58,205 | $ | 300,300 | $ | 776 | $ | 359,281 | ||||||||||
Total gains or losses: |
||||||||||||||||||||
Included in realized gains/losses |
0 | 15,924 | 1 | 0 | 15,925 | |||||||||||||||
Included in other comprehensive income |
0 | 3,929 | 19,667 | 57 | 23,653 | |||||||||||||||
Acquisitions |
0 | 0 | 186,365 | 0 | 186,365 | |||||||||||||||
Sales |
0 | (16,049 | ) | (1 | ) | 0 | (16,050 | ) | ||||||||||||
Amortization |
0 | 4,072 | 10 | 0 | 4,082 | |||||||||||||||
Other (2) |
0 | (3,231 | ) | (1,773 | ) | 0 | (5,004 | ) | ||||||||||||
Transfers in and/or out of Level 3 (3) |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at September 30, 2014 |
$ | 0 | $ | 62,850 | $ | 504,569 | $ | 833 | $ | 568,252 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Percent of total fixed maturity and equity securities |
0.0 | % | 0.4 | % | 3.6 | % | 0.0 | % | 4.0 | % | ||||||||||
For the nine months ended September 30, 2013 | ||||||||||||||||||||
Asset- backed securities |
Collateralized debt obligations |
Corporates (1) | Equities | Total | ||||||||||||||||
Balance at January 1, 2013 |
$ | 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 | 3,173 | (13,613 | ) | 37 | (9,977 | ) | |||||||||||||
Acquisitions |
0 | 0 | 65,507 | 0 | 65,507 | |||||||||||||||
Sales |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Amortization |
(57 | ) | 3,329 | 3 | 0 | 3,275 | ||||||||||||||
Other (2) |
0 | 0 | (759 | ) | 0 | (759 | ) | |||||||||||||
Transfers in and/or out of Level 3 (3) |
(8,350 | ) | 0 | (42,455 | ) | 0 | (50,805 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at September 30, 2013 |
$ | 0 | $ | 53,073 | $ | 239,755 | $ | 776 | $ | 293,604 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Percent of total fixed maturity and equity securities |
0.0 | % | 0.4 | % | 1.9 | % | 0.0 | % | 2.3 | % |
(1) | Includes redeemable preferred stocks. |
(2) | Includes capitalized interest, foreign exchange adjustments, and principal repayments. |
(3) | Considered to be transferred at the end of the period. Transfers into Level 3 occur when observable inputs are no longer available. Transfers out of Level 3 occur when observable inputs become available. |
11
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note DInvestments (continued)
Other-Than-Temporary Impairments:
During the first quarter of 2013, Torchmark wrote down investment real estate in the amount of $2.7 million pretax ($1.7 million after tax) because of other-than-temporary impairment. There were no additional other-than-temporary impairments during the nine-month periods ended September 30, 2014 or 2013.
Unrealized Loss Analysis:
The following table discloses unrealized investment losses by class of investment at September 30, 2014 for the period of time in a loss position. Torchmark considers these investments not to be other-than-temporarily impaired.
Analysis of Gross Unrealized Investment Losses
At September 30, 2014
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 |
$ | 15,478 | $ | (229 | ) | $ | 301,161 | $ | (20,830 | ) | $ | 316,639 | $ | (21,059 | ) | |||||||||
States, municipalities and political subdivisions |
10,847 | (253 | ) | 35,852 | (1,185 | ) | 46,699 | (1,438 | ) | |||||||||||||||
Foreign governments |
834 | (1 | ) | 0 | 0 | 834 | (1 | ) | ||||||||||||||||
Corporates |
767,413 | (12,446 | ) | 1,058,596 | (70,584 | ) | 1,826,009 | (83,030 | ) | |||||||||||||||
Collateralized debt obligations |
0 | 0 | 12,107 | (8,352 | ) | 12,107 | (8,352 | ) | ||||||||||||||||
Other asset-backed securities |
0 | 0 | 2,852 | (31 | ) | 2,852 | (31 | ) | ||||||||||||||||
Redeemable preferred stocks |
9,962 | (38 | ) | 60,045 | (5,948 | ) | 70,007 | (5,986 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturities |
804,534 | (12,967 | ) | 1,470,613 | (106,930 | ) | 2,275,147 | (119,897 | ) | |||||||||||||||
Equity securities |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturities and equity securities |
$ | 804,534 | $ | (12,967 | ) | $ | 1,470,613 | $ | (106,930 | ) | $ | 2,275,147 | $ | (119,897 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
12
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note DInvestments (continued)
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 September 30, 2014 |
133 | 267 | 400 | |||||||||
As of December 31, 2013 |
462 | 130 | 592 |
Torchmarks entire fixed-maturity and equity portfolio consisted of 1,604 issues at September 30, 2014 and 1,619 issues at December 31, 2013. The weighted average quality rating of all unrealized loss positions as of September 30, 2014 was A-. Although Torchmarks fixed-maturity investments are available for sale, Torchmarks management generally does not intend to sell and does not believe it will be required to sell any securities which are temporarily impaired before they recover due to the strong and stable cash flows generated by its insurance products.
13
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note ESupplemental Information about Changes to Accumulated Other Comprehensive Income (continued)
An analysis of the change in balance by component of Accumulated Other Comprehensive Income is as follows for the three and nine month periods ended September 30, 2014 and 2013.
Components of Accumulated Other Comprehensive Income
For the three months ended September 30, 2014 | ||||||||||||||||||||
Available for Sale Assets |
Deferred Acquisition Costs |
Foreign Exchange |
Pension Adjustments |
Total | ||||||||||||||||
Balance at July 1, 2014 |
$ | 933,015 | $ | (11,455 | ) | $ | 26,124 | $ | (59,710 | ) | $ | 887,974 | ||||||||
Other comprehensive income (loss) before reclassifications, net of tax |
(1,991 | ) | 450 | (4,566 | ) | 2 | (6,105 | ) | ||||||||||||
Reclassifications, net of tax |
(711 | ) | 0 | 0 | 1,669 | 958 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive income (loss) |
(2,702 | ) | 450 | (4,566 | ) | 1,671 | (5,147 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at September 30, 2014 |
$ | 930,313 | $ | (11,005 | ) | $ | 21,558 | $ | (58,039 | ) | $ | 882,827 | ||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
For the three months ended September 30, 2013 | ||||||||||||||||||||
Available for Sale Assets |
Deferred Acquisition Costs |
Foreign Exchange |
Pension Adjustments |
Total | ||||||||||||||||
Balance at July 1, 2013 |
$ | 424,003 | $ | (9,551 | ) | $ | 22,782 | $ | (103,334 | ) | $ | 333,900 | ||||||||
Other comprehensive income (loss) before reclassifications, net of tax |
(100,348 | ) | 1,667 | 2,814 | 0 | (95,867 | ) | |||||||||||||
Reclassifications, net of tax |
(3,882 | ) | 0 | 0 | 2,992 | (890 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive income (loss) |
(104,230 | ) | 1,667 | 2,814 | 2,992 | (96,757 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at September 30, 2013 |
$ | 319,773 | $ | (7,884 | ) | $ | 25,596 | $ | (100,342 | ) | $ | 237,143 | ||||||||
|
|
|
|
|
|
|
|
|
|
14
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note ESupplemental Information about Changes to Accumulated Other Comprehensive Income (continued)
Components of Accumulated Other Comprehensive Income
For the nine months ended September 30, 2014 | ||||||||||||||||||||
Available for Sale Assets |
Deferred Acquisition Costs |
Foreign Exchange |
Pension Adjustments |
Total | ||||||||||||||||
Balance at January 1, 2014 |
$ | 256,196 | $ | (6,728 | ) | $ | 24,866 | $ | (63,353 | ) | $ | 210,981 | ||||||||
Other comprehensive income (loss) before reclassifications, net of tax |
688,958 | (4,277 | ) | (3,308 | ) | 299 | 681,672 | |||||||||||||
Reclassifications, net of tax |
(14,841 | ) | 0 | 0 | 5,015 | (9,826 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive income (loss) |
674,117 | (4,277 | ) | (3,308 | ) | 5,314 | 671,846 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at September 30, 2014 |
$ | 930,313 | $ | (11,005 | ) | $ | 21,558 | $ | (58,039 | ) | $ | 882,827 | ||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
For the nine months ended September 30, 2013 | ||||||||||||||||||||
Available for Sale Assets |
Deferred Acquisition Costs |
Foreign Exchange |
Pension Adjustments |
Total | ||||||||||||||||
Balance at January 1, 2013 |
$ | 1,024,367 | $ | (16,417 | ) | $ | 26,608 | $ | (109,283 | ) | $ | 925,275 | ||||||||
Other comprehensive income (loss) before reclassifications, net of tax |
(697,480 | ) | 8,533 | (1,012 | ) | 0 | (689,959 | ) | ||||||||||||
Reclassifications, net of tax |
(7,114 | ) | 0 | 0 | 8,941 | 1,827 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive income (loss) |
(704,594 | ) | 8,533 | (1,012 | ) | 8,941 | (688,132 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at September 30, 2013 |
$ | 319,773 | $ | (7,884 | ) | $ | 25,596 | $ | (100,342 | ) | $ | 237,143 | ||||||||
|
|
|
|
|
|
|
|
|
|
15
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note ESupplemental Information about Changes to Accumulated Other Comprehensive Income (continued)
Reclassifications out of Accumulated Other Comprehensive Income are presented below for the three and nine month periods ended September 30, 2014 and 2013.
Reclassification Adjustments
Three months ended September 30, |
Nine months ended September 30, |
Affected line items in the Statement of Operations | ||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||
Unrealized investment gains (losses) on available for sale assets: |
||||||||||||||||||
Realized (gains) losses |
$ | 1,261 | $ | (4,520 | ) | $ | (15,935 | ) | $ | (7,871 | ) | Realized investment gains (losses) | ||||||
Amortization of (discount) premium |
(2,354 | ) | (1,478 | ) | (6,898 | ) | (4,939 | ) | Net investment income | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total before tax |
(1,093 | ) | (5,998 | ) | (22,833 | ) | (12,810 | ) | ||||||||||
Tax |
382 | 2,116 | 7,992 | 5,696 | Income Taxes | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total after tax |
(711 | ) | (3,882 | ) | (14,841 | ) | (7,114 | ) | ||||||||||
Pension adjustments: |
||||||||||||||||||
Amortization of prior service cost |
529 | 569 | 1,586 | 1,707 | Other operating expenses | |||||||||||||
Amortization of actuarial gain (loss) |
2,038 | 4,036 | 6,130 | 12,049 | Other operating expenses | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total before tax |
2,567 | 4,605 | 7,716 | 13,756 | ||||||||||||||
Tax |
(898 | ) | (1,613 | ) | (2,701 | ) | (4,815 | ) | Income Taxes | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total after tax |
1,669 | 2,992 | 5,015 | 8,941 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total reclassifications (after tax) |
$ | 958 | $ | (890 | ) | $ | (9,826 | ) | $ | 1,827 | ||||||||
|
|
|
|
|
|
|
|
16
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
NOTE FBusiness Segments
Torchmark is comprised of life insurance companies which primarily market individual life and supplemental health insurance products through niche distribution systems to middle income Americans. Torchmarks core operations are insurance marketing and underwriting, and management of its investments. Insurance marketing and underwriting is segmented by the types of insurance products offered: life, health, Medicare Part D, and annuity. Effective January 1, 2014, Torchmark reorganized its segment structure to separate its Medicare Part D health insurance business from its other health insurance activities as a stand-alone segment. Management has concluded that Medicare Part D meets the criteria of a distinct segment. Previously, Part D was included in the health segment. Prior periods segment results have been retrospectively adjusted for comparability. Premium income for Medicare Part D health insurance is included with the premium for other health products in the Consolidated Statements of Operations. Annuity revenue is classified as Other premium. Managements measure of profitability for each insurance segment is insurance underwriting margin, which is underwriting income before other income and insurance administrative expenses. It represents the profit margin on insurance products before administrative expenses, and is calculated by deducting net policy obligations (claims incurred and change in reserves), commissions and other acquisition expenses from premium revenue. Torchmark further views the profitability of each insurance product segment by the marketing groups that distribute the products of that segment: direct response, independent, or captive agencies.
The investment segment includes the management of the investment portfolio, debt, and cash flow. Managements measure of profitability for this segment is excess investment income, which is the income earned on the investment portfolio less the required interest on net policy liabilities and financing costs. Financing costs include the interest on Torchmarks debt. Other income and insurance administrative expense are classified in a separate Other segment.
The majority of the Companys required interest on net policy liabilities (benefit reserves less the deferred acquisition cost asset) is not credited to policyholder accounts. Instead, it is an actuarial assumption for discounting cash flows in the computation of benefit reserves and the amortization of the deferred acquisition cost asset. Required interest related to the net policy liabilities is not included in the various insurance underwriting segments but is shown in the investment segment as a reduction to net investment income. We believe this presentation facilitates a more meaningful analysis of the Companys underwriting and investment performance as the underwriting results are based on premiums, claims, and expenses and are not affected by unanticipated fluctuations in investment yields.
17
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
NOTE FBusiness Segments (continued)
As noted, Torchmarks core operations are insurance and investment management. The insurance segments issue policies for which premiums are collected for the eventual payment of policy benefits. In addition to policy benefits, operating expenses are incurred including acquisition costs, administrative expenses, and taxes. Because life and health contracts can be long term, premium receipts in excess of current expenses are invested. Investment activities, conducted by the investment segment, focus on seeking quality investments with a yield and term appropriate to support the insurance product obligations. These investments generally consist of fixed maturities, and, over the long term, the expected yields are taken into account when setting insurance premium rates and product profitability expectations. As a result, fixed maturities are generally held for long periods to support the liabilities, and Torchmark generally expects to hold investments until maturity. Dispositions of investments occur from time to time, generally as a result of credit concerns, calls by issuers, or other factors usually beyond the control of management.
Dispositions are sometimes required in order to maintain the Companys investment policies and objectives. Investments are also occasionally written down as a result of other-than-temporary impairment. Torchmark does not actively trade investments. As a result, realized gains and losses from the disposition and write down of investments are generally incidental to operations and are not considered a material factor in insurance pricing or product profitability. While from time to time these realized gains and losses could be significant to net income in the period in which they occur, they generally have a limited effect on the yield of the total investment portfolio. Further, because the proceeds of the disposals are reinvested in the portfolio, the disposals have little effect on the size of the portfolio and the income from the reinvestments is included in net investment income. Therefore, management removes realized investment gains and losses from results of core operations when evaluating the performance of the Company. For this reason, these gains and losses are excluded from Torchmarks operating segments.
Torchmark accounts for its stock options and restricted stock under current accounting guidance requiring stock options and stock grants to be expensed based on fair value at the time of grant. Management considers stock compensation expense to be an expense of the Parent Company. Therefore, stock compensation expense is treated as a corporate expense in Torchmarks segment analysis.
18
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
NOTE FBusiness Segments (continued)
Torchmark provides coverage under the Medicare Part D prescription drug plan for Medicare beneficiaries. In accordance with GAAP, Part D premiums are recognized evenly throughout the year when they become due but benefit costs are recognized when the costs are incurred. Due to the design of the Part D product, premiums are evenly distributed throughout the year, but benefit costs are higher earlier in the year. As a result, under GAAP, benefit costs can exceed premiums in the first part of the year, but be less than premiums during the remainder of the year. In order to more closely match the benefit cost with the associated revenue for interim periods, Torchmark defers these excess benefits for segment reporting purposes. In addition, GAAP recognizes in each quarter a government risk-sharing premium adjustment consistent with the contract as if the quarter represented an entire contract period. These quarterly risk-sharing adjustments are removed in the segment analysis because the actual contract payments are based upon the experience of the full contract year, not the experience of interim periods. Generally, Torchmark expects its benefit ratio to be in line with pricing and generally does not expect to receive any government risk-sharing premium. Total premiums and benefits were the same for segment reporting purposes as they were under GAAP in 2013. For the year 2014, due to unexpected claims on Hepatitis C drugs, Torchmark expects its benefit ratio to exceed pricing and expects to receive government risk sharing premium. Total premiums and benefits for the full year 2014 are still anticipated to be the same under this alternative method as under GAAP. The Companys presentation results in the underwriting margin percentage of each interim period reflecting the expected margin percentage for the full year.
An analysis of the adjustments for the difference in the interim results as presented for segment purposes and GAAP for Medicare Part D is as follows.
