Business Segments

Torchmark’s reportable segments are based on the insurance product lines it markets and administers: life insurance, health insurance, and annuities. These major product lines are set out as reportable segments because of the common characteristics of products within these categories, comparability of margins, and the similarity in regulatory environment and management techniques. There is also an investment segment which manages the investment portfolio, debt, and cash flow for the insurance segments and the corporate function. Torchmark's chief operating decision makers evaluate the overall performance of the operations of the Company in accordance with these segments.

Life insurance products include traditional and interest-sensitive whole life insurance as well as term life insurance. Health insurance products are generally guaranteed-renewable and include Medicare Supplement, critical illness, accident, long-term care, and limited-benefit supplemental hospital and surgical coverages. Annuities include fixed-benefit contracts.

Torchmark markets its insurance products through a number of distribution channels, each of which sells the products of one or more of Torchmark’s insurance segments. The tables below present segment premium revenue by each of Torchmark’s marketing groups.

Torchmark Corporation

Premium Income by Distribution Channel



	For the Year 2015
	Life			Health			Annuity			Total
Distribution Channel	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total
United American Independent	$	15,036	1	$	345,330	37	$	135	100	$	360,501	12
Liberty National Exclusive	271,113		13	209,150		23				480,263		16
American Income Exclusive	830,903		40	80,339		9				911,242		30
Family Heritage Exclusive	2,334		—	221,091		24				223,425		8
Globe Life Direct Response	746,693		36	69,610		7				816,303		27
Other	206,986		10							206,986		7
	$	2,073,065	100	$	925,520	100	$	135	100	$	2,998,720	100



	For the Year 2014
	Life			Health			Annuity			Total
Distribution Channel	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total
United American Independent	$	16,582	1	$	305,368	35	$	400	100	$	322,350	11
Liberty National Exclusive	272,265		14	222,017		25				494,282		18
American Income Exclusive	766,458		39	78,722		9				845,180		30
Family Heritage Exclusive	1,595		—	204,667		24				206,262		7
Globe Life Direct Response	702,023		36	58,666		7				760,689		27
Other	207,377		10							207,377		7
	$	1,966,300	100	$	869,440	100	$	400	100	$	2,836,140	100



	For the Year 2013
	Life			Health			Annuity			Total
Distribution Channel	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total
United American Independent	$	19,742	1	$	298,298	35	$	532	100	$	318,572	11
Liberty National Exclusive	275,980		15	241,264		28				517,244		19
American Income Exclusive	715,366		38	79,435		9				794,801		29
Family Heritage Exclusive	1,006		—	190,923		22				191,929		7
Globe Life Direct Response	663,544		35	53,898		6				717,442		26
Other	209,694		11							209,694		8
	$	1,885,332	100	$	863,818	100	$	532	100	$	2,749,682	100

Due to the nature of the life insurance industry, Torchmark has no individual or group which would be considered a major customer. Substantially all of Torchmark’s business is conducted in the United States.

The measure of profitability established by the chief operating decision makers for insurance segments is underwriting margin before other income and administrative expenses, in accordance with the manner the segments are managed. It essentially represents gross profit margin on insurance products before insurance administrative expenses and consists of premium, less net policy obligations, acquisition expenses, and commissions. Interest credited to net policy liabilities (reserves less deferred acquisition costs) is reflected as a component of the Investment segment in order to match this cost to the investment earnings from the assets supporting the net policy liabilities.

The measure of profitability for the Investment segment is excess investment income, which represents the income earned on the investment portfolio in excess of net policy requirements and financing costs associated with Torchmark’s debt. Other than the above-mentioned interest allocations and an intersegment commission, there are no other intersegment revenues or expenses. Expenses directly attributable to corporate operations are included in the “Corporate” category. Stock-based compensation expense is considered a corporate expense by Torchmark management and is included in this category. All other unallocated revenues and expenses on a pretax basis, including insurance administrative expense, are included in the “Other” segment category.

Torchmark holds a sizeable investment portfolio to support its insurance liabilities, the yield from which is used to offset policy benefit, acquisition, administrative and tax expenses. This yield or investment income is taken into account when establishing premium rates and profitability expectations of its insurance products. In holding such a portfolio, investments are sold, called, or written down from time to time, resulting in a realized gain or loss. These gains or losses generally occur as a result of disposition due to issuer calls, compliance with Company investment policies, or other reasons often beyond management’s control. Unlike investment income, realized gains and losses are incidental to insurance operations, and only overall yields are considered when setting premium rates or insurance product profitability expectations. While these gains and losses are not relevant to segment profitability or core operating results, they can have a material positive or negative result on net income. For these reasons, management removes realized investment gains and losses when it views its segment operations.

