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, 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 2016
	Life			Health			Annuity			Total
Distribution Channel	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total
United American Independent	$	13,733	1	$	355,015	38	$	38	100	$	368,786	12
Liberty National Exclusive	270,476		12	201,798		21				472,274		15
American Income Exclusive	913,355		42	84,382		9				997,737		32
Family Heritage Exclusive	2,866		—	236,075		25				238,941		8
Direct Response	782,765		36	70,393		7				853,158		27
Other	206,138		9							206,138		6
	$	2,189,333	100	$	947,663	100	$	38	100	$	3,137,034	100



	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
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
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

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 2016, Torchmark recorded $3.8 million in administrative settlements ($2.5 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 2016.

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.

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 noted in the paragraphs 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 2016
	Life			Health			Annuity			Investment			Other			Corporate			Adjustments				Consolidated
Revenue:
Premium	$	2,189,333		$	947,663		$	38															$	3,137,034
Net investment income										$	806,903												806,903
Other income													$	1,534					$	(159	)	⁽²⁾	1,375
Total revenue	2,189,333			947,663			38			806,903			1,534						(159		)		3,945,312
Expenses:
Policy benefits	1,475,477			612,725			36,751												3,795			⁽³⁾	2,128,748
Required interest on:
Policy reserves	(577,827		)	(73,382		)	(51,131		)	702,340													—
Deferred acquisition costs	178,946			23,060			807			(202,813		)											—
Amortization of acquisition costs	374,499			90,385			4,179																469,063
Commissions, premium taxes, and non-deferred acquisition costs	164,476			84,819			38												(159		)	⁽²⁾	249,174
Insurance administrative expense ⁽¹⁾													196,598						553			⁽⁴⁾	197,151
Parent expense																$	8,587						8,587
Stock-based compensation expense																26,326							26,326
Interest expense										83,345													83,345
Total expenses	1,615,571			737,607			(9,356		)	582,872			196,598			34,913			4,189				3,162,394
Subtotal	573,762			210,056			9,394			224,031			(195,064		)	(34,913		)	(4,348		)		782,918
Non-operating items																			4,348			^(3,4)	4,348
Measure of segment profitability (pretax)	$	573,762		$	210,056		$	9,394		$	224,031		$	(195,064	)	$	(34,913	)	$	—			787,266
Deduct applicable income taxes																							(237,906		)
Net operating income from continuing operations																							549,360
Add back income taxes applicable to segment profitability																							237,906
Add (deduct) realized investment gains (losses)																							(10,683		)
Deduct administrative settlements ⁽³⁾																							(3,795		)
Deduct non-operating fees ⁽⁴⁾																							(553		)
Income before income taxes per Consolidated Statement of Operations																							$	772,235

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

(2) Elimination of intersegment commission.

(3) Administrative settlements.

(4) Non-operating fees.



	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		)
Net operating income from continuing operations																							522,913
Add back income taxes applicable to segment profitability																							253,459
Add (deduct) realized investment gains (losses)																							(8,791		)
Deduct administrative settlements ⁽³⁾																							(1,394		)
Income before income taxes 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										$	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		)
Net operating income from continuing operations																							519,603
Add back income taxes applicable to segment profitability																							252,041
Add (deduct) realized investment gains (losses)																							23,548
Deduct legal settlement expenses ⁽³⁾																							(2,337		)
Deduct administrative settlements⁽⁴⁾																							(8,178		)
Income before income taxes 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.

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



	2016			2015			2014			2016 Change			%		2015 Change			%
Life insurance underwriting margin	$	573,762		$	569,402		$	556,489		$	4,360		1		$	12,913		2
Health insurance underwriting margin	210,056			204,377			199,319			5,679			3		5,058			3
Annuity underwriting margin	9,394			4,568			4,312			4,826			106		256			6
Excess investment income	224,031			219,504			224,364			4,527			2		(4,860		)	(2	)
Other insurance:
Other income	1,534			2,379			2,354			(845		)	(36	)	25			1
Administrative expense	(196,598		)	(186,191		)	(174,832		)	(10,407		)	6		(11,359		)	6
Corporate and adjustments	(34,913		)	(37,667		)	(40,362		)	2,754			(7	)	2,695			(7	)
Pre-tax total	787,266			776,372			771,644			10,894			1		4,728			1
Applicable taxes⁽¹⁾	(237,906		)	(253,459		)	(252,041		)	15,553			(6	)	(1,418		)	1
Net operating income from continuing operations	549,360			522,913			519,603			26,447			5		3,310			1
Discontinued operations (after tax)⁽²⁾	10,189			10,807			14,865			(618		)	(6	)	(4,058		)	(27	)
Total	559,549			533,720			534,468			25,829			5		(748		)	—
Realized gains (losses)—investments (after tax)	(6,944		)	(5,714		)	15,306			(1,230		)			(21,020		)
Legal settlement expenses (after tax)	—			—			(1,519		)	—					1,519
Administrative settlements (after tax)	(2,467		)	(906		)	(5,316		)	(1,561		)			4,410
Non-operating fees (after tax)	(359		)	—			—			(359		)			—
Net income	$	549,779		$	527,100		$	542,939		$	22,679		4		$	(15,839	)	(3	)

(1) Certain current year amounts were prospectively adjusted to give effect to the adoption of ASU 2016-09 related to excess tax benefits from stock compensation as described in Note 1—Significant Accounting Policies under "Accounting Pronouncements Adopted in the Current Year."

(2) 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, 2016
	Life		Health		Annuity		Investment		Other		Consolidated
Cash and invested assets							$	15,955,891			$	15,955,891
Accrued investment income							223,148				223,148
Deferred acquisition costs	$	3,261,220	$	512,701	$	9,237					3,783,158
Goodwill	309,609		131,982								441,591
Other assets									$	1,032,299	1,032,299
Total assets	$	3,570,829	$	644,683	$	9,237	$	16,179,039	$	1,032,299	$	21,436,087



	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

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 as well as current and deferred income taxes payable. Debt represents both short and long term.

Liabilities by Segment



	At December 31, 2016
	Life		Health		Annuity		Investment		Other		Consolidated
Future policy benefits	$	9,825,776	$	1,706,870	$	1,293,191					$	12,825,837
Unearned and advance premiums	16,828		47,189								64,017
Policy claims and other benefits payable	156,437		143,128								299,565
Debt							$	1,397,640			1,397,640
Other									$	2,282,167	2,282,167
Total liabilities	$	9,999,041	$	1,897,187	$	1,293,191	$	1,397,640	$	2,282,167	$	16,869,226



	At December 31, 2015
	Life		Health		Annuity		Investment		Other		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
Other									$	1,978,069	1,978,069
Total liabilities	$	9,480,720	$	1,787,000	$	1,318,010	$	1,233,862	$	1,978,069	$	15,797,661