Nine months ended | ||||||||
September 30, | ||||||||
2014 | 2013 | |||||||
Benefit costs deferred |
$ | 45,382 | $ | 21,279 | ||||
Government risk-sharing premium adjustment |
(28,532 | ) | (8,706 | ) | ||||
|
|
|
|
|||||
Pre-tax addition to segment interim period income |
$ | 16,850 | $ | 12,573 | ||||
|
|
|
|
|||||
After tax amount |
$ | 10,952 | $ | 8,172 | ||||
|
|
|
|
The significant increases in the risk-sharing adjustments in 2014 were caused by the increase in volume of business and certain benefit design changes.
19
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
NOTE FBusiness Segments (continued)
Additionally, management does not view the risk-sharing premium for Medicare Part D as a component of premium income, and accordingly adjusts health premium income in its segment analysis. A reconciliation of health premium included in the segment analysis with health premium as reported in the Consolidated Statements of Operations is presented in the following table.
Nine months ended | ||||||||||||
September 30, | ||||||||||||
2014 | 2013 | % Change | ||||||||||
Premium per segment analysis: |
||||||||||||
Medicare Part D premium |
$ | 258,243 | $ | 226,779 | 14 | |||||||
Other health premium |
644,758 | 648,918 | (1 | ) | ||||||||
Part D risk sharing adjustment |
28,532 | 8,706 | 228 | |||||||||
|
|
|
|
|||||||||
Health premium per Consolidated Statements of Operations |
$ | 931,533 | $ | 884,403 | 5 | |||||||
|
|
|
|
Torchmark has invested in various limited partnerships that provide investment returns through the provision of low-income housing tax credits and other related Federal income tax benefits to the Company. The investment returns from a portion of the interests are guaranteed by unrelated third-parties. Under GAAP, expenses associated with the amortization of the guaranteed interests are required to be reflected in income tax expense. In contrast, GAAP requires the expenses associated with the amortization of non-guaranteed interests to be reflected as a component of Net investment income. All of the investment returns from investing in these guaranteed and non-guaranteed limited partnerships interests are in the form of income tax benefits reflected in income tax expense. Management believes including the amortization expense associated with the non-guaranteed as well as the guaranteed interests in income tax expense provides a more appropriate matching of the expense with the related income. For this reason, amortization expense of the non-guaranteed interests is included in Income taxes and not Net investment income for segment reporting purposes. As described in Note GNew Unadopted Accounting Guidance, new accounting guidance related to low-income housing investments will conform more closely with Torchmarks segment reporting once adopted in future periods.
20
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
NOTE FBusiness Segments (continued)
During the first nine months of 2014, Torchmark accrued for certain litigation in the net amount of $3.7 million ($2.4 million after tax) that were not directly related to its insurance operations. Additionally, Torchmark received $1.3 million ($853 thousand after tax) in settlement of litigation regarding investments. Also in 2014, the Company recorded $8.2 million in administrative settlements ($5.3 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 2014.
During the first nine months of 2013, Torchmark incurred four non-operating charges: (1) a state guaranty fund assessment in the amount of $1.2 million ($751 thousand after tax), resulting from events in years prior to 2012, (2) a legal settlement related to a non-insurance matter in the amount of $500 thousand ($325 thousand after tax), (3) the settlement of a litigation matter related to prior years in the amount of $8.6 million ($5.6 million after tax), and (4) a one-time adjustment related to the finalization of accounting for the insurance assets and liabilities of the Family Heritage Life Insurance Company of America (Family Heritage) acquisition which closed on November 1, 2012. The Family Heritage adjustment increased after-tax earnings in the amount of $522 thousand. With the exception of the administrative settlements in the paragraph above, all of these items are included in Other operating expense in the Consolidated Statements of Operations for the appropriate year. The Company removes items related to prior years and non-operating items such as these from its segment analysis because management does not view such expenses as part of its ongoing core insurance operating results.
The following tables total the components of Torchmarks operating segments and reconcile these operating results to its pretax income and each significant line item in its Consolidated Statements of Operations.
21
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
NOTE FBusiness Segments (continued)
Reconciliation of Segment Operating Information to the Consolidated Statement of Operations
For the nine months ended September 30, 2014 | ||||||||||||||||||||||||||||||||
Life | Health | Medicare Part D |
Annuity | Investment | Other & Corporate |
Adjustments | Consolidated | |||||||||||||||||||||||||
Revenue: |
||||||||||||||||||||||||||||||||
Premium |
$ | 1,472,734 | $ | 644,758 | $ | 258,243 | $ | 334 | $ | 28,532 | (1) | $ | 2,404,601 | |||||||||||||||||||
Net investment income |
$ | 567,569 | (21,591 | )(4) | 545,978 | |||||||||||||||||||||||||||
Other income |
$ | 1,990 | (178 | )(3) | 1,812 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total revenue |
1,472,734 | 644,758 | 258,243 | 334 | 567,569 | 1,990 | 6,763 | 2,952,391 | ||||||||||||||||||||||||
Expenses: |
||||||||||||||||||||||||||||||||
Policy benefits |
964,305 | 414,607 | 213,184 | 31,599 | 53,561 | (1,6) | 1,677,256 | |||||||||||||||||||||||||
Required interest on: |
||||||||||||||||||||||||||||||||
Policy reserves |
(395,595 | ) | (48,018 | ) | 0 | (41,576 | ) | 485,189 | 0 | |||||||||||||||||||||||
Deferred acquisition costs |
125,758 | 16,823 | 534 | 1,120 | (144,235 | ) | 0 | |||||||||||||||||||||||||
Amortization of acquisition costs |
251,954 | 53,088 | 2,127 | 5,959 | 313,128 | |||||||||||||||||||||||||||
Commissions, premium taxes, and non-deferred acquisition costs |
105,724 | 59,787 | 19,664 | 37 | (178 | )(3) | 185,034 | |||||||||||||||||||||||||
Insurance administrative expense (2) |
134,918 | 2,337 | (5) | 137,255 | ||||||||||||||||||||||||||||
Parent expense |
6,284 | 6,284 | ||||||||||||||||||||||||||||||
Stock compensation expense |
25,219 | 25,219 | ||||||||||||||||||||||||||||||
Interest expense |
57,119 | 57,119 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total expenses |
1,052,146 | 496,287 | 235,509 | (2,861 | ) | 398,073 | 166,421 | 55,720 | 2,401,295 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Subtotal |
420,588 | 148,471 | 22,734 | 3,195 | 169,496 | (164,431 | ) | (48,957 | ) | 551,096 | ||||||||||||||||||||||
Nonoperating items |
27,366 | (1,5,6) | 27,366 | |||||||||||||||||||||||||||||
Amortization of low-income housing |
21,591 | (4) | 21,591 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Measure of segment profitability |
$ | 420,588 | $ | 148,471 | $ | 22,734 | $ | 3,195 | $ | 169,496 | $ | (164,431 | ) | $ | 0 | 600,053 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Deduct applicable income taxes |
|
(196,288 | ) | |||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
Segment profits after tax |
|
403,765 | ||||||||||||||||||||||||||||||
Add back income taxes applicable to segment profitability |
|
196,288 | ||||||||||||||||||||||||||||||
Add (deduct) realized investment gains (losses) |
|
15,713 | ||||||||||||||||||||||||||||||
Deduct Part D adjustment (1) |
|
(16,850 | ) | |||||||||||||||||||||||||||||
Deduct amortization of low-income housing (4) |
|
(21,591 | ) | |||||||||||||||||||||||||||||
Deduct legal settlement expenses (5) |
|
(2,337 | ) | |||||||||||||||||||||||||||||
Deduct administrative settlements (6) |
|
(8,179 | ) | |||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
Pretax income per Consolidated Statement of Operations |
|
$ | 566,809 | |||||||||||||||||||||||||||||
|
|
(1) | Medicare Part D items adjusted to GAAP from the segment analysis, which matches expected benefits with policy premium. |
(2) | Administrative expense is not allocated to insurance segments. |
(3) | Elimination of intersegment commission. |
(4) | Amortization of low-income housing expense, considered a component of income tax expense in the segment analysis. |
(5) | Legal settlement expenses. |
(6) | Administrative settlements. |
22
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
NOTE FBusiness Segments (continued)
Reconciliation of Segment Operating Information to the Consolidated Statement of Operations *
For the nine months ended September 30, 2013 | ||||||||||||||||||||||||||||||||
Life | Health | Medicare Part D |
Annuity | Investment | Other & Corporate |
Adjustments | Consolidated | |||||||||||||||||||||||||
Revenue: |
||||||||||||||||||||||||||||||||
Premium |
$ | 1,416,859 | $ | 648,918 | $ | 226,779 | $ | 401 | $ | 8,706 | (1) | $ | 2,301,663 | |||||||||||||||||||
Net investment income |
$ | 550,015 | (18,556 | )(4) | 531,459 | |||||||||||||||||||||||||||
Other income |
$ | 1,970 | (213 | )(3) | 1,757 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total revenue |
1,416,859 | 648,918 | 226,779 | 401 | 550,015 | 1,970 | (10,063 | ) | 2,834,879 | |||||||||||||||||||||||
Expenses: |
||||||||||||||||||||||||||||||||
Policy benefits |
921,921 | 420,251 | 188,816 | 32,393 | 29,904 | (1,6) | 1,593,285 | |||||||||||||||||||||||||
Required interest on: |
||||||||||||||||||||||||||||||||
Policy reserves |
(379,163 | ) | (44,602 | ) | 0 | (43,298 | ) | 467,063 | 0 | |||||||||||||||||||||||
Deferred acquisition costs |
123,599 | 17,006 | 497 | 1,399 | (142,501 | ) | 0 | |||||||||||||||||||||||||
Amortization of acquisition costs |
243,259 | 52,139 | 1,912 | 6,855 | (1,519 | )(7) | 302,646 | |||||||||||||||||||||||||
Commissions, premium taxes, and non-deferred acquisition costs |
99,398 | 57,025 | 10,234 | 46 | (213 | )(3) | 166,490 | |||||||||||||||||||||||||
Insurance administrative expense (2) |
133,080 | 1,155 | (5) | 134,235 | ||||||||||||||||||||||||||||
Parent expense |
6,734 | 500 | (6) | 7,234 | ||||||||||||||||||||||||||||
Stock compensation expense |
19,376 | 19,376 | ||||||||||||||||||||||||||||||
Interest expense |
61,381 | 61,381 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total expenses |
1,009,014 | 501,819 | 201,459 | (2,605 | ) | 385,943 | 159,190 | 29,827 | 2,284,647 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Subtotal |
407,845 | 147,099 | 25,320 | 3,006 | 164,072 | (157,220 | ) | (39,890 | ) | 550,232 | ||||||||||||||||||||||
Nonoperating items |
21,334 | (1,5,6,7) | 21,334 | |||||||||||||||||||||||||||||
Amortization of low-income housing |
18,556 | (4) | 18,556 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Measure of segment profitability |
$ | 407,845 | $ | 147,099 | $ | 25,320 | $ | 3,006 | $ | 164,072 | $ | (157,220 | ) | $ | 0 | 590,122 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Deduct applicable income taxes |
|
(193,109 | ) | |||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
Segment profits after tax |
|
397,013 | ||||||||||||||||||||||||||||||
Add back income taxes applicable to segment profitability |
|
193,109 | ||||||||||||||||||||||||||||||
Add (deduct) realized investment gains (losses) |
|
6,465 | ||||||||||||||||||||||||||||||
Deduct Part D adjustment (1) |
|
(12,573 | ) | |||||||||||||||||||||||||||||
Deduct amortization of low-income housing (4) |
|
(18,556 | ) | |||||||||||||||||||||||||||||
Deduct Guaranty Fund Assessment (5) |
|
(1,155 | ) | |||||||||||||||||||||||||||||
Deduct legal settlement expenses (6) |
|
(9,125 | ) | |||||||||||||||||||||||||||||
Add Family Heritage Life acquisition adjustments (7) |
|
1,519 | ||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
Pretax income from continuing operations per Consolidated Statement of Operations |
|
$ | 556,697 | |||||||||||||||||||||||||||||
|
|
(1) | Medicare Part D items adjusted to GAAP from the segment analysis, which matches expected benefits with policy premium. |
(2) | Administrative expense is not allocated to insurance segments. |
(3) | Elimination of intersegment commission. |
(4) | Amortization of low-income housing expense, considered a component of income tax expense in the segment analysis. |
(5) | Guaranty Fund Assessment. |
(6) | Legal settlement expenses. |
(7) | Family Heritage Life acquisition adjustments. |
* | Retrospectively adjusted to give effect to the reorganization of segments described earlier in this Note. |
23
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note FBusiness Segments (continued)
The following table summarizes the measures of segment profitability for comparison. It also reconciles segment profits to net income.
Analysis of Profitability by Segment
Nine months ended September |
Increase (Decrease) |
|||||||||||||||
2014 | 2013* | Amount | % | |||||||||||||
Life |
$ | 420,588 | $ | 407,845 | $ | 12,743 | 3 | |||||||||
Health |
148,471 | 147,099 | 1,372 | 1 | ||||||||||||
Medicare Part D |
22,734 | 25,320 | (2,586 | ) | (10 | ) | ||||||||||
Annuity |
3,195 | 3,006 | 189 | 6 | ||||||||||||
Investment |
169,496 | 164,072 | 5,424 | 3 | ||||||||||||
Other and corporate: |
||||||||||||||||
Other income |
1,990 | 1,970 | 20 | 1 | ||||||||||||
Administrative expense |
(134,918 | ) | (133,080 | ) | (1,838 | ) | 1 | |||||||||
Corporate |
(31,503 | ) | (26,110 | ) | (5,393 | ) | 21 | |||||||||
|
|
|
|
|
|
|||||||||||
Pretax total |
600,053 | 590,122 | 9,931 | 2 | ||||||||||||
Applicable taxes |
(196,288 | ) | (193,109 | ) | (3,179 | ) | 2 | |||||||||
|
|
|
|
|
|
|||||||||||
Total |
403,765 | 397,013 | 6,752 | 2 | ||||||||||||
Reconciling items, net of tax: |
||||||||||||||||
Realized gains (losses) - Investments |
10,213 | 2,974 | 7,239 | |||||||||||||
Part D adjustment |
(10,952 | ) | (8,172 | ) | (2,780 | ) | ||||||||||
Guaranty Fund assessment |
0 | (751 | ) | 751 | ||||||||||||
Administrative settlements |
(5,316 | ) | 0 | (5,316 | ) | |||||||||||
Family Heritage acquisition adjustments and expense |
0 | 522 | (522 | ) | ||||||||||||
Legal settlement expense |
(1,519 | ) | (5,931 | ) | 4,412 | |||||||||||
|
|
|
|
|
|
|||||||||||
Net income |
$ | 396,191 | $ | 385,655 | $ | 10,536 | 3 | |||||||||
|
|
|
|
|
|
|
|
* | Retrospectively adjusted to give effect to the reorganization of segments described earlier in this Note. |
24
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note GNew Unadopted Accounting Guidance
Revenue recognition: The FASB issued Accounting Standard Update No. 2014-09 Revenue from Contracts with Customers (ASU 2014-09), to clarify the principles for recognizing revenue, to provide more consistency and comparability in revenue recognition practices, and to simplify recognition requirements along with other improvements. ASU 2014-09 will be effective for Torchmark beginning in calendar year 2017. The Company is currently evaluating this new guidance. Torchmarks revenues consist of insurance premium and revenues related to financial instruments. These forms of revenue are not within the scope of ASC 2014-09 because they are addressed by other guidance. Therefore, Torchmark does not expect that the implementation of this guidance will result in any significant change in the manner the Company recognizes its revenue.
Low income housing tax credits: The FASB has issued new accounting guidance, Investments-Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects (ASU 2014-01). This accounting guidance replaces the effective yield method of accounting with respect to investments in qualified affordable housing projects and, if certain conditions are present, provides for a new method of accounting. The new method of accounting allows an investor to amortize the cost of its investment based on the proportion of the tax credits/benefits received during the year to the total expected tax credits/benefits to be received over the life of the investment and will be recognized in the Consolidated Statements of Operations as a component of Income tax expense. Additional disclosures are required concerning investments in qualified affordable housing.