In 2015, Torchmark recorded $1.4 million in administrative settlements ($906 thousand after tax) related to a post closing adjustment on the sale of a former subsidiary. These administrative settlements were included in "Commissions, premium taxes, and non-deferred acquisition costs" in the Consolidated Statements of Operations in 2015.

During 2014, Torchmark accrued for certain litigation matters 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 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 2013, (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 acquisition of the insurance assets and liabilities of Family Heritage. The Family Heritage acquisition closed on November 1, 2012. This adjustment increased 2013 after-tax earnings in the amount of $522 thousand. Management removes items that are related to prior periods when evaluating the operating results of current periods. Management also removes non-operating items unrelated to its core insurance activities when evaluating those results. Therefore, these items are excluded in its presentation of segment results, because accounting guidance requires that operating segment results be presented as management views its business. 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 following tables set forth a reconciliation of Torchmark’s revenues and operations by segment to its major income statement line items. See Note 1—Significant Accounting Policies for additional information concerning reconciling items of segment profits to pretax income.



	For the year 2015
	Life			Health			Annuity			Investment			Other			Corporate			Adjustments				Consolidated
Revenue:
Premium	$	2,073,065		$	925,520		$	135															$	2,998,720
Net investment income										$	773,951												773,951
Other income													$	2,379					$	(194	)	⁽²⁾	2,185
Total revenue	2,073,065			925,520			135			773,951			2,379						(194		)		3,774,856
Expenses:
Policy benefits	1,374,608			602,610			38,994																2,016,212
Required interest on:
Policy reserves	(552,298		)	(69,057		)	(53,295		)	674,650													—
Deferred acquisition costs	172,947			22,760			1,138			(196,845		)											—
Amortization of acquisition costs	353,595			83,341			8,689																445,625
Commissions, premium taxes, and non-deferred acquisition costs	154,811			81,489			41												1,200			^(2,3)	237,541
Insurance administrative expense ⁽¹⁾													186,191										186,191
Parent expense																$	9,003						9,003
Stock-based compensation expense																28,664							28,664
Interest expense										76,642													76,642
Total expenses	1,503,663			721,143			(4,433		)	554,447			186,191			37,667			1,200				2,999,878
Subtotal	569,402			204,377			4,568			219,504			(183,812		)	(37,667		)	(1,394		)		774,978
Non-operating items																			1,394			⁽³⁾	1,394
Measure of segment profitability (pretax)	$	569,402		$	204,377		$	4,568		$	219,504		$	(183,812	)	$	(37,667	)	$	—			776,372
Deduct applicable income taxes																							(253,459		)
Segment profits after tax																							522,913
Add back income taxes applicable to segment profitability																							253,459
Add (deduct) realized investment gains (losses) and impairments																							(8,791		)
Deduct administrative settlements ⁽³⁾																							(1,394		)
Pretax income per Consolidated Statement of Operations																							$	766,187

(1) Administrative expense is not allocated to insurance segments.

(2) Elimination of intersegment commission.

(3) Administrative settlements.