The new guidance is effective for Torchmark beginning January 1, 2015, with early adoption permitted. The guidance continues to permit the effective-yield method for investments held as of the date of adoption. Adoption is required on a retrospective basis. Torchmark is currently evaluating the impact of adoption but does not expect that adoption will have a material impact on the consolidated financial statements.
Share-based performance awards: New accounting guidance has also been issued pertaining to share awards with performance targets. This standard, entitled Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved After the Requisite Service Period (ASU 2014-12), is effective for Torchmark beginning in calendar year 2016, with early adoption permitted. The new guidance provides that the Company must take into account the performance target in the recognition of compensation expense once the achievement of the performance target is probable. Torchmark has a limited number of such awards, but currently accounts for these items consistent with the new guidance. Therefore, no material impact is expected from adoption.
25
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)
Note GNew Unadopted Accounting Guidance (continued)
Going concern: The FASB has issued Presentation of Financial Statements Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern (ASU 2014-15). This new standard requires management to perform interim and annual assessments of the entitys ability to continue its business operations within one year of the date of issuance of its financial statements. The Company must then provide certain disclosures if there is substantial doubt about its ability to continue as a going concern. ASU 2014-15 is effective for Torchmark for the year 2016 and for interim periods thereafter. Early adoption is permitted.
26
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Summary of Operations. Torchmarks operations are segmented into its insurance underwriting and investment operations as described in Note FBusiness Segments. The measures of profitability described in Note F are useful in evaluating the performance of the segments and the marketing groups within each insurance segment, because each of our distribution units operates in a niche market. These measures enable management to view period-to-period trends, and to make informed decisions regarding future courses of action.
The tables in Note FBusiness Segments demonstrate how the measures of profitability are determined. Those tables also reconcile our revenues and expenses by segment to major income statement line items for the nine month periods ended September 30, 2014 and 2013. Additionally, a table in that note, Analysis of Profitability by Segment, provides a summary of the profitability measures that demonstrates year-to-year comparability and reconciles those measures to our net income. That summary represents our overall operations in the manner that management views the business, and is a basis of the following highlights discussion.
A discussion of operations by each segment follows later in this report. These discussions compare the first nine months of 2014 with the same period of 2013, unless otherwise noted. The following discussions are presented in the manner we view our operations, as described in Note FBusiness Segments.
Highlights, comparing the first nine months of 2014 with the first nine months of 2013. Net income per diluted share increased 8% to $2.97 from $2.75. Included in net income in 2014 were after-tax realized investment gains of $10 million ($.08 per share) compared with gains of $3 million or $.02 per share in 2013. Realized investment gains and losses are presented more fully under the caption Realized Gains and Losses in this report.
We use three statistical measures as indicators of future premium growth: 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 defined as annualized premium issued, net of cancellations in the first thirty days after issue, except for Direct Response, where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer has expired. Annualized premium issued is the gross premium that would be received during the policies first year in force, assuming that none of the policies lapsed or terminated. Although lapses and terminations will occur, we believe that net sales is a useful indicator of the rate of acceleration of premium growth. First-year collected premium is the premium collected during the reporting period for all policies in their first policy year.
27
First-year collected premium takes lapses into account in the first policy 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.
Total premium income rose 4% in 2014 to $2.4 billion. Total net sales rose 32% to $467 million. After removing the impact of sales of Medicare Part D, which increased significantly in 2014 as a result of the addition of automatic enrollees discussed later in this report, net sales rose 19% to $390 million. Automatic enrollees are individuals who are assigned by the Centers for Medicare and Medicaid Services (CMS) to Part D carriers because they are eligible for both Medicaid and Medicare and didnt select a Part D plan on their own. First-year collected premium was $350 million for the 2014 period, compared with $323 million for the 2013 period. Excluding Part D, there was a 5% increase in first-year collected premium.
Life insurance premium income grew 4% to $1.5 billion. Life net sales increased 10% to $281 million. First-year collected life premium gained 4% to $201 million. Life underwriting margins were steady at 29% of premium, having increased to $421 million in 2014 from $408 million in 2013.
Health insurance premium income, excluding Medicare Part D premium, declined 1% to $645 million. Health net sales, led by sales of Medicare Supplement, rose 54% to $109 million for the nine-month period. First-year collected health premium rose 8% to $81 million. Health margins increased 1% to $148 million.
In the manner we view our Medicare Part D prescription drug business as described in Note FBusiness Segments, policyholder premium was $258 million in 2014 compared with $227 million in 2013, an increase of 14%. As discussed under the caption Medicare Part D in this report, the increase in Part D premium resulted primarily from an increase in automatic enrollees. The increase in automatic enrollees, along with an increase in employer group activity, resulted in net sales increasing from $26 million to $77 million in 2014.
However, margins for the Medicare Part D product will be negatively affected by the requirement to cover two costly Hepatitis C drugs in 2014 which we were not able to include in our 2014 pricing. We anticipate reductions in 2014 Part D margins as a percentage of premium of 4% to 5% when compared with 2013, primarily due to the costs of the Hepatitis C drugs.
As explained in Note FBusiness Segments, differences in our estimate of interim results for Medicare Part D as we view this product for segment purposes and GAAP financial statement purposes resulted in a $11 million after-tax charge to earnings in 2014 ($.08 per share) and a $8 million charge in 2013 ($.06 per share). We expect our 2014 full year benefit ratios to be approximately the same as those for interim periods, as was the case in 2013 and prior years. For this reason, there should be no difference in our segment versus financial statement reporting by year end 2014, as it relates to Medicare Part D. The increase in this adjustment in 2014 resulted primarily from the increase in volume.
28
Excess investment income per diluted share increased 9% in 2014 to $1.27 from $1.17, while the dollar amount of excess investment income rose 3% to $169 million. The greater increase in per share excess investment income in relation to the increase in dollar amount resulted from share purchases over the past twelve months, as discussed later in this report. Net investment income rose $18 million or 3% to $568 million, corresponding closely with the 3% growth in our average investment portfolio at amortized cost. The average effective yield on the fixed-maturity portfolio, which represented 96% of our investments at amortized cost, decreased slightly to 5.91% in the 2014 period from 5.95% in the prior period, as the impact of the low-interest-rate environment on average yield has moderated. Excess investment income is negatively impacted by the increase in required interest on net insurance policy liabilities. Required interest rose 5% or $16 million to $341 million, consistent with the growth in average net policy liabilities. Financing costs declined 7% in the period to $57 million, due to the maturity and repayment of our $94 million par amount 7.375% Notes during the third quarter of 2013. Please refer to the discussion under Capital Resources for more information on debt and interest expense.
In the first nine months of 2014, we invested new money in our fixed-maturity portfolio at an effective annual yield on new investments of 4.74%, compared with 4.37% in the same period of 2013. The portfolio had an average rating of A-, the same as of the previous year end. Approximately 96% of the portfolio at amortized cost was investment grade at September 30, 2014. Cash and short-term investments were $146 million at that date, compared with $114 million at December 31, 2013.
The net unrealized gain position in our fixed-maturity portfolio grew from $390 million at December 31, 2013 to $1.4 billion during the first nine months of 2014, largely due to a decline in market interest rates during 2014. The fixed-maturity portfolio contains no commercial mortgage-backed securities. We are not a party to any counterparty risk, with no credit default swaps or other derivative contracts. We do not engage in securities lending, and our only direct exposure to European sovereign debt is $9 million of German bonds.
We have an on-going share repurchase program which began in 1986 and was reaffirmed by the Board of Directors at their August, 2014 meeting. With no specified authorization amount, we determine the amount of repurchases based on the amount of our excess cash flow, general market conditions, and other alternative uses. These purchases are made at the Parent with excess cash flow. Share purchases are also made with the proceeds from option exercises by current and former employees, in order to reduce dilution. The following chart summarizes share purchases for the nine-month periods ended September 30, 2014 and 2013.
29
Analysis of Share Purchases
(Amounts in thousands, except per share amounts)
For the nine months ended September 30, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
Shares | Amount | Average Price |
Shares | Amount | Average Price |
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Purchases with: |
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Excess cash flow |
5,500 | $ | 287,743 | $ | 52.32 | 6,369 | $ | 265,134 | $ | 41.63 | ||||||||||||||
Option exercise proceeds |
1,022 | 54,341 | 53.15 | 1,901 | 77,686 | 40.86 | ||||||||||||||||||
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Total |
6,522 | $ | 342,084 | $ | 52.45 | 8,270 | $ | 342,820 | $ | 41.45 | ||||||||||||||
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Throughout the remainder of this discussion, share purchases will only refer to those made from excess cash flow.
A detailed discussion of our operations by component segment follows.
Life insurance, comparing the first nine months of 2014 with the first nine months of 2013. Life insurance is our predominant segment, representing 62% of premium income and 71% of insurance underwriting margin in the first nine months of 2014. In addition, investments supporting the reserves for life business generate the majority of excess investment income attributable to the investment segment. Life insurance premium income increased 4% to $1.5 billion. The following table presents Torchmarks life insurance premium by distribution method.
Life Insurance
Premium by Distribution Method
(Dollar amounts in thousands)
Nine months ended September 30, | Increase | |||||||||||||||||||||||
2014 | 2013 | (Decrease) | ||||||||||||||||||||||
Amount | % of Total |
Amount | % of Total |
Amount | % | |||||||||||||||||||
American Income Exclusive Agency |
$ | 570,122 | 39 | $ | 533,348 | 38 | $ | 36,774 | 7 | |||||||||||||||
Direct Response |
528,501 | 36 | 501,333 | 35 | 27,168 | 5 | ||||||||||||||||||
Liberty National Exclusive Agency |
204,932 | 14 | 208,369 | 15 | (3,437 | ) | (2 | ) | ||||||||||||||||
Other Agencies |
169,179 | 11 | 173,809 | 12 | (4,630 | ) | (3 | ) | ||||||||||||||||
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Total Life Premium |
$ | 1,472,734 | 100 | $ | 1,416,859 | 100 | $ | 55,875 | 4 | |||||||||||||||
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Net sales, defined earlier in this report as an indicator of new business production, grew 10% to $281 million. An analysis of life net sales by distribution group is presented below.
30
Life Insurance Net Sales by Distribution Method (Dollar amounts in thousands)
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Nine months ended September 30, | Increase | |||||||||||||||||||||||
2014 | 2013 | (Decrease) | ||||||||||||||||||||||
Amount | % of Total |
Amount | % of Total |
Amount | % | |||||||||||||||||||
American Income Exclusive Agency |
$ | 126,115 | 45 | $ | 115,022 | 45 | $ | 11,093 | 10 | |||||||||||||||
Direct Response |
120,321 | 43 | 109,990 | 43 | 10,331 | 9 | ||||||||||||||||||
Liberty National Exclusive Agency |
24,988 | 9 | 22,856 | 9 | 2,132 | 9 | ||||||||||||||||||
Other Agencies |
9,821 | 3 | 8,091 | 3 | 1,730 | 21 | ||||||||||||||||||
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Total Life Net Sales |
$ | 281,245 | 100 | $ | 255,959 | 100 | $ | 25,286 | 10 | |||||||||||||||
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First-year collected life premium, defined earlier in this report, was $201 million in the 2014 period, rising 4%. First-year collected life premium by distribution group is presented in the table below.
Life Insurance First-Year Collected Premium by Distribution Method (Dollar amounts in thousands)
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Nine months ended September 30, | Increase | |||||||||||||||||||||||
2014 | 2013 | (Decrease) | ||||||||||||||||||||||
Amount | % of Total |
Amount | % of Total |
Amount | % | |||||||||||||||||||
American Income Exclusive Agency |
$ | 98,868 | 49 | $ | 96,529 | 50 | $ | 2,339 | 2 | |||||||||||||||
Direct Response |
75,738 | 38 | 70,531 | 36 | 5,207 | 7 | ||||||||||||||||||
Liberty National Exclusive Agency |
19,156 | 9 | 19,485 | 10 | (329 | ) | (2 | ) | ||||||||||||||||
Other Agencies |
7,580 | 4 | 7,608 | 4 | (28 | ) | 0 | |||||||||||||||||
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Total |
$ | 201,342 | 100 | $ | 194,153 | 100 | $ | 7,189 | 4 | |||||||||||||||
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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 and referrals to help to ensure sustainable growth. The life business of this agency is Torchmarks highest margin life business and it is the largest contributor to life premium of any of Torchmarks distribution systems at 39% of Torchmarks total. This group produced premium income of $570 million, an increase of 7%. First-year collected premium was $99 million, an increase of 2%. Net sales increased 10% to $126 million. Sales growth in our captive agencies is generally dependent on growth in the size of the agency force. The American Income agent count rose 13% to 6,155 at September 30, 2014 over the count a year earlier (5,449), and rose 16% when
31
compared with the count at December 31, 2013 (5,302). The average agent count for the nine months of 2014 was 5,716. The average agent count is based on the actual count at the end of each week during the period. The American Income Agency has been focusing on growing and strengthening middle management to support sustainable growth of the agency force. To accomplish this, we have placed an increased emphasis on agent training programs and financial incentives that appropriately reward agents at all levels for helping develop and train personnel. The agency has also begun providing 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 each individuals level of experience and responsibilities.
The 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 units efforts to reach the consumer. The Direct Response Units 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 have introduced certain new initiatives in this unit that have increased response rates. These initiatives include lower premium rates as well as offerings of higher face amounts on the adult products.
While the juvenile market is an important source of sales, it also is a vehicle to reach the parents and grandparents of the juvenile policyholders, who are more likely to respond favorably to a Direct Response solicitation for life coverage on themselves than is the general adult population. Also, both the juvenile policyholders and their parents are low acquisition-cost targets for sales of additional coverage over time.
Direct Responses life premium income rose 5% to $529 million, representing 36% of Torchmarks total life premium in the first nine months of 2014. Net sales of $120 million for this group increased 9%. First-year collected premium increased 7% to $76 million.
The Liberty National Exclusive Agency markets individual and group life insurance to middle-income customers. Life premium income for this agency was $205 million in the 2014 period, a 2% decline from $208 million in the 2013 nine months. First-year collected premium declined 2% to $19 million.
Net sales for the Liberty Agency increased 9% to $25 million. Liberty had 1,604 producing agents at September 30, 2014, compared with 1,320 a year earlier, an increase of 22%. The agent count has increased 12% since December 31, 2013, when it stood at 1,430. The average agent count for the first nine months of 2014 was 1,482. Our long term plans to grow this agency involve expansion from small-town markets in the southeast to more densely populated areas with larger pools of potential agent recruits and customers. We believe that expansion of this Agencys presence into more heavily populated, less-penetrated areas will help create long term agency growth. Additionally, a new prospecting training program has helped to improve the ability of agents to develop new worksite marketing business.
32
The Other Agencies distribution systems offering life insurance include the Military Agency, the UA Independent Agency (which predominantly writes health insurance), and various smaller distribution channels. The Other Agencies distribution group contributed $169 million of life premium income, or 11% of Torchmarks total in the first nine months of 2014, but contributed only 3% of net sales.
Life Insurance Summary of Results (Dollar amounts in thousands)
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Nine months ended September 30, | ||||||||||||||||||||||||
2014 | 2013 | Increase | ||||||||||||||||||||||
Amount | % of Premium |
Amount | % of Premium |
Amount | % | |||||||||||||||||||
Premium and policy charges |
$ | 1,472,734 | 100 | $ | 1,416,859 | 100 | $ | 55,875 | 4 | |||||||||||||||
Net policy obligations |
568,710 | 38 | 542,758 | 38 | 25,952 | 5 | ||||||||||||||||||
Commissions and acquisition expense |
483,436 | 33 | 466,256 | 33 | 17,180 | 4 | ||||||||||||||||||
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Insurance underwriting income before other income and administrative expense |
$ | 420,588 | 29 | $ | 407,845 | 29 | $ | 12,743 | 3 | |||||||||||||||
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Life insurance underwriting income before insurance administrative expense was $421 million, increasing 3%. Increases in margin were due in large part to growth in premium income. The percentage growth in margin was less than the growth in premium income due to slightly higher claims in 2014. As a percentage of premium, underwriting margins were stable at 29%.
Health insurance, comparing the first nine months of 2014 with the first nine months of 2013. Health insurance sold by Torchmark includes primarily Medicare Supplement insurance, cancer coverage, accident coverage, and other limited-benefit supplemental health products. In this discussion of health business, references to premium income, net sales, and underwriting will exclude our Medicare Part D health business, which will be discussed under another caption. In this analysis, all health coverage plans other than Medicare Supplement are classified as limited-benefit plans.
Health premium accounted for 27% of our total premium in the 2014 period, while the health underwriting margin accounted for 25% 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 lifes superior profitability and its greater contribution to excess investment income.
33
Health premium declined 1% to $645 million in the 2014 period. Medicare Supplement premium declined 1% to $314 million, while other limited-benefit health premium declined 1% to $331 million. Limited-benefit premium now provides Torchmark with the greatest amount of non-Part D health premium, representing 51% of such premium for the 2014 period.
Health net sales increased 54% to $109 million. Medicare Supplement net sales increased 148% to $54 million in the 2014 period. The increase in Medicare Supplement net sales was primarily a result of stronger group sales, which vary significantly from period to period. Limited-benefit net sales increased 12% to $54 million. Health first-year collected premium rose 8% to $81 million.
The following table is an analysis of our health premium by distribution method.
Health Insurance
Premium by Distribution Method
(Dollar amounts in thousands)
Nine months ended September 30, | Increase | |||||||||||||||||||||||
2014 | 2013 | (Decrease) | ||||||||||||||||||||||
Amount | % of Total |
Amount | % of Total |
Amount | % | |||||||||||||||||||
United American Independent Agency |
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Limited-benefit plans |
$ | 12,032 | $ | 17,365 | $ | (5,333 | ) | (31 | ) | |||||||||||||||
Medicare Supplement |
212,626 | 206,122 | 6,504 | 3 | ||||||||||||||||||||
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224,658 | 35 | 223,487 | 35 | 1,171 | 1 | |||||||||||||||||||
Liberty National Exclusive Agency |
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Limited-benefit plans |
107,984 | 114,546 | (6,562 | ) | (6 | ) | ||||||||||||||||||
Medicare Supplement |
59,905 | 68,418 | (8,513 | ) | (12 | ) | ||||||||||||||||||
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167,889 | 26 | 182,964 | 28 | (15,075 | ) | (8 | ) | |||||||||||||||||
Family Heritage Agency |
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Limited-benefit plans |
151,882 | 141,808 | 10,074 | 7 | ||||||||||||||||||||
Medicare Supplement |
0 | 0 | 0 | 0 | ||||||||||||||||||||
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151,882 | 24 | 141,808 | 22 | 10,074 | 7 | |||||||||||||||||||
American Income Exclusive Agency |
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Limited-benefit plans |
58,683 | 59,353 | (670 | ) | (1 | ) | ||||||||||||||||||
Medicare Supplement |
365 | 440 | (75 | ) | (17 | ) | ||||||||||||||||||
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59,048 | 9 | 59,793 | 9 | (745 | ) | (1 | ) | |||||||||||||||||
Direct Response |
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Limited-benefit plans |
506 | 242 | 264 | 109 | ||||||||||||||||||||
Medicare Supplement |
40,775 | 40,624 | 151 | 0 | ||||||||||||||||||||
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41,281 | 6 | 40,866 | 6 | 415 | 1 | |||||||||||||||||||
Total Health Premium |
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Limited-benefit plans |
331,087 | 51 | 333,314 | 51 | (2,227 | ) | (1 | ) | ||||||||||||||||
Medicare Supplement |
313,671 | 49 | 315,604 | 49 | (1,933 | ) | (1 | ) | ||||||||||||||||
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Total |
$ | 644,758 | 100 | $ | 648,918 | 100 | $ | (4,160 | ) | (1 | ) | |||||||||||||
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34
Presented below is a table of health net sales by distribution method.
Health Insurance
Net Sales by Distribution Method
(Dollar amounts in thousands)
Nine months ended September 30, | Increase | |||||||||||||||||||||||
2014 | 2013 | (Decrease) | ||||||||||||||||||||||
Amount | % of Total |
Amount | % of Total |
Amount | % | |||||||||||||||||||
United American Independent Agency |
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Limited-benefit plans |
$ | 647 | $ | 705 | $ | (58 | ) | (8 | ) | |||||||||||||||
Medicare Supplement |
32,286 | 18,757 | 13,529 | 72 | ||||||||||||||||||||
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32,933 | 30 | 19,462 | 28 | 13,471 | 69 | |||||||||||||||||||
Liberty National Exclusive Agency |
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Limited-benefit plans |
12,136 | 9,767 | 2,369 | 24 | ||||||||||||||||||||
Medicare Supplement |
187 | 263 | (76 | ) | (29 | ) | ||||||||||||||||||
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12,323 | 12 | 10,030 | 14 | 2,293 | 23 | |||||||||||||||||||
Family Heritage Agency |
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Limited-benefit plans |
35,134 | 32,476 | 2,658 | 8 | ||||||||||||||||||||
Medicare Supplement |
0 | 0 | 0 | 0 | ||||||||||||||||||||
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35,134 | 32 | 32,476 | 46 | 2,658 | 8 | |||||||||||||||||||
American Income Exclusive Agency |
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Limited-benefit plans |
6,445 | 5,057 | 1,388 | 27 | ||||||||||||||||||||
Medicare Supplement |
0 | 0 | 0 | 0 | ||||||||||||||||||||
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6,445 | 6 | 5,057 | 7 | 1,388 | 27 | |||||||||||||||||||
Direct Response |
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Limited-benefit plans |
4 | 580 | (576 | ) | (99 | ) | ||||||||||||||||||
Medicare Supplement |
21,925 | 2,950 | 18,975 | 643 | ||||||||||||||||||||
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21,929 | 20 | 3,530 | 5 | 18,399 | 521 | |||||||||||||||||||
Total Net Sales |
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Limited-benefit plans |
54,366 | 50 | 48,585 | 69 | 5,781 | 12 | ||||||||||||||||||
Medicare Supplement |
54,398 | 50 | 21,970 | 31 | 32,428 | 148 | ||||||||||||||||||
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Total |
$ | 108,764 | 100 | 70,555 | 100 | $ | 38,209 | 54 | ||||||||||||||||
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35
The following table presents health insurance first-year collected premium by distribution method.
Health Insurance
First-Year Collected Premium by Distribution Method
(Dollar amounts in thousands)
Nine months ended September 30, | Increase | |||||||||||||||||||||||
2014 | 2013 | (Decrease) | ||||||||||||||||||||||
Amount | % of Total |
Amount | % of Total |
Amount | % | |||||||||||||||||||
United American Independent Agency |
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Limited-benefit plans |
$ | 537 | $ | 606 | $ | (69 | ) | (11 | ) | |||||||||||||||
Medicare Supplement |
32,655 | 27,716 | 4,939 | 18 | ||||||||||||||||||||
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33,192 | 41 | 28,322 | 38 | 4,870 | 17 | |||||||||||||||||||
Liberty National Exclusive Agency |
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Limited-benefit plans |
9,673 | 9,143 | 530 | 6 | ||||||||||||||||||||
Medicare Supplement |
229 | 444 | (215 | ) | (48 | ) | ||||||||||||||||||
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9,902 | 12 | 9,587 | 13 | 315 | 3 | |||||||||||||||||||
Family Heritage Agency |
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Limited-benefit plans |
26,987 | 27,409 | (422 | ) | (2 | ) | ||||||||||||||||||
Medicare Supplement |
0 | 0 | 0 | 0 | ||||||||||||||||||||
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26,987 | 33 | 27,409 | 36 | (422 | ) | (2 | ) | |||||||||||||||||
American Income Exclusive Agency |
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Limited-benefit plans |
6,895 | 6,928 | (33 | ) | 0 | |||||||||||||||||||
Medicare Supplement |
0 | 0 | 0 | 0 | ||||||||||||||||||||
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6,895 | 9 | 6,928 | 9 | (33 | ) | 0 | ||||||||||||||||||
Direct Response |
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Limited-benefit plans |
142 | 424 | (282 | ) | (67 | ) | ||||||||||||||||||
Medicare Supplement |
3,942 | 2,476 | 1,466 | 59 | ||||||||||||||||||||
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4,084 | 5 | 2,900 | 4 | 1,184 | 41 | |||||||||||||||||||
Total First-Year Collected Premium |
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Limited-benefit plans |
44,234 | 55 | 44,510 | 59 | (276 | ) | (1 | ) | ||||||||||||||||
Medicare Supplement |
36,826 | 45 | 30,636 | 41 | 6,190 | 20 | ||||||||||||||||||
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Total |
$ | 81,060 | 100 | $ | 75,146 | 100 | $ | 5,914 | 8 | |||||||||||||||
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36
A discussion of health operations by distribution group follows.
The UA Independent Agency consists of independent agencies appointed with Torchmark who may also sell for other companies. The UA Independent Agency was Torchmarks largest health agency in terms of health premium income. Premium income was $225 million, representing 35% of Torchmarks total health premium. Net sales were $33 million, or 30% of Torchmarks health sales. This agency is Torchmarks largest producer of Medicare Supplement insurance, with Medicare Supplement premium income of $213 million. The UA Independent Agency represents approximately 68% of all Torchmark Medicare Supplement premium and 59% of Medicare Supplement net sales. Medicare Supplement premium in this agency rose 3%, while total health premium increased 1%. Net sales of these products rose 69% in 2014. As noted earlier, Group Medicare Supplement sales have historically fluctuated from period to period.
The Family Heritage Agency markets primarily 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 incorporation of Torchmarks recruiting programs. The Family Heritage Agency contributed $35 million in net sales in the nine months of 2014, compared with $32 million for the same period in 2013, an increase of 8%. Health premium income was $152 million for the nine month period of 2014, representing 24% of Torchmarks health premium. This compared with $142 million or 22% of health premium in the prior year period. The producing agent count was 761 agents at September 30, 2014, compared with 695 at December 31, 2013, and 717 at September 30, 2013. The average agent count for the nine months of 2014 was 726.
The Liberty National Exclusive Agency represented 26% of all Torchmark health premium income at $168 million in the nine months of 2014. The Liberty Agency markets limited-benefit health supplemental products consisting primarily of cancer insurance. Much of Libertys health business is now generated through worksite marketing targeting small businesses of 10 to 25 employees. In 2014, health premium income in the Agency declined 8% from prior year premium of $183 million. Libertys health premium decline has been due primarily to the runoff of a block of discontinued hospital-surgical products and the declining Medicare Supplement block.
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 15% of health premium in the 2014 period. The American Income Exclusive Agency markets a variety of limited-benefit plans, primarily accident. The Direct Response group markets primarily Medicare Supplements to employer or union-sponsored groups. In 2014, Direct Response added $22 million of Medicare Supplement net sales compared with $3 million a year earlier, due to sales to a new large group. On a combined basis, the health net sales of these agencies more than tripled to $28 million in 2014 from $9 million in 2013, as a result of the Direct Response increase.
37
The following table presents underwriting margin data for health insurance.
Health Insurance
Summary of Results
(Dollar amounts in thousands)
Nine months ended September 30, | ||||||||||||||||||||||||
2014 | 2013 | Change | ||||||||||||||||||||||
Amount | % of Premium |
Amount | % of Premium |
Amount | % | |||||||||||||||||||
Premium |
$ | 644,758 | 100 | $ | 648,918 | 100 | $ | (4,160 | ) | (1 | ) | |||||||||||||
Net policy obligations |
366,589 | 57 | 375,649 | 58 | (9,060 | ) | (2 | ) | ||||||||||||||||
Commissions and acquisition expense |
129,698 | 20 | 126,170 | 19 | 3,528 | 3 | ||||||||||||||||||
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Insurance underwriting income before other income and administrative expense |
$ | 148,471 | 23 | $ | 147,099 | 23 | $ | 1,372 | 1 | |||||||||||||||
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Underwriting income for health insurance increased 1% to $148 million in 2014. As a percentage of health premium, underwriting margins were stable at 23%. The improved benefit ratio was largely a result of normal claim fluctuations.
Medicare Part D, comparing the first nine months of 2014 with the first nine months of 2013. Coverage under Torchmarks Medicare Part D prescription drug plan for Medicare beneficiaries is provided through United American. The Medicare Part D plan is a stand-alone prescription drug plan for Medicare beneficiaries which is regulated and partially funded by CMS for participating private insurers. These products are marketed through our Direct Response unit and to groups through our UA Independent Agency. As described in Note FBusiness Segments, we report our Medicare Part D business for segment analysis purposes as we view the business, in which expected full-year benefits are matched with the related premium income which is received evenly throughout the policy year. At this time, we have expensed benefits based on our expected benefit ratio of approximately 82% for the entire 2014 contract year. This ratio was also 82% for the full year 2013. We describe the differences between the segment analysis and the GAAP operating results in Note F. Due to the design of the Medicare prescription drug product, claims are expected to be heaviest early in the calendar year. Management believes that the use of the full-year loss ratio is an appropriate measure for interim results, and also that these reporting differences will arise only on an interim basis and will be eliminated at the end of a full year, as they were in the full year of 2013.
38
Medicare Part D
Selected Financial Information
(Dollar amounts in thousands)
Nine months ended September 30, |
Increase (Decrease) |
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2014 | 2013 | Amount | % | |||||||||||||
Premium (1) |
$ | 258,243 | $ | 226,779 | $ | 31,464 | 14 | |||||||||
Net Sales (2) |
76,955 | 26,115 | 50,840 | 195 | ||||||||||||
First-Year Collected Premium (3) |
67,423 | 54,050 | 13,373 | 25 |
(1) | Total Medicare Part D premium excludes the risk-sharing premiums of $28.5 million in 2014 and $8.7 million in 2013 receivable from the CMS consistent with the Medicare Part D contract. This risk-sharing amount is a portion of the excess or deficiency of actual over expected claims, and therefore we view this payment as a component of policyholder benefits in our segment analysis. |
(2) | Net sales for Medicare Part D represents only new first-time enrollees. |
(3) | First-year collected premium for Medicare Part D represents only premium collected within the first twelve months from new first-time enrollees. |
Medicare Part D premium was $258 million in 2014, compared with $227 million in 2013, after removal of the risk-sharing adjustment in both periods. This represents an increase in premium of 14%. Net sales rose $51 million, due to an increase in new Part D auto-enrollees and an increase in employer group activity.
Medicare Part D underwriting results are presented in the following chart. The adjustments which reconcile Part D results in accordance with our health segment analysis to Part D results in accordance with GAAP are presented in the charts in Note FBusiness Segments.
Medicare Part D
Summary of Results
(Dollar amounts in thousands)
Nine months ended September 30, | ||||||||||||||||||||||||
2014 | 2013 | Increase | ||||||||||||||||||||||
Amount | % of Premium |
Amount | % of Premium |
Amount | % | |||||||||||||||||||
Premium |
$ | 258,243 | 100 | $ | 226,779 | 100 | $ | 31,464 | 14 | |||||||||||||||
Net policy obligations |
213,184 | 82 | 188,816 | 83 | 24,368 | 13 | ||||||||||||||||||
Commissions and acquisition expense |
22,325 | 9 | 12,643 | 6 | 9,682 | 77 | ||||||||||||||||||
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Insurance underwriting income before other income and administrative expense |
$ | 22,734 | 9 | $ | 25,320 | 11 | $ | (2,586 | ) | (10 | ) | |||||||||||||
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39
Margins decreased 10% in 2014 to $23 million, even though premium rose 14%. Premiums were increased for 2014 to cover higher anticipated non-deferred acquisition expenses. As such, we expected significantly lower obligation ratios in 2014. However, due primarily to unexpected costs related to two Hepatitis C drugs approved by the U.S. Food and Drug Administration late in 2013, the obligation ratios for 2014 were only slightly lower than 2013. Non-deferred acquisition cost ratios were higher, as planned in our pricing, due to (1) new taxes imposed by the Affordable Care Act, (2) higher costs related to a change in structure of drug rebates, and (3) higher costs related to the increased volume of enrollees. As a percentage of premium, underwriting margin for the 2014 nine months was 9%, compared with 11% for 2013.
Medicare Part D claims will be higher than originally anticipated for the full year 2014 due to the cost of the new Hepatitis C drugs. We expect that Part D margin for the full year 2014 will decline primarily as a result of the impact of the new Hepatitis C drugs, causing 2014 margins to be in a range of approximately 6% to 9% of premium.
For 2015, we expect significantly less volatility in Part D and a return to higher margins at historical levels. We have addressed this issue by adjusting our 2015 pricing to reflect the impact of the Hepatitis C drugs. Additionally, we expect to have a significantly reduced number of auto-enrollees in 2015 than in 2014. Since auto-enrollees have accounted for nearly 85% of our Hepatitis C claims this year, our exposure to Hepatitis C claims should be much lower next year. This loss of auto-enrollees will result in lower Part D premium income in 2015, but we expect improved and more stable margins as a percentage of premium.