	For the year 2014
	Life			Health			Annuity			Investment			Other			Corporate			Adjustments				Consolidated
Revenue:
Premium	$	1,966,300		$	869,440		$	400															$	2,836,140
Net investment income ⁽⁵⁾										$	758,286												758,286
Other income													$	2,354					$	(233	)	⁽²⁾	2,121
Total revenue	1,966,300			869,440			400			758,286			2,354						(233		)		3,596,547
Expenses:
Policy benefits	1,293,384			559,817			42,005												8,178			⁽⁴⁾	1,903,384
Required interest on:
Policy reserves	(530,192		)	(64,401		)	(55,255		)	649,848													—
Deferred acquisition costs	168,100			22,499			1,453			(192,052		)											—
Amortization of acquisition costs	335,345			72,731			7,838																415,914
Commissions, premium taxes, and non-deferred acquisition costs	143,174			79,475			47												(233		)	⁽²⁾	222,463
Insurance administrative expense ⁽¹⁾													174,832						2,422			⁽³⁾	177,254
Parent expense																$	8,159		(85		)	⁽³⁾	8,074
Stock-based compensation expense																32,203							32,203
Interest expense										76,126													76,126
Total expenses	1,409,811			670,121			(3,912		)	533,922			174,832			40,362			10,282				2,835,418
Subtotal	556,489			199,319			4,312			224,364			(172,478		)	(40,362		)	(10,515		)		761,129
Non-operating items																			10,515			^(3,4)	10,515
Measure of segment profitability (pretax)	$	556,489		$	199,319		$	4,312		$	224,364		$	(172,478	)	$	(40,362	)	$	—			771,644
Deduct applicable income taxes																							(252,041		)
Segment profits after tax																							519,603
Add back income taxes applicable to segment profitability																							252,041
Add (deduct) realized investment gains (losses) and impairments																							23,548
Deduct legal settlement expenses ⁽³⁾																							(2,337		)
Deduct administrative settlements⁽⁴⁾																							(8,178		)
Pretax income per Consolidated Statement of Operations																							$	784,677

(1) Administrative expense is not allocated to insurance segments.

(2) Elimination of intersegment commission.

(3) Legal settlement expenses.

(4) Administrative settlements.

(5) Retrospectively adjusted to give effect to the adoption of ASU 2014-01 as described in Note 1—Significant Accounting Policies.



	For the Year 2013
	Life			Health			Annuity			Investment			Other			Corporate			Adjustments				Consolidated
Revenue:
Premium	$	1,885,332		$	863,818		$	532															$	2,749,682
Net investment income⁽⁶⁾										$	734,650												734,650
Other income													$	2,208					$	(277	)	⁽²⁾	1,931
Total revenue	1,885,332			863,818			532			734,650			2,208						(277		)		3,486,263
Expenses:
Policy benefits	1,227,857			558,982			43,302												8,625			⁽⁴⁾	1,838,766
Required interest on:
Policy reserves	(508,236		)	(59,858		)	(57,294		)	625,388													—
Deferred acquisition costs	164,981			22,568			1,811			(189,360		)											—
Amortization of acquisition costs	323,950			69,724			8,714												(1,519		)	⁽⁵⁾	400,869
Commissions, premium taxes, and non-deferred acquisition costs	131,721			75,895			60												(277		)	⁽²⁾	207,399
Insurance administrative expense ⁽¹⁾													175,651						1,155			⁽³⁾	176,806
Parent expense																$	8,495		500			⁽⁴⁾	8,995
Stock-based compensation expense																25,642							25,642
Interest expense										80,461													80,461
Total expenses	1,340,273			667,311			(3,407		)	516,489			175,651			34,137			8,484				2,738,938
Subtotal	545,059			196,507			3,939			218,161			(173,443		)	(34,137		)	(8,761		)		747,325
Non-operating items																			8,761			^(3,4,5)	8,761
Measure of segment profitability (pretax)	$	545,059		$	196,507		$	3,939		$	218,161		$	(173,443	)	$	(34,137	)	$	—			756,086
Deduct applicable income taxes																							(246,686		)
Segment profits after tax																							509,400
Add back income taxes applicable to segment profitability																							246,686
Add (deduct) realized investment gains (losses) and impairments																							7,990
Deduct Guaranty Fund Assessment⁽³⁾																							(1,155		)
Deduct legal settlement expenses ⁽⁴⁾																							(9,125		)
Add Family Heritage Life acquisition adjustments ⁽⁵⁾																							1,519
Pretax income per Consolidated Statement of Operations																							$	755,315

(1) Administrative expense is not allocated to insurance segments.

(2) Elimination of intersegment commission.

(3) Guaranty Fund Assessment.

(4) Legal settlement expenses.

(5) Family Heritage Life acquisition adjustments.

(6) Retrospectively adjusted to give effect to the adoption of ASU 2014-01 as described in Note 1—Significant Accounting Policies.

The following table summarizes the measures of segment profitability as determined in the three preceding tables for comparison with prior periods. The table also reconciles segment profits to net income.