Since the Medicare Part D plan is a government-sponsored program, regulatory changes could further alter the outlook for this market.
Annuities. Annuities represent an insignificant part of our business and are not expected to be an important part of our marketing strategy going forward.
Operating expenses, comparing the first nine months of 2014 with the first nine months of 2013. Operating expenses consist of insurance administrative expenses and parent company expenses. Also included is stock compensation expense, which is viewed by us as a parent company expense. Insurance administrative expenses relate to premium income for a given period; therefore, we measure those expenses as a percentage of premium income. Total expenses are measured as a percentage of total revenues. An analysis of operating expenses is shown below.
40
Operating Expenses Selected Information
(Dollar amounts in thousands)
Nine months ended September 30, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
% of | % of | |||||||||||||||
Amount | Premium | Amount | Premium | |||||||||||||
Insurance administrative expenses: |
||||||||||||||||
Salaries |
$ | 62,876 | 2.6 | $ | 61,523 | 2.7 | ||||||||||
Other employee costs |
21,373 | 0.9 | 25,640 | 1.1 | ||||||||||||
Other administrative costs |
42,906 | 1.8 | 39,140 | 1.7 | ||||||||||||
Legal expense |
7,763 | 0.3 | 6,777 | 0.3 | ||||||||||||
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Total insurance administrative expenses |
134,918 | 5.6 | 133,080 | 5.8 | ||||||||||||
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Parent company expense |
6,284 | 6,734 | ||||||||||||||
Stock compensation expense |
25,219 | 19,376 | ||||||||||||||
New York Guaranty Fund Assessment |
0 | 1,155 | ||||||||||||||
Legal settlement expense |
2,337 | 500 | ||||||||||||||
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Total operating expenses, per |
$ | 168,758 | $ | 160,845 | ||||||||||||
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Insurance administrative expenses: |
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Increase (decrease) over prior year |
1.4 | % | 10.0 | % | ||||||||||||
Total operating expenses: |
||||||||||||||||
Increase (decrease) over prior year |
4.9 | % | 11.5 | % |
Insurance administrative expenses were up 1% in 2014 when compared with the prior year period. As a percentage of total premium, insurance administrative expenses declined from 5.8% in 2013 to 5.6%. Total operating expenses rose $8 million or 5%. In 2014, employee costs other than salaries declined 17% during the period, primarily as a result of decreased pension benefit costs. Stock compensation expense rose 30% to $25 million, primarily as a result of an increase in the market price of Torchmark stock in 2014 that resulted in higher grant prices for restricted stock and options, and positive Company performance that caused an increase in the expense related to performance share grants. As described in Note F in the Consolidated Financial Statements, we recorded legal accruals involving non-insurance matters, partially offset by proceeds for investment litigation. Litigation not related to our direct insurance operations is not considered an insurance administrative expense by Torchmark management and is removed from its analysis of core insurance operations in its segment reporting.
Investments (excess investment income), comparing the first nine months of 2014 with the first nine months of 2013. 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 FBusiness Segments in the Notes to the Consolidated Financial Statements. It is defined as net investment income less the required interest on net policy liabilities and the interest cost associated with capital funding or financing costs.
41
We also view excess investment income per diluted 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 $6.0 billion of cash flow to repurchase Torchmark shares (average price per share of $14.16) after determining that the repurchases provided a greater return than other investment alternatives. Share repurchases reduce excess investment income because of the foregone earnings on the cash that would otherwise have been invested in interest-bearing assets, but they also reduce the number of 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.
The following table summarizes Torchmarks investment income, excess investment income, and excess investment income per diluted share.
Excess Investment Income
(Dollar amounts in thousands)
Nine months ended September 30, |
Increase (Decrease) |
|||||||||||||||
2014 | 2013 | Amount | % | |||||||||||||
Net investment income * |
$ | 567,569 | $ | 550,015 | $ | 17,554 | 3 | |||||||||
Required interest on net insurance policy liabilities |
(340,954 | ) | (324,562 | ) | (16,392 | ) | 5 | |||||||||
Financing costs: |
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Interest on funded debt |
(53,299 | ) | (57,383 | ) | 4,084 | (7 | ) | |||||||||
Interest on short-term debt |
(3,820 | ) | (3,998 | ) | 178 | (4 | ) | |||||||||
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Total financing costs |
(57,119 | ) | (61,381 | ) | 4,262 | (7 | ) | |||||||||
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Excess investment income |
$ | 169,496 | $ | 164,072 | $ | 5,424 | 3 | |||||||||
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Excess investment income per diluted share |
$ | 1.27 | $ | 1.17 | $ | 0.10 | 9 | |||||||||
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Average invested assets (at amortized cost) |
$ | 13,228,138 | $ | 12,782,072 | $ | 446,066 | 3 | |||||||||
Average net insurance policy liabilities ** |
8,185,121 | 7,788,647 | 396,474 | 5 | ||||||||||||
Average debt and preferred securities (at amortized cost) |
1,286,113 | 1,335,366 | (49,253 | ) | (4 | ) |
* | Net investment income per Torchmarks segment analysis does not agree with Net investment income per the Consolidated Statements of Operations because management views the amortization of certain low-income housing interests as an adjustment to increase tax expense while GAAP requires that it reduce net investment income, as presented in the Reconciliation in Note F - Business Segments. |
** | Net of deferred acquisition costs, excluding the attributed unrealized gains and losses thereon. |
Excess investment income for the 2014 period increased 3% to $169 million. On a per share basis, excess investment income increased an even greater 9% as a result of our share purchases over the past 12 months. While excess investment income has been pressured in recent years as a result of the impact that lower interest rates have had on net investment income, it has increased in 2014 as the impact of portfolio turnover has moderated. The increase in excess investment income was also due, in part, to the decline in financing costs related to the August, 2013 maturity and repayment of our $94 million principal amount 7 3/8% Notes.
42
Net investment income rose $18 million or 3% in 2014, while average invested assets (with fixed maturities at amortized cost) also rose 3% year over year. The effective annual yield on the fixed maturity portfolio was 5.91% in the first nine months of 2014, compared with 5.95% a year earlier. The reduction in the average portfolio yield rate was primarily a result of investing new money at rates lower than the portfolio average yield and reinvesting proceeds from bonds that were called or matured in 2013 at yield rates less than the rates we earned on the bonds before they were called or matured. At current new money rates, we would expect to see only modest declines in the average portfolio yield rate over the next few years compared with the larger declines in recent years, as only 1% to 2% of fixed maturities on average are expected to run off each year over the next five years.
In recent years, investment income has been negatively impacted as the proceeds from fixed maturity assets that matured, were called, or were otherwise disposed of were reinvested in lower yielding assets. However, during 2014, the proceeds from dispositions have been reinvested at yield rates closer to the yield rates earned on the assets disposed of. There would be no material negative impact on investment income in the foreseeable future if the assets currently callable are called and the proceeds from such calls and the proceeds from assets expected to mature are reinvested at expected future new money rates.
Net investment income has also been negatively affected in 2014 by the CMS requirement for us to cover Medicare Part D claim costs in the current period that are ultimately the responsibility of the government, but are not reimbursed until the following year. Because Part D claims have been unusually high in 2014, due to the approval of new Hepatitis C drugs discussed earlier in this report and higher generic drug costs, we have incurred extensive upfront costs that will not be reimbursed by CMS until late 2015. This delay has caused a decrease in investable cash flows that will cause us to lose approximately $4 million in investment income in 2014 and approximately $6 million in 2015. See the discussion on Consolidated Liquidity later in this report for more information.
Should interest rates rise, especially long-term rates, Torchmark would benefit due to higher net investment income on new purchases. Even a sudden, significant increase in interest rates would be beneficial because Torchmark has very little disintermediation risk. Also, we are not 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 excess investment income because we consider these amounts to be components of the profitability of our insurance segments. Required interest is based on the actuarial interest assumptions used in discounting the benefit reserve liability and the
43
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 under ASC 944-20-05 (formerly SFAS 60) which mandates that interest rate assumptions 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 premiums 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.
Required interest on net insurance policy liabilities increased $16 million or 5% to $341 million. The increase in required interest correlated with the 5% growth in average net interest-bearing insurance policy liabilities.
Financing costs declined 7% or $4 million to $57 million, as a result of a decline in interest cost from the previously-mentioned maturity of our $94 million 7 3/8% Notes in August, 2013. More information concerning debt can be found in the Capital Resources section of this report.
Investments (acquisitions), comparing the first nine months of 2014 with the first nine months of 2013. Torchmarks 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 available longer-term securities do not meet our quality and yield objectives, new money is generally invested in shorter-term fixed maturities.
The following table summarizes selected information for fixed-maturity purchases. The effective annual yield shown is the yield calculated to 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 (or the maturity date, if the yield calculated to the maturity date is lower than the yield calculated to each call date).
44
Fixed Maturity Acquisitions Selected Information
(Dollar amounts in millions)
For the nine months ended September 30, |
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2014 | 2013 | |||||||
Cost of acquisitions: |
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Investment-grade corporate securities |
$ | 493 | $ | 807 | ||||
Other |
7 | 18 | ||||||
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Total fixed-maturity acquisitions |
$ | 500 | $ | 825 | ||||
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Effective annual yield * |
4.74 | % | 4.37 | % | ||||
Average life, in years to: |
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Next call |
21.1 | 26.4 | ||||||
Maturity |
21.3 | 27.0 | ||||||
Average rating |
BBB+ | A- |
* | One-year compounded yield on a tax-equivalent basis, whereby the yield on tax-exempt securities is adjusted to produce a yield equivalent to the pretax yield on taxable securities. |
Acquisitions in both periods consisted primarily of corporate bonds, with securities spanning a diversified range of issuers, industry sectors, and geographical regions. All of the acquired securities were investment grade.
Investments (portfolio composition). The composition of the investment portfolio at book value on September 30, 2014 was as follows:
Invested Assets At September 30, 2014
(Dollar amounts in millions)
Amount | % of Total |
|||||||
Fixed maturities(at amortized cost) |
$ | 12,728 | 96 | % | ||||
Equities (at cost) |
1 | 0 | ||||||
Policy loans |
465 | 4 | ||||||
Other long-term investments |
12 | 0 | ||||||
Short-term investments |
79 | 0 | ||||||
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Total |
$ | 13,285 | 100 | % | ||||
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Approximately 96% of our investments at book value are in a diversified fixed-maturity portfolio. Policy loans, which are secured by policy cash values, make up approximately 4% 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.
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Fixed Maturities. The following table summarizes certain information about our fixed-maturity portfolio by component at September 30, 2014.
Fixed Maturities by Component
(Dollar amounts in millions)
Cost or | Gross | Gross | % of Total Fixed Maturities | |||||||||||||||||||||
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
at Amortized Cost |
at Fair Value |
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Corporates |
$ | 10,455 | $ | 1,335 | $ | (83 | ) | $ | 11,707 | 82 | 83 | |||||||||||||
Redeemable preferred stock |
497 | 54 | (6 | ) | 545 | 4 | 4 | |||||||||||||||||
Municipals |
1,278 | 148 | (2 | ) | 1,424 | 10 | 10 | |||||||||||||||||
Government-sponsored enterprises |
288 | 0 | (19 | ) | 269 | 2 | 2 | |||||||||||||||||
Governments & agencies |
109 | 1 | (2 | ) | 108 | 1 | 1 | |||||||||||||||||
Residential mortgage-backed* |
6 | 0 | 0 | 6 | 0 | 0 | ||||||||||||||||||
Collateralized debt obligations |
67 | 4 | (8 | ) | 63 | 1 | 0 | |||||||||||||||||
Other asset-backed securities |
28 | 3 | 0 | 31 | 0 | 0 | ||||||||||||||||||
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Total fixed maturities |
$ | 12,728 | $ | 1,545 | $ | (120 | ) | $ | 14,153 | 100 | 100 | |||||||||||||
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* | Includes GNMAs |
At September 30, 2014, fixed maturities had a fair value of $14.2 billion, compared with $12.9 billion at December 31, 2013. The net unrealized gain position in the fixed-maturity portfolio increased from a net gain of $390 million at December 31, 2013 to a net gain of $1.4 billion at September 30, 2014, as a result of a decrease in market interest rates. The September 30, 2014 net unrealized gain consisted of gross unrealized gains of $1.5 billion offset by $120 million of gross unrealized losses, compared with the December, 2013 net unrealized gain which consisted of a gross unrealized gain of $801 million and a gross unrealized loss of $411 million.
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Investments in fixed-maturity securities are diversified over a wide range of industry sectors. The following table summarizes certain information about our fixed-maturity portfolio by sector at September 30, 2014.
Fixed Maturities by Sector
(Dollar amounts in millions)
Cost or Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
% of Total Fixed Maturities | ||||||||||||||||||||
Amortized | Fair | |||||||||||||||||||||||
Cost | Value | |||||||||||||||||||||||
Financial - Life/Health/PC Insurance |
$ | 1,790 | $ | 255 | $ | (5 | ) | $ | 2,040 | 14 | % | 14 | % | |||||||||||
Financial - Bank |
683 | 80 | (7 | ) | 756 | 5 | 5 | |||||||||||||||||
Financial - Other |
621 | 76 | (8 | ) | 689 | 5 | 5 | |||||||||||||||||
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Subtotal Financial |
3,094 | 411 | (20 | ) | 3,485 | 24 | 24 | |||||||||||||||||
Utilities |
2,244 | 317 | (14 | ) | 2,547 | 18 | 18 | |||||||||||||||||
Energy |
1,459 | 205 | (8 | ) | 1,656 | 11 | 12 | |||||||||||||||||
Government (US, municipal, and foreign) |
1,675 | 149 | (22 | ) | 1,802 | 13 | 13 | |||||||||||||||||
Basic Materials |
1,005 | 93 | (8 | ) | 1,090 | 8 | 8 | |||||||||||||||||
Consumer, Non-cyclical |
802 | 99 | (9 | ) | 892 | 6 | 6 | |||||||||||||||||
Other Industrials |
852 | 87 | (14 | ) | 925 | 7 | 7 | |||||||||||||||||
Communications |
541 | 68 | (6 | ) | 603 | 4 | 4 | |||||||||||||||||
Transportation |
579 | 67 | (10 | ) | 636 | 5 | 5 | |||||||||||||||||
Consumer, Cyclical |
404 | 45 | (1 | ) | 448 | 3 | 3 | |||||||||||||||||
Collateralized debt obligations |
67 | 4 | (8 | ) | 63 | 1 | 0 | |||||||||||||||||
Mortgage-backed Securities |
6 | 0 | 0 | 6 | 0 | 0 | ||||||||||||||||||
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Total fixed maturities |
$ | 12,728 | $ | 1,545 | $ | (120 | ) | $ | 14,153 | 100 | % | 100 | % | |||||||||||
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At September 30, 2014, approximately 42% of the fixed-maturity assets at amortized cost and fair value were in the financial and utility sectors. The balance of the portfolio is spread among 398 issuers in a wide variety of sectors. The financial sector had a net unrealized gain of $391 million at September 30, 2014, compared with a gain of $180 million at December 31, 2013. We expect our investment in temporarily impaired securities to be fully recoverable.
An analysis of the fixed-maturity portfolio at September 30, 2014 by a composite quality rating is shown in the table below. The composite rating for each security is the average of the securitys ratings as assigned by Moodys Investor Service, Standard & Poors, 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.
47
Fixed Maturities by Rating
(Dollar amounts in millions)
Amortized Cost |
% | Fair Value |
% | |||||||||||||
Investment grade: |
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AAA |
$ | 694 | 5 | $ | 701 | 5 | ||||||||||
AA |
1,335 | 11 | 1,493 | 11 | ||||||||||||
A |
3,832 | 31 | 4,403 | 31 | ||||||||||||
BBB+ |
2,448 | 19 | 2,726 | 19 | ||||||||||||
BBB |
2,937 | 23 | 3,271 | 23 | ||||||||||||
BBB- |
912 | 7 | 1,000 | 7 | ||||||||||||
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Investment grade |
12,158 | 96 | 13,594 | 96 | ||||||||||||
Below investment grade: |
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BB |
341 | 2 | 342 | 2 | ||||||||||||
B |
119 | 1 | 110 | 1 | ||||||||||||
Below B |
110 | 1 | 107 | 1 | ||||||||||||
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Below investment grade |
570 | 4 | 559 | 4 | ||||||||||||
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$ | 12,728 | 100 | $ | 14,153 | 100 | |||||||||||
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Of the $12.7 billion of fixed maturities at amortized cost as of September 30, 2014, $12.2 billion or 96% were investment grade with an average rating of A-. Below-investment-grade bonds were $570 million with an average rating of B+. Below-investment-grade bonds at amortized cost were 16% of our shareholders equity, excluding the effect of unrealized gains and losses on fixed maturities as of September 30, 2014. Overall, the total portfolio was rated A- based on amortized cost, the same as at the end of 2013.