Analysis of Profitability by Segment



	2015			2014			2013			2015 Change			%		2014 Change			%
Life insurance underwriting margin	$	569,402		$	556,489		$	545,059		$	12,913		2		$	11,430		2
Health insurance underwriting margin	204,377			199,319			196,507			5,058			3		2,812			1
Annuity underwriting margin	4,568			4,312			3,939			256			6		373			9
Excess investment income	219,504			224,364			218,161			(4,860		)	(2	)	6,203			3
Other insurance:
Other income	2,379			2,354			2,208			25			1		146			7
Administrative expense	(186,191		)	(174,832		)	(175,651		)	(11,359		)	6		819			—
Corporate and adjustments	(37,667		)	(40,362		)	(34,137		)	2,695			(7	)	(6,225		)	18
Pre-tax total	776,372			771,644			756,086			4,728			1		15,558			2
Applicable taxes	(253,459		)	(252,041		)	(246,686		)	(1,418		)	1		(5,355		)	2
After-tax total, before discontinued operations	522,913			519,603			509,400			3,310			1		10,203			2
Discontinued operations (after tax)⁽¹⁾	10,807			14,865			21,267			(4,058		)	(27	)	(6,402		)	(30	)
Total	533,720			534,468			530,667			(748		)	—		3,801			1
Realized gains (losses)—investments (after tax)	(5,714		)	15,306			3,965			(21,020		)			11,341
Family Heritage acquisition finalization adjustments (after tax)	—			—			522			—					(522		)
Legal settlement expenses (after tax)	—			(1,519		)	(5,931		)	1,519					4,412
Guaranty Fund assessment (after tax)	—			—			(751		)	—					751
Administrative settlements (after tax)	(906		)	(5,316		)	—			4,410					(5,316		)
Net income	$	527,100		$	542,939		$	528,472		$	(15,839	)	(3	)	$	14,467		3

(1) Income from discontinued operations (after tax) is included for purposes of reconciling to net income.

Assets for each segment are reported based on a specific identification basis. The insurance segments’ assets contain deferred acquisition costs (including the value of insurance purchased). The investment segment includes the investment portfolio, cash, and accrued investment income. Goodwill is assigned to the insurance segments at the time of purchase based on the excess of cost over the fair value of assets acquired for the benefit of that segment. All other assets are included in the Other category. The table below reconciles segment assets to total assets as reported in the consolidated financial statements.

Assets by Segment



	At December 31, 2015
	Life		Health		Annuity		Investment		Other		Consolidated
Cash and invested assets							$	14,405,073			$	14,405,073
Accrued investment income							209,915				209,915
Deferred acquisition costs	$	3,098,656	$	502,535	$	15,944					3,617,135
Goodwill	309,609		131,982								441,591
Other assets									$	1,179,499	1,179,499
Total assets	$	3,408,265	$	634,517	$	15,944	$	14,614,988	$	1,179,499	$	19,853,213



	At December 31, 2014
	Life		Health		Annuity		Investment		Other		Consolidated
Cash and invested assets							$	15,058,996			$	15,058,996
Accrued investment income							204,879				204,879
Deferred acquisition costs	$	2,946,995	$	493,880	$	16,522					3,457,397
Goodwill	309,609		131,982								441,591
Other assets									$	1,109,396	1,109,396
Total assets	$	3,256,604	$	625,862	$	16,522	$	15,263,875	$	1,109,396	$	20,272,259

Liabilities for each segment are reported also on a specific identification basis similar to the assets. The insurance segments' liabilities contain future policy benefits, unearned and advance premiums, and policy claims and other benefits payable. Other policyholders' funds are included in Other. Debt represents both short and long term. Current and deferred income taxes payable is also included in Other.

Other Balances by Segment



	At December 31, 2015
	Life		Health		Annuity		Investment		Consolidated
Future policy benefits	$	9,327,561	$	1,600,240	$	1,318,010			$	12,245,811
Unearned and advance premiums	17,381		49,640						67,021
Policy claims and other benefits payable	135,778		137,120						272,898
Debt							$	1,233,862	1,233,862
Total	$	9,480,720	$	1,787,000	$	1,318,010	$	1,233,862	$	13,819,592



	At December 31, 2014
	Life		Health		Annuity		Investment		Consolidated
Future policy benefits	$	8,900,344	$	1,489,963	$	1,360,188			$	11,750,495
Unearned and advance premium	17,238		54,465						71,703
Policy claims and other benefits payable	125,884		128,265						254,149
Debt							$	1,230,528	1,230,528
Total	$	9,043,466	$	1,672,693	$	1,360,188	$	1,230,528	$	13,306,875