An analysis of the changes in our portfolio of below-investment-grade bonds at amortized cost during the first nine months of 2014 is as follows:
(Dollar amounts in millions)
Balance as of December 31, 2013 |
$ | 566 | ||
Downgrades by rating agencies |
15 | |||
Upgrades by rating agencies |
(10 | ) | ||
Disposals |
(4 | ) | ||
Amortization and other |
3 | |||
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|
|||
Balance as of September 30, 2014 |
$ | 570 | ||
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48
Our investment policy is to acquire only investment-grade obligations. Thus, any increases in below-investment-grade issues are a result of ratings downgrades of existing holdings. Our investment portfolio contains no commercial mortgage-backed securities. We have no direct investments in residential mortgages, nor do we have any counterparty risks as 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 have only insignificant exposure to European Sovereign debt consisting of $9 million in German bonds.
Additional information concerning the fixed-maturity portfolio is as follows.
Fixed Maturity Portfolio Selected Information
At | At | At | ||||||||||
September 30, | December 31, | September 30, | ||||||||||
2014 | 2013 | 2013 | ||||||||||
Average annual effective yield (1) |
5.90 | % | 5.91 | % | 5.91 | % | ||||||
Average life, in years, to: |
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Next call (2) |
17.9 | 18.3 | 18.5 | |||||||||
Maturity (2) |
20.7 | 21.5 | 21.6 | |||||||||
Effective duration to: |
||||||||||||
Next call (2), (3) |
10.8 | 10.4 | 10.4 | |||||||||
Maturity (2), (3) |
11.9 | 11.7 | 11.7 |
(1) | Tax-equivalent basis, whereby 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. |
Realized Gains and Losses, comparing the first nine months of 2014 with the first nine months of 2013. As discussed in Note FBusiness Segments, our core business of providing insurance coverage requires us to maintain a large and diverse investment portfolio to support our insurance liabilities. From time to time, investments are disposed of or written down prior to maturity, resulting in realized gains or losses. Because these dispositions and writedowns are outside the course of our normal operations, management removes the effects of such gains and losses when evaluating its overall core operating results.
49
The following table summarizes our tax-effected realized gains (losses) by component.
Analysis of Realized Gains (Losses), Net of Tax
(Dollar amounts in thousands, except for per share data)
Nine months ended September 30, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
Amount | Per Share | Amount | Per Share | |||||||||||||
Fixed maturities and equities: |
||||||||||||||||
Investment sales |
$ | 9,993 | $ | 0.08 | $ | (1,236 | ) | $ | (0.01 | ) | ||||||
Investments called or tendered |
365 | 0.00 | 5,123 | 0.04 | ||||||||||||
Real estate: |
||||||||||||||||
Sold |
0 | 0.00 | (159 | ) | 0.00 | |||||||||||
Other-than-temporary impairments |
0 | 0.00 | (1,741 | ) | (0.01 | ) | ||||||||||
Other investments |
(145 | ) | 0.00 | 987 | 0.00 | |||||||||||
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Total |
$ | 10,213 | $ | 0.08 | $ | 2,974 | $ | 0.02 | ||||||||
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Financial Condition
Liquidity. Liquidity provides Torchmark with the ability to meet on demand the cash commitments required by our business operations and financial obligations. Our liquidity is evidenced by positive cash flow, a portfolio of marketable investments, and the availability of 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.
Parent Company liquidity. An important source of Parent Company liquidity is the dividends from the insurance subsidiaries noted above. These dividends are used by the Parent Company to pay dividends on common and preferred stock, interest and principal repayment requirements on Parent Company debt, and operating expenses of the Parent Company. In the first nine months of 2014, the Parent Company received $345 million of cash dividends from subsidiaries, compared with $392 million in 2013. For the full year 2014, cash dividends from subsidiaries are expected to total approximately $479 million.
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Additional sources of liquidity for the Parent Company are cash, intercompany receivables, and a credit facility. At September 30, 2014, the Parent Company had $105 million of invested cash and net intercompany receivables. The credit facility is discussed below under the caption Short-term borrowings.
Short-term borrowings. As of July 16, 2014, we entered into a new credit facility with a group of lenders allowing for unsecured borrowings and stand-by letters of credit up to $750 million, replacing our previous facility that had a maximum limitation of $600. Up to $250 million in letters of credit can be issued against the new facility. The facility is further designated as a back-up credit line for a commercial paper program under which we 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, less any letters of credit issued. Interest is charged at variable rates. The facility has no ratings-based acceleration triggers which would require early repayment. The new facility terminates July 16, 2019. In accordance with the agreement, we are subject to certain covenants regarding capitalization, as was the case with our previous credit facility. As of September 30, 2014, we were in full compliance with these covenants.
Short-term debt consists of our commercial paper outstanding as noted above. The following table presents certain information about our commercial paper borrowings.
Short-term Borrowings - Commercial Paper
(Dollar amounts in millions)
At | At | At | ||||||||||
September 30, | December 31, | September 30, | ||||||||||
2014 | 2013 | 2013 | ||||||||||
Balance at end of period (par value) |
$ | 290.5 | $ | 229.1 | $ | 228.0 | ||||||
Annualized interest rate |
.26 | % | .30 | % | .30 | % | ||||||
Letters of credit outstanding |
$ | 198.0 | $ | 198.0 | $ | 198.0 | ||||||
Remaining amount available under credit line |
$ | 261.5 | $ | 172.9 | $ | 174.0 | ||||||
For the nine months ended | ||||||||||||
September 30, | September 30, | |||||||||||
2014 | 2013 | |||||||||||
Average balance outstanding during period (par value) |
$ | 295.1 | $ | 274.7 | ||||||||
Daily-weighted average interest rate (annualized) |
.23 | % | .31 | % | ||||||||
Maximum daily amount outstanding during period (par value) |
$ | 340.0 | $ | 314.0 |
Our balance of commercial paper outstanding at September 30, 2014 was $291 million compared with $229 million at the previous year end. We have had no difficulties in accessing the commercial paper market under this facility during the nine-month periods ended September 30, 2014 and 2013.
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In summary, Torchmark expects to have readily available funds for 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 debt, an additional short-term credit facility, and intercompany borrowing.
Consolidated liquidity. Consolidated net cash inflows from operations were $644 million in the first nine months of 2014, compared with $771 million in the same period of 2013. The decline in cash provided from operations was caused primarily by the increase in the Medicare Part D receivable from CMS resulting from our required coverage of Hepatitis C drug claims discussed earlier in this report and higher than expected generic drug costs. In addition to cash inflows from operations, our companies have received $123 million in investment calls and tenders and $95 million in scheduled maturities or repayments during the 2014 period. As previously noted under the caption Short-term borrowings, we have in place a line of credit facility. The insurance companies have no additional outstanding credit facilities.
Cash and short term investments were $146 million at September 30, 2014, compared with $114 million at December 31, 2013. In addition to these liquid assets, the entire $14.2 billion (fair value at September 30, 2014) portfolio of fixed-income and equity securities is available for sale in the event of an unexpected need. Substantially all of our fixed-income and equity securities are publicly traded. We generally expect to hold fixed-income securities to maturity, and even though these securities are classified as available for sale, we have the ability and intent to hold any securities which are temporarily impaired until they mature. Our strong cash flows from operations, investment maturities, and credit line availability make any need to sell securities for liquidity highly unlikely.
Capital Resources. Our insurance subsidiaries maintain capital at a level adequate to support their current operations and meet the requirements of the regulatory authorities and the rating agencies. Our insurance subsidiaries generally target a capital ratio of around 325% of Company Action Level required regulatory capital under Risk-Based Capital (RBC), a measure established by insurance regulatory authorities to monitor the adequacy of capital. The 325% target is considered sufficient because of the insurance companies strong reliable cash flows, the relatively low risk of their product mix, and because that ratio exceeds regulatory requirements and has been in line with rating agency expectations for Torchmark. As of December 31, 2013, our insurance subsidiaries had a consolidated RBC ratio of 341%. In the event of a decline in the RBC ratios of the insurance companies due to ratings downgrades in the investment portfolios, impairments, or other circumstances, we have available cash on hand and credit availability at the Parent Company to make additional contributions as necessary to maintain the ratio at or above 325%.
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During the third quarter, Standard and Poors (S&Ps) revised their outlook on Torchmark to negative. This revised outlook was due to a change in S&Ps view of certain components of Torchmarks existing capital position, rather than a change in the capital position itself. There has not been any significant change recently in the level or components of Torchmarks capital position. We do not expect S&Ps action to cause any change in our share repurchase program.
On a consolidated basis, Torchmarks capital structure consists of short-term debt (comprised of the commercial paper outstanding discussed above), long-term funded debt, and shareholders equity. The outstanding long-term debt at book value was $992 million at September 30, 2014, versus $991 million at December 31, 2013. An analysis of long-term debt issues outstanding is as follows at September 30, 2014.
Long Term Debt at September 30, 2014
(Dollar amounts in millions)
Instrument |
Year Due |
Interest Rate |
Par Value |
Book Value |
Fair Value |
|||||||||||||||
Senior Notes |
2016 | 6.375 | % | $ | 250.0 | $ | 249.1 | $ | 275.0 | |||||||||||
Senior Notes |
2019 | 9.250 | 292.7 | 290.5 | 382.2 | |||||||||||||||
Senior Notes (1) |
2022 | 3.800 | 150.0 | 147.6 | 148.1 | |||||||||||||||
Notes |
2023 | 7.875 | 165.6 | 163.7 | 208.6 | |||||||||||||||
Junior Subordinated Debentures |
2052 | 5.875 | 125.0 | 120.9 | 110.3 | |||||||||||||||
Junior Subordinated Debentures |
2036 | 3.531 | (2) | 20.0 | 20.0 | 20.0 | ||||||||||||||
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Total long-term debt |
$ | 1,003.3 | $ | 991.8 | $ | 1,144.2 | ||||||||||||||
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(1) | An additional $150 million par value and book value is held by insurance subsidiaries that eliminates in consolidation. |
(2) | Interest paid at 3 month LIBOR plus 330 basis points, resets each quarter. |
As previously noted under the caption Highlights in this report, we acquired 5.5 million of our outstanding common shares under our share repurchase program during the first nine months of 2014. These shares were acquired at a cost of $288 million (average of $52.32 per share), compared with purchases of 6.4 million shares at a cost of $265 million in the first nine months of 2013.
Shareholders equity was $4.5 billion at September 30, 2014. This compares with $3.8 billion at both December 31, 2013 and September 30, 2013. During the nine months since December 31, 2013, shareholders equity was increased by $668 million of after-tax unrealized gains in the fixed-maturity portfolio, as interest rates have declined over the period. Net income added another $396 million for the nine months, but the share purchases of $288 million noted above during the period reduced shareholders equity.
We are required by GAAP to revalue our available-for-sale fixed-maturity portfolio to fair market value at the end of each accounting period. These changes, net of their associated impact on deferred acquisition costs and income tax, are reflected directly in shareholders equity.
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While GAAP requires our fixed-maturity assets to be revalued, it does not permit interest-bearing insurance policy liabilities supported by those assets to be valued at fair value in a consistent manner, with changes in value applied directly to shareholders equity. However, due to the size of both the investment portfolio and our policy liabilities, this inconsistency in measurement can have a material impact on shareholders equity. Because of the long-term nature of our fixed maturities and liabilities and the strong cash flows 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 realized gains or losses due to fluctuations in the market value of fixed maturities caused by interest rate changes or losses caused by temporarily illiquid markets. Accordingly, management removes the effect of this rule when analyzing Torchmarks balance sheet, capital structure, and financial ratios in order to provide a more consistent and meaningful portrayal of the Companys financial position from period to period.
The following table presents selected data related to capital resources. Additionally, the table presents the effect of this GAAP requirement on relevant line items, so that investors and other financial statement users may determine its impact on our capital structure.
Selected Financial Data
At September 30, 2014 | At December 31, 2013 | At September 30, 2013 | ||||||||||||||||||||||
Effect of | Effect of | Effect of | ||||||||||||||||||||||
Accounting | Accounting | Accounting | ||||||||||||||||||||||
Rule | Rule | Rule | ||||||||||||||||||||||
Requiring | Requiring | Requiring | ||||||||||||||||||||||
GAAP | Revaluation(1) | GAAP | Revaluation(1) | GAAP | Revaluatio(1) | |||||||||||||||||||
Fixed maturities (millions) |
$ | 14,153 | $ | 1,425 | $ | 12,879 | $ | 390 | $ | 12,757 | $ | 490 | ||||||||||||
Deferred acquisition costs (millions) (2) |
3,434 | (17 | ) | 3,338 | (10 | ) | 3,306 | (13) | ||||||||||||||||
Total assets (millions) |
19,871 | 1,408 | 18,192 | 380 | 18,138 | 477 | ||||||||||||||||||
Short-term debt (millions) |
290 | 0 | 229 | 0 | 228 | 0 | ||||||||||||||||||
Long-term debt (millions) |
992 | 0 | 991 | 0 | 991 | 0 | ||||||||||||||||||
Shareholders equity (millions) |
4,530 | 915 | 3,776 | 247 | 3,777 | 310 | ||||||||||||||||||
Book value per diluted share |
34.55 | 6.98 | 27.66 | 1.81 | 27.31 | 2.24 | ||||||||||||||||||
Debt to capitalization (3) |
22.1 | % | (4.1 | )% | 24.4 | % | (1.3 | )% | 24.4 | % | (1.6)% | |||||||||||||
Diluted shares outstanding (thousands) |
131,106 | 136,537 | 138,293 | |||||||||||||||||||||
Actual shares outstanding (thousands) |
129,268 | 134,252 | 136,131 |
(1) | Amount added to (deducted from) comprehensive income to produce the stated GAAP item, per accounting rule ASC 320-10-35-1, formerly SFAS 115. |
(2) | Includes the value of insurance purchased. |
(3) | Torchmarks debt covenants require that the effect of this accounting rule be removed to determine this ratio. This ratio is computed by dividing total debt by the sum of total debt and shareholders equity. |
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Interest coverage was 10.9 times in the 2014 nine months, compared with10.1 times in the 2013 period. Interest coverage is computed by dividing interest expense into the sum of pretax income and interest expense.
Cautionary Statements
We caution readers regarding certain forward-looking statements contained in the previous discussion and elsewhere in this document, and in any other statements made by, or on behalf of Torchmark 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 Torchmark or its business, whether express or implied, is meant as and should be considered a forward-looking statement. Such statements represent managements opinions concerning future operations, strategies, financial results or other developments. We specifically disclaim any obligation to update or revise any forward-looking statement because of new information, future developments, or otherwise.
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 of Torchmark 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) | Changing general economic conditions leading to unexpected changes in lapse rates and/or sales of our policies, as well as levels of mortality, morbidity, and utilization of health care services that differ from Torchmarks assumptions; |
2) | Regulatory developments, including changes in governmental regulations (particularly those impacting taxes and changes to the Federal Medicare program that would affect Medicare Supplement and Medicare Part D insurance); |
3) | Market trends in the senior-aged health care industry that provide alternatives to traditional Medicare (such as Health Maintenance Organizations 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 we own, or that may impair an issuers ability to make principal and/or interest payments due on those securities; |
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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 managements estimates and judgments which may differ from the actual amounts ultimately realized. |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no quantitative or qualitative changes with respect to market risk exposure during the nine months ended September 30, 2014.
Item 4. 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 SECs rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to Torchmarks 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 quarter completed September 30, 2014, 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 Torchmarks 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 Torchmarks disclosure controls and procedures are effective as of the date of this Form 10-Q. 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-Q.
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As of the date of this Form 10-Q for the quarter ended September 30, 2014, there have not been any changes in Torchmarks 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, Torchmarks 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.
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 Torchmarks 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 Torchmarks 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. Torchmarks 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.
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 various 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.
Torchmark has had no material changes to its risk factors.
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Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
(e) | Purchases of Certain Equity Securities by the Issuer and Others |
Period |
(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 | ||||||||||
July 1-31, 2014 |
700,645 | $ | 54.45 | 700,645 | ||||||||||
August 1-31, 2014 |
901,550 | 53.28 | 901,550 | |||||||||||
September 1-30, 2014 |
328,271 | 53.58 | 328,271 |
On July 14, 2014, 2,700 shares of unvested restricted stock, valued at $55.25 per share on that date, were forfeited to the Company by an executive upon termination.
At its August 6, 2014 meeting, the Board of Directors reaffirmed the Companys 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. The program has no defined expiration date or maximum shares to be repurchased.
(a) | Exhibits |
(10.1) | Payments to Directors | |
(10.2) | Torchmark Corporation Amended 2011 Non-Employee Director Compensation Plan, as amended November 6, 2014 | |
(11) | Statement re Computation of Per Share Earnings | |
(31.1) | Rule 13a-14(a)/15d-14(a) Certification by Larry M. Hutchison | |
(31.2) | Rule 13a-14(a)/15d-14(a) Certification by Gary L. Coleman | |
(31.3) | Rule 13a-14(a)/15d-14(a) Certification by Frank M. Svoboda | |
(32.1) | Section 1350 Certification by Larry M. Hutchison, Gary L. Coleman, and Frank M. Svoboda | |
(101) | Interactive Data Files for the Torchmark Corporation Form 10-Q for the period ended September 30, 2014 |
58
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
TORCHMARK CORPORATION | ||||
Date: November 7, 2014 |
/s/ Gary L. Coleman | |||
Gary L. Coleman | ||||
Co-Chairman and Chief Executive Officer | ||||
Date: November 7, 2014 |
/s/ Larry M. Hutchison | |||
Larry M. Hutchison | ||||
Co-Chairman and Chief Executive Officer | ||||
Date: November 7, 2014 |
/s/ Frank M. Svoboda | |||
Frank M. Svoboda | ||||
Executive Vice President and Chief Financial Officer |
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Exhibit 10.1
Payments to Directors
Non-employee directors of the Company are compensated on the following basis:
(1) Cash Compensation(a) Non-employee directors are paid $90,000 of their annual retainer in cash in quarterly installments unless a timely election is made under the non-employee director sub-plan of the Torchmark Corporation 2011 Incentive Plan, as amended (2011 Plan) to receive an equivalent amount of market value stock options, restricted stock or restricted stock units (RSUs) or to defer the cash to an interest-bearing account under the terms of that sub-plan of the 2011 Plan; (b) The Lead Director receives an additional $40,000 annual retainer (effective October 1, 2014, prorated for 2014)in cash, payable in quarterly installments; (c) Annual Board committee chair retainers, payable in quarterly installments in cash, are $35,000 for the Audit Committee Chair (effective October 1, 2014, prorated for 2014) and $12,500 for each of the Chairs of the Compensation Committee and the Governance and Nominating Committee (effective October 1, 2014, prorated for 2014); and (d) Members of the Audit Committee (excluding the Chair) receive an additional annual Audit Committee Member Retainer of $12,500 (effective October 1, 2014, prorated for 2014), payable in cash quarterly; and
(2) Equity CompensationNon-employee directors are paid $120,000 of their annual retainer in equity (effective January 1, 2015), either in the form of market value stock options, restricted stock or RSUs, based on the directors timely election, with the equity issued on the first NYSE trading day of January of each calendar year valued at the NYSE market closing price of Company common stock on that date. If no timely election is made, the non-employee director receives his or her annual equity compensation in the form of $120,000 of market value stock options awarded on the first NYSE trading day of each year.
Non-employee directors may currently elect to defer all of the cash portion of their annual retainer into an interest-bearing account pursuant to a timely election made under the director subplan. These accounts bear interest at non- preferential rates set from time to time by the Compensation Committee. Such accounts are paid to the director in a lump sum or equal monthly installments for up to 120 months as elected by the director with payments commencing on the earliest of (a) December 31 of the fifth year after the year for which the deferral was made, (b) the first business day of the fourth month after the directors death or (c) the directors termination as a non-employee director of the Company or any of its subsidiaries for a reason other than death.
Non-employee directors do not receive meeting fees or fees for the execution of written consents in lieu of Board meetings or in lieu of Board committee meetings. They receive reimbursement for their travel and lodging expenses if they do not live in the area where a meeting is held.
Pursuant to the non-employee director sub-plan of the 2011 Plan, newly elected non-employee directors receive upon the date of their initial election to the Board $100,000 of restricted stock, valued at the market closing price of Company common stock on that date.
Directors who are employees of Torchmark or its subsidiaries receive no compensation for Board service or for service as Co-Chairmen of the Board.
Exhibit 10.2
TORCHMARK CORPORATION
AMENDED 2011 NON-EMPLOYEE DIRECTOR COMPENSATION PLAN
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS
The name of this plan is the Torchmark Corporation 2011 Non-Employee Director Compensation Plan (the Plan). The purpose of the Plan is to enable Torchmark Corporation (the Company) and its Subsidiaries and Affiliates to attract and retain directors who contribute to the Companys success by their ability, ingenuity and industry, and to enable such directors to participate in the long-term success and growth of the Company through an equity interest in the Company. The Plan is adopted to be effective as of January I, 2011, and is intended to replace and supersede the Companys existing Non-Employee Director Compensation Plan.
The Plan is adopted as a subplan of the Torchmark Corporation 2007 Long-Term Compensation Plan (the 2007 Compensation Plan). The Company intends to submit a new equity incentive plan, which shall be referred to as the 20 II Incentive Plan, for approval by the Companys stockholders at the Companys 2011 annual meeting. If the 2011 Incentive Plan is approved by stockholders, the Plan will automatically become a subplan of the 2011 Incentive Plan, and all references in the Plan to the 2007 Compensation Plan shall mean the 2011 Incentive Plan.
Capitalized terms used in the Plan but not otherwise defined shall have the meanings given such terms in the 2007 Compensation Plan. In addition, the following terms shall be defined for purposes of the Plan as set forth below:
Annual Compensation means the total annual retainer, expressed as a dollar amount, payable by the Company to a Non- Employee Director for services as a director (excluding, if applicable any retainers or fees payable for services as the member or chairman of a committee of the Board, which shall be payable separate and apart from the provisions of this Plan) of the Company, as such amount may be changed from time to time.
Award Notice means a written award notice to a Non-Employee Director from the Company evidencing an award of Stock Options, Restricted Stock or Restricted Stock Units.
Beneficiary means any person or persons designated by a Participant, in accordance with procedures established by the Committee or Plan Administrator, to receive benefits hereunder in the event of the Participants death. If any Participant shall fail to designate a Beneficiary or shall designate a Beneficiary who shall fail to survive the Participant, the Beneficiary shall be the Participants surviving spouse, or, if none, the Participants surviving descendants (who shall take per stirpes) and if there are no surviving descendants, the Beneficiary shall be the Participants estate.
Business Day shall mean a day on which the New York Stock Exchange or any national securities exchange or over-the- counter market on which the Stock is traded is open for business.
Committee means the Compensation Committee of the Board. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board.
Election Date means the date by which a Non-Employee Director must submit a valid Election Form to the Plan Administrator. For each calendar year, the Election Date is December 31 of the preceding calendar year; provided, however, that the Election Date for a newly eligible Participant shall be the 30th day following the date on which such individual becomes a Non- Employee Director.
Election Form means an Election Form for Annual Compensation, substantially in the form attached hereto as Exhibit A, pursuant to which a Non-Employee Director elects to receive all or a portion of his or her Annual Compensation in the form of cash, Stock Options, Restricted Stock or Restricted Stock Units, or to defer Annual Compensation under the Plan.
Grantee means a Non-Employee Director to whom a Stock Option, Restricted Stock, or Restricted Stock Unit has been granted.
Interest Account means the account established by the Company for each Non-Employee Director for Annual Compensation deferred pursuant to the Plan and which shall be credited with interest on the last day of each calendar quarter (or such other day as determined by Plan Administrator) pursuant to Section 6(f) of the Plan.
Plan means this 2011 Non-Employee Director Compensation Plan.
Plan Administrator means one or more agents to whom the Board shall have delegated administrative duties under the Plan or the Committee if no such delegation shall have occurred.
Restricted Stock means shares of Stock granted to a Participant under Section 5 or 6 that are subject to certain restrictions and to risk of forfeiture.
Restricted Stock Unit means a right granted to a Participant under Section 6 to receive shares of Stock in the future, which right is subject to certain restrictions and to risk of forfeiture.
Stock Option means any option granted to a Participant to purchase shares of Stock granted pursuant to Section 6.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by the Committee. The Committee shall have the discretionary authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to construe and interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may delegate administrative duties under the Plan to one or more agents as it shall deem necessary or advisable. No member of the Committee or the Board or the Plan Administrator shall be personally liable for any action or determination made in good faith with respect to the Plan or any Options, Restricted Stock or Restricted Stock Units, or to any settlement of any dispute between a Non-Employee Director and the Company.
All decisions made by the Board or the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Participants.
SECTION 3. SOURCE OF SHARES FOR THE PLAN.
The shares of Stock that may be issued pursuant to the Plan shall be issued under the 2007 Compensation Plan, subject to all of the terms and conditions of the 2007 Compensation Plan. The terms contained in the 2007 Compensation Plan are incorporated into and made a part of this Plan with respect to Stock Options, Restricted Stock or Restricted Stock Units granted pursuant hereto, and any such Stock Options, Restricted Stock or Restricted Stock Units shall be governed by and construed in accordance with the 2007 Compensation Plan. In the event of any actual or alleged conflict between the provisions of the 2007 Compensation Plan and the provisions of this Plan, the provisions of the 2007 Compensation Plan shall be controlling and determinative. This Plan does not constitute a separate source of shares for the grant of the equity awards described herein.
SECTION 4. ELIGIBILITY.
All Non-Employee Directors are eligible to participate in the Plan.
SECTION 5. INITIAL GRANT OF RESTRICTED STOCK.
On the effective day of a Non-Employee Directors first appointment to the Board (which shall be the Restricted Stock Grant Date for purposes of Restricted Stock granted under this Section 5), he or she shall be granted a number of whole shares of Restricted Stock equal to X divided by Y, where:
X = $100,000; and
Y = the Fair Market Value per Share on the Restricted Stock Grant Date.
Restricted Stock granted under this Section 5 shall be evidenced by an Award Notice in such form as the Committee shall from time to time approve, and shall have terms and conditions identical to Restricted Stock granted pursuant to Section 6(d).
SECTION 6. ELECTION TO RECEIVE ANNUAL COMPENSATION IN CASH, STOCK OPTIONS, RESTRICTED STOCK, RESTRICTED STOCK UNITS OR TO DEFER ANNUAL COMPENSATION.
(a) | Election Regarding Annual Compensation. With respect to $90,000 of his or her Annual Compensation, a Non- Employee Director may receive cash, payable in quarterly installments, or may elect (i) to receive Stock Options, Restricted Stock or Restricted Stock Units pursuant to subsections (c), (d) or (e) below, or (ii) to defer receipt of this portion of his or her Annual Compensation pursuant to subsection (f) below for a calendar year, in either case by delivering a properly completed and signed Election Form to the Plan Administrator on or before the Election Date. With respect to the remaining $120,000 of his or her Annual Compensation, a Non-Employee |
Director must elect to receive Stock Options, Restricted Stock or Restricted Stock Units pursuant to subsections (c), (d) or (e) below, by delivering a properly completed and signed Election Form to the Plan Administrator on or before the Election Date. Such election will be effective as of the first day of the calendar year beginning after the Plan Administrator receives the Non-Employee Directors Election Form, or, in the case of a newly eligible Participant, on the first day of the calendar month beginning after the Plan Administrator receives such Non-Employee Directors Election Form, provided that the Election Form is received within thirty (30) days following the Non-Employee Directors date of initial eligibility to participate in the Plan. If a Non-Employee Director fails to make a timely election under this Section 6(a), he or she will receive $90,000 of his or her Annual Compensation in the form of cash, payable in quarterly installments, and the remaining $120,000 of his or her Annual Compensation in the form of Stock Options. |
(b) | Irrevocable Election. A Participant may not revoke or change his or her Election Form. |
(c) | Election to Receive Stock Options. A Non-Employee Director may elect to receive $120,000 or $210,000 of his or her Annual Compensation in Stock Options in accordance with the provisions of this subsection (c). Stock Options granted under this subsection (c) shall be evidenced by an Award Notice in such form as the Committee shall from time to time approve, which agreements shall comply with and be subject to the following terms and conditions: |
(i) | Time of Issuance of Stock Options. If an election is made under this subsection, Stock Options will be issued to the Non-Employee Director on the first Business Day in the calendar year to which the election relates (the Option Grant Date). |
(ii) | Number of Stock Options. The number of shares subject to a Stock Option granted pursuant to this Article 6(c) shall be the number of whole Shares equal to A divided by B, where: |
A = the dollar amount which the Non-Employee Director has elected to receive in Stock Options; and
B = the per share value of a Stock Option on the Option Grant Date, as determined by the Committee using any recognized option valuation model selected by the Board in its discretion (such value to be expressed as a percentage of the Fair Market Value per Share on the Option Grant Date).
In determining the number of shares subject to a Stock Option, (A) the Board may designate the assumptions to be used in the selected option valuation model, and (B) any fraction of a Share will be rounded up to the next whole number of Shares.
(iii) | Exercise Price of Stock Options. The exercise price per share of each Stock Option shall be 100% of the Fair Market |
Value of the underlying Stock on the date of the grant of the Stock Option.
(iv) | Vesting and Forfeiture of Stock Options. Except as provided in Section 9, Stock Options shall vest (become exercisable) on the six-month anniversary of the Option Grant Date, provided that the Grantee is still serving as a Non-Employee Director at such time. Notwithstanding the foregoing vesting schedule, Stock Option shall become fully vested and exercisable upon Grantees termination of service as a Non-Employee Director due to death, Disability or Retirement. Upon a Grantees termination of status as a Non-Employee Director with the Company for any reason other than due to death, Disability or Retirement, any unvested Stock Options held by such Grantee shall be forfeited. |
(v) | Method of Exercise. Any Stock Option granted pursuant to the Plan may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price, in cash, by check or such other instrument as may be acceptable to the Committee (including net or cashless exercise arrangements). Payment in full or in part may also be made in the form of unrestricted Stock already owned by the Grantee (based on the Fair Market Value of the Stock on the date the Option is exercised). No shares of Stock shall be issued upon exercise of a Stock Option until the exercise price has been fully paid or satisfied. |
(vi) | Transferability of Stock Options. Stock Options shall not be transferable by the Grantee otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the Grantees lifetime, only by the Grantee; provided, however, that the Committee may (but need not) permit other transfers where the Committee concludes that such transferability (i) does not result in accelerated taxation, and (ii) is otherwise appropriate and desirable, taking into account any state or federal securities laws applicable to transferable options. |
(vii) | Term of Stock Options. The term of any Stock Option granted pursuant to the Plan shall be for a period of seven years, expiring on the seventh anniversary of the Option Grant Date (the Expiration Date). Following Grantees termination of status as a Non-Employee Director for any reason, vested Stock Options held by such Grantee shall be retained and may thereafter be exercised during the period ending on the Expiration Date. |
(d) | Election to Receive Restricted Stock. A Non-Employee Director may elect to receive $120,000 or $210,000 of his or her Annual Compensation in Restricted Stock in accordance with the provisions of this subsection (d). Restricted Stock granted under this subsection (d) shall be evidenced by an Award Notice in such form as the Committee shall from time to time approve, which agreements shall comply with and be subject to the following terms and conditions: |
(i) | Time of Issuance of Restricted Stock. If an election is made under this subsection, Restricted Stock will be issued to the Non-Employee Director on the first Business Day in the calendar year to which the election relates (which shall be the Restricted Stock Grant Date for purposes of Restricted Stock granted under this Section 6). |
(ii) | Number of Shares of Restricted Stock. The number of shares of Restricted Stock granted pursuant to this Article 6 (d) shall be the number of whole Shares equal to A divided by B, where: |
A = the dollar amount which the Non-Employee Director has elected to receive in shares of Restricted Stock; and
B = the Fair Market Value per Share on the Restricted Stock Grant Date.
In determining the number of shares of Restricted Stock, any fraction of a Share will be rounded up to the next whole number of Shares.
(iii) | Terms and Conditions of Restricted Stock. Restricted Stock shall comply with and be subject to the following terms and conditions: |
(1) | Vesting. Except as provided in Section 9, Restricted Stock granted under this Section 6 shall become fully vested on the six-month anniversary of the Restricted Stock Grant Date, provided that the Grantee is still serving as a Non-Employee Director at such time. Notwithstanding the foregoing vesting schedule, Restricted Stock shall become fully vested upon Grantees termination of service as a Non-Employee Director due to death, Disability or Retirement. |
(2) | Restrictions on Unvested Restricted Stock. Unvested Restricted Stock may not be sold, transferred, exchanged, assigned, pledged, hypothecated or otherwise encumbered. If a Non-Employee Directors service as a director of the Company terminates for any reason other than death, Disability or Retirement, then the Non-Employee Director shall forfeit all of his or her right, title and interest in and to any unvested Restricted Stock as of the date of such termination from the Board, and such Restricted Stock shall be re-conveyed to the Company without further consideration or any act or action by the Non-Employee Director. |
(3) | Rights as a Shareholder. A Non-Employee Director shall have full voting and dividend rights with respect to the Restricted Stock. If a Non-Employee Director forfeits any shares of Restricted Stock, he or she shall no longer have any rights as a stockholder with respect to the Restricted Stock or any interest therein and the Participant shall no longer be entitled to receive dividends on such stock. |
(e) | Election to Receive Restricted Stock Units. A Non-Employee Director may elect to receive $120,000 or $210,000 of his or her Annual Compensation in Restricted Stock Units in accordance with the provisions of this subsection (e). Restricted Stock Units granted under this subsection (e) shall be evidenced by an Award Notice in such form as the Committee shall from time to time approve, which agreements shall comply with and be subject to the following terms and conditions: |
(i) | Time of Issuance of Restricted Stock Units. If an election is made under this subsection, Restricted Stock Units will be issued to the Non-Employee Director on the first Business Day in the calendar year to which the election relates (the Restricted Stock Unit Grant Date). |
(ii) | Number of Restricted Stock Units. The number of Restricted Stock Units granted pursuant to this Article 6(d) shall be the number of whole Shares equal to A divided by B, where: |
A = the dollar amount which the Non-Employee Director has elected to receive in Restricted Stock Units; and
B = the Fair Market Value per Share on the Restricted Stock Unit Grant Date.
In determining the number of Restricted Stock Units, any fraction of a Share will be rounded up to the next whole number of Shares.
(iii) | Terms and Conditions of Restricted Stock Units. Restricted Stock Units will be credited to a bookkeeping account on behalf of the Non-Employee Director and shall comply with and be subject to the following terms and conditions: |
(I) | Vesting and Forfeiture. Except as provided in Section 9, Restricted Stock Units shall vest and become non-forfeitable on the six-month anniversary of the Restricted Stock Unit Grant Date, provided that the Grantee is still serving as a Non-Employee Director at such time. Notwithstanding the foregoing vesting schedule, Restricted Stock Units shall become fully vested upon Grantees termination of service as a Non-Employee Director due to death, Disability or Retirement. If a Non-Employee Directors service as a director of the Company terminates for any reason other than death, Disability or Retirement, then the Non-Employee Director shall forfeit all of his or her right, title and interest in and to any unvested Restricted Stock Units as of the date of such termination from the Board, and such Restricted Stock Units shall be reconveyed to the Company without further consideration or any act or action by the Non-Employee Director. |
(2) | Conversion to Common Stock. Unless forfeited prior to vesting, Restricted Stock Units shall be converted to actual shares of Stock on the Non-Employee Directors termination of service as a director of the Company for any reason. Upon conversion, stock certificates evidencing the conversion of Restricted Stock Units into shares of Stock shall be registered on the books of the Company in the Non-Employee Directors name (or in street name to the Non-Employee Directors brokerage account) in uncertificated (book-entry) form unless the Non-Employee Director requests a stock certificate or certificates for the Shares. |
(3) | Dividend Equivalents. If any dividends or other distributions are paid with respect to the Shares while Restricted Stock Units are outstanding, the dollar amount or fair market value of such dividends or distributions with respect to the number of Shares then underlying the outstanding Restricted Stock Units shall be converted into additional Restricted Stock Units in Non-Employee Directors name, based on the Fair Market Value of the Stock as of the date such dividends or distributions were payable, and such additional Restricted Stock Units shall be immediately vested and non-forfeitable upon grant, and shall convert to actual shares of Stock on the Non-Employee Directors termination of service as a director of the Company for any reason. |
(4) | Restrictions on Transfer. Restricted Stock Units are not assignable or transferable other than by will or the laws of descent and distribution. Restricted Stock Units may not be pledged, hypothecated or otherwise encumbered to or in favor of any party other than the Company or an affiliate, or be subjected to any lien, obligation or liability of a Non-Employee Director to any other party other than the Company or an affiliate. |
(5) | Rights as a Shareholder. A Non-Employee Director shall not have voting or any other rights as a shareholder of the Company with respect to the Restricted Stock Units. Upon conversion of the Restricted Stock Units into shares of Stock, the Non-Employee Director will obtain full voting and other rights as a shareholder of the Company. |
(f) | Election to Defer Annual Compensation. A Non-Employee Director may elect to defer $90,000 of his or her Annual Compensation to his or her Interest Account. For bookkeeping purposes, the amount of the Annual Compensation, which the Participant elects to defer pursuant to the Plan, shall be transferred to and held in individual Interest Accounts (in annual designations) pending distribution in cash pursuant to subsection (iii) below. |
(i) | Interest Accounts. Amounts in a Participants Interest Account will be credited with interest as of the last day of each calendar quarter (or such other day as determined by the Plan Administrator) at the rate set from time to time by the Committee to be applicable to the Interest Accounts of all Participants under the Plan. To the extent required for bookkeeping purposes, a Participants Interest Accounts will be segregated to reflect Deferred Compensation on a year-by-year basis. Within a reasonable time after the end of each calendar year, the Plan Administrator shall report in writing to each Participant the amount held in his or her Interest Accounts at the end of the year. |
(ii) | Payment Commencement Date. Payment of the balances in a Participants Interest Accounts shall commence on the earliest to occur of (a) December 31 of the fifth year after the year with respect to which the deferral was made, (b) the first Business Day of the fourth month after the Participants death, or (c) the Participants termination as a Non-Employee Director of the Company or any of its Subsidiaries or Affiliates, other than by reason of death. |
(iii) | Optional Forms of Payment. Distributions from a Participants Interest Accounts may be paid to the Participant either in a lump sum or in a number (not to exceed ten) of approximately equal annual installments designated by the Participant on his or her Election Form. In the event of the Participants death during the payout period, the remaining balance shall be payable to the Participants Beneficiary in a lump sum on or about the first Business Day of the fourth month after the Participants death. If a Participant elects to receive a distribution of his or her Interest Accounts in installments, the Plan Administrator may purchase an annuity from an insurance company which annuity will pay the Participant the desired annual installments. If the Plan Administrator purchases an annuity contract, the Participant will have no further rights to receive payments from the Company or the Plan with respect to the amounts subject to the annuity. If the Plan Administrator does not purchase an annuity contract, the value of the Interest Accounts remaining unpaid shall continue to receive allocations of return as provided in subsection (f) above. If the Participant fails to designate a payment method in the Participants Election Form, the Participants Account shall be distributed in a lump sum. |
(iv) | Irrevocable Elections. A Participant may elect a different payment form for each years Annual Compensation deferred under the Plan. The payment form elected or deemed elected on the Participants election form shall be irrevocable. |
(v) | Acceleration of Payment. If a Participant elects an installment distribution and the aggregate value of the Participants Interest Accounts at the time the installments are due to commence is less than $16,500, the Plan Administrator will accelerate payment of the Participants benefits in a single lump sum. |
(vi) | Effect of Adverse Determination. Notwithstanding the Election Form or any provision set forth herein, if the Internal Revenue Service determines that all or any portion of the amounts credited under this Plan is currently includable in the taxable income of any Participant due to a failure of the Plan to meet the requirements of Code Section 409A or the regulations thereunder, then the amounts so determined to be includable in income shall be distributed in a lump sum to such Participant as soon as practicable. |
(g) | Unforeseeable Emergency. The Plan Administrator may, in its sole discretion, accelerate the making of payment to a Participant in the event that a participant incurs a financial hardship as a result of an unforeseeable emergency (as such term is defined below). All unforeseeable emergency distributions shall be made in cash in a lump sum. Such payments will be made on a first-in, first-out basis so that the oldest Annual Compensation deferred under the Plan shall be deemed distributed first. For purposes hereof, an unforeseeable emergency means a severe financial hardship to the Participant resulting from illness or accident of the Participant, the Participants spouse, or a dependent (as defined in Section 152 of the Code without regard to Section l52(b)(I), (b)(2), and (d)( I )(B)) of the Participant, loss of the Participants property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The amounts distributable because of an unforeseeable emergency cannot exceed the amounts necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such emergency is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participants assets (to the extent the liquidation of such assets would not itself cause severe financial hardship). Notwithstanding any provision in the Plan to the contrary, any payment made pursuant to this Section 6(g) shall comply with Section 409A(a)(2)(A)(vi) of the Code and the regulations (or similar guidance) promulgated thereunder (or any successor provisions). |
(h) | Payment to Minors and Incapacitated Persons. In the event that any amount is payable to a minor or to any person who, in the judgment of the Plan Administrator, is incapable of making proper disposition thereof, such payment shall be made for the benefit of such minor or such person in any of the following ways as the Plan Administrator, in its sole discretion, shall determine: |
(i) | By payment to the legal representative of such minor or such person; |
(ii) | By payment directly to such minor or such person; |
(iii) | By payment in discharge of bills incurred by or for the benefit of such minor or such person. The Plan Administrator shall make such payments without the necessary intervention of any guardian or like fiduciary, and without any obligation to require bond or to see to the further application of such payment. Any payment so made shall be in complete discharge of the Plans obligation to the Participant and his or her Beneficiaries. |
(i) | Application for Benefits. The Plan Administrator may require a Participant or Beneficiary to complete and file certain forms as a condition precedent to receiving the payment of benefits. The Plan Administrator may rely upon all such information given to it, including the Participants current mailing address. It is the responsibility of all persons interested in receiving a distribution pursuant to the Plan to keep the Plan Administrator informed of their current mailing addresses. |
(j) | Designation of Beneficiary. Each Participant from time to time may designate any person or persons (who may be designated contingently or successively and who may be an entity other than a natural person) as his or her Beneficiary or Beneficiaries to whom the Participants Interest Accounts are to be paid if the Participant dies before receipt of all such benefits. Each Beneficiary designation shall be on the form prescribed by the Plan Administrator and will be effective only when filed with the Plan Administrator during the Participants lifetime. Each Beneficiary designation filed with the Plan Administrator will cancel all Beneficiary designations previously filed with the Plan Administrator. The revocation of a Beneficiary designation, no matter how effected, shall not require the consent of any designated Beneficiary. |
SECTION 7. AMENDMENTS AND TERMINATION.
The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made which would impair the right of a Participant or a Grantee of an award of Stock Options, Restricted Stock or Restricted Stock Units heretofore granted, without the Participants or Grantees consent.
Amendments may be made without stockholder approval except as required to satisfy stock exchange listing requirements or other regulatory requirements.
The Board may amend the terms of any Stock Option, Restricted Stock or Restricted Stock Unit award theretofore granted, prospectively or retroactively; provided, however, (a) no such amendment shall impair the rights of any holder without his/her consent; (b) the original term of a Stock Option may not be extended without prior approval of the stockholders of the Company; and (c) the exercise price of a Stock Option may not be reduced, directly or indirectly, without prior approval of the stockholders of the Company.
SECTION 8. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an unfunded plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant or Grantee by the Company, nothing set forth herein shall give any such Participant or Grantee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan.
SECTION 9. CHANGE IN CONTROL.
In the event of a Change in Control, unless otherwise determined by the Board in writing at or after grant, but prior to the occurrence of such Change in Control, any Stock Options awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested, and any Restricted Stock or Restricted Stock Units awarded under the Plan not previously vested shall become fully vested.
SECTION 10. GENERAL PROVISIONS.
(a) | Nothing set forth in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in the specified cases. The adoption of the Plan shall not confer upon any director of the Company, any Subsidiary or any Affiliate, any right to continued retention as a director with the Company, a Subsidiary or an Affiliate, as the case may be. |
(b) | At the time of grant or exercise, the Committee may provide in connection with any grant or exercise made under this Plan that the shares of Stock received as a result of such grant or purchase shall be subject to a right of first refusal, pursuant to which the Participant shall be required to offer to the Company any shares that the participant wishes to sell, with the price being the then Fair Market Value of the Stock, subject to the provisions of Section 9 hereof and to such other terms and conditions as the Board may specify at the time of grant. |
(c) | No member of the Board or the Committee, nor any officer or employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation. |
(d) | In the event that any provision of the Plan or any related Award Notice is held to be invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of the Plan or any related Award Notice. |
(e) | The rights and obligations under the Plan and any related agreements shall inure to the benefit of, and shall be binding upon the Company, its successors and assigns, and the Non-Employee Directors and their beneficiaries. |
(f) | Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. |
(g) | The Plan shall be construed, governed and enforced in accordance with the Jaw of Delaware, except as such laws are preempted by applicable federal law. |
SECTION 11. EFFECTIVE DATE OF PLAN.
The Plan shall be effective as of January 1, 2011.
SECTION 12. TERM OF PLAN.
No Stock Options, Restricted Stock or Restricted Stock Units shall be granted pursuant to the Plan following the termination of the 2007 Compensation Plan or the 2011 Incentive Plan, as applicable, but awards theretofore granted may extend beyond that date.
Exhibit 11. Statement re computation of per share earnings.
TORCHMARK CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Three Months
Ended September 30, |
||||||||
2014 | 2013 | |||||||
Net Income |
$ | 132,412,000 | $ | 132,122,000 | ||||
|
|
|
|
|||||
Basic weighted average shares outstanding |
129,969,902 | 136,903,754 | ||||||
Diluted weighted average shares outstanding |
131,877,205 | 139,010,061 | ||||||
Basic net income per share |
$ | 1.02 | $ | 0.97 | ||||
|
|
|
|
|||||
Diluted net income per share |
$ | 1.00 | $ | 0.95 | ||||
|
|
|
|
|||||
Nine Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
Net Income |
$ | 396,191,000 | $ | 385,655,000 | ||||
|
|
|
|
|||||
Basic weighted average shares outstanding |
131,529,818 | 138,509,957 | ||||||
Diluted weighted average shares outstanding |
133,431,340 | 140,487,536 | ||||||
Basic net income per share |
$ | 3.01 | $ | 2.78 | ||||
|
|
|
|
|||||
Diluted net income per share |
$ | 2.97 | $ | 2.75 | ||||
|
|
|
|
Exhibit 31.1
CERTIFICATIONS
I, Larry M. Hutchison, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Torchmark Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 7, 2014
/s/ Larry M. Hutchison |
Larry M. Hutchison Co-Chairman and Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, Gary L. Coleman, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Torchmark Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 7, 2014
/s/ Gary L. Coleman |
Gary L. Coleman Co-Chairman and Chief Executive Officer |
Exhibit 31.3
CERTIFICATIONS
I, Frank M. Svoboda, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Torchmark Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 7, 2014
/s/ Frank M. Svoboda |
Frank M. Svoboda Executive Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION OF PERIODIC REPORT
We, Larry M. Hutchison, Co-Chairman and Chief Executive Officer of Torchmark Corporation, Gary L. Coleman, Co-Chairman and Chief Executive Officer of Torchmark Corporation and Frank M. Svoboda, Executive Vice President and Chief Financial Officer of Torchmark Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to the best of our knowledge:
(1) | the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2014 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
(2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: November 7, 2014
/s/ Larry M. Hutchison |
Larry M. Hutchison Co-Chairman and Chief Executive Officer |
/s/ Gary L. Coleman |
Gary L. Coleman Co-Chairman and Chief Executive Officer |
/s/ Frank M. Svoboda |
Frank M. Svoboda Executive Vice President and Chief Financial Officer |
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