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Business Segments
 9 Months Ended
Sep. 30, 2017
Segment Reporting [Abstract]  
Business Segments
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. Torchmark's chief operating decision makers evaluate the overall performance of the operations of the Company in accordance with these segments.
Management’s 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 agencies, or captive agencies.
Torchmark’s management prefers to evaluate the performance of its underwriting and investment activities separately, rather than allocating investment income to the underwriting results. As such, the investment function is presented as a stand-alone segment. The investment segment includes the management of the investment portfolio, debt, and cash flow. Management’s 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 Torchmark’s debt. Other income and insurance administrative expense are classified in a separate Other segment.
The majority of the Company’s 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. Investment income required to fund the required interest on net policy liabilities is removed from the investment segment and applied to the insurance segments to eliminate the effect of the required interest from the insurance segments. As a result, the investment segment measures net investment income against the required interest on net policy liabilities and financing costs, while the insurance segments simply measure premiums against net policy benefits and expenses. Management believes this presentation facilitates a more meaningful analysis of the Company’s 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.
 
As noted, Torchmark’s “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. However, dispositions of investments occur from time to time, generally for reasons such as credit concerns, calls by issuers, or other factors.

Since Torchmark does not actively trade investments, 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 Torchmark’s 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 Torchmark’s segment analysis.
As discussed in Note 6—Commitments and Contingencies, the Company received an assessment from various state guaranty fund associations for the liquidation of Penn Treaty and its affiliate. The total estimated assessment for Torchmark's subsidiaries is approximately $10 million of which $1.4 million is estimated to be unrecoverable. We are anticipating the remaining amount of the assessments to be recovered through premium tax credits. The assessment expenses were considered a non-operational event and therefore were excluded from the core underwriting operations of the Company.
The following tables set forth a reconciliation of Torchmark’s revenues and operations by segment to its pretax income and each significant line item in its Condensed Consolidated Statements of Operations.
Reconciliation of Segment Operating Information to the Condensed Consolidated Statement of Operations
 
Three Months Ended September 30, 2017
 
Life
 
Health
 
Annuity
 
Investment
 
Other &
Corporate
 
Adjustments
 
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
576,223

 
$
242,991

 
$
3

 
 
 
 
 
 
 
 
$
819,217

Net investment income
 
 
 
 
 
 
$
213,872

 
 
 
 
 
 
213,872

Other income
 
 
 
 
 
 
 
 
$
361

 
$
(30
)
 
(2)
331

    Total revenue
576,223

 
242,991

 
3

 
213,872

 
361

 
(30
)
 
 
1,033,420

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Policy benefits
386,445

 
155,774

 
9,000

 
 
 
 
 


 

551,219

Required interest on reserves
(152,862
)
 
(19,617
)
 
(12,433
)
 
184,912

 
 
 
 
 
 
—

Required interest on DAC
46,893

 
5,881

 
172

 
(52,946
)
 
 
 
 
 
 
—

Amortization of acquisition costs
98,268

 
23,458

 
608

 
 
 
 
 
 
 
 
122,334

Commissions, premium taxes, and non-deferred acquisition costs
44,748

 
21,746

 
7

 
 
 
 
 
1,362

 
(2,3)
67,863

Insurance administrative expense(1)
 
 
 
 
 
 
 
 
52,426

 


 

52,426

Parent expense
 
 
 
 
 
 
 
 
2,330

 
 
 
 
2,330

Stock compensation expense
 
 
 
 
 
 
 
 
8,263

 
 
 
 
8,263

Interest expense
 
 
 
 
 
 
20,970

 
 
 
 
 
 
20,970

Total expenses
423,492

 
187,242

 
(2,646
)
 
152,936

 
63,019

 
1,362

 
 
825,405

Subtotal
152,731

 
55,749

 
2,649

 
60,936

 
(62,658
)
 
(1,392
)
 
 
208,015

Non-operating items
 
 
 
 
 
 
 
 
 
 
1,392

 
(3)
1,392

Measure of segment profitability (pretax)
$
152,731

 
$
55,749

 
$
2,649

 
$
60,936

 
$
(62,658
)
 
$
—

 
 
209,407

Deduct applicable income taxes
 
 
(63,342
)
Segment profits after tax
 
 
146,065

Add back income taxes applicable to segment profitability
 
 
63,342

Add (deduct) realized investment gains (losses)
 
   
12,595

Add (deduct) guaranty fund assessments(3)
 
 
(1,392
)
Pretax income from continuing operations per Condensed Consolidated Statements of Operations
 
   
$
220,610


(1) Administrative expense is not allocated to insurance segments.
(2) Elimination of intersegment commission.
(3) Guaranty fund assessments.


 
Three Months Ended September 30, 2016
 
Life
 
Health
 
Annuity
 
Investment
 
Other &
Corporate
 
Adjustments
 
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
546,415

 
$
236,987

 
$
9

 
 
 
 
 
 
 
 
$
783,411

Net investment income
 
 
 
 
 
 
$
202,720

 
 
 
 
 
 
202,720

Other income
 
 
 
 
 
 
 
 
$
199

 
$
(39
)
 
(2)
160

Total revenue
546,415

 
236,987

 
9


202,720

 
199

 
(39
)
 
 
986,291

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Policy benefits
369,546

 
153,351

 
9,255

 
 
 
 
 
 
 
 
532,152

Required interest on reserves
(145,295
)
 
(18,476
)
 
(12,761
)
 
176,532

 
 
 
 
 
 
—

Required interest on DAC
44,950

 
5,789

 
192

 
(50,931
)
 
 
 
 
 
 
—

Amortization of acquisition costs
93,496

 
22,643

 
682

 
 
 
 
 
 
 
 
116,821

Commissions, premium taxes, and non-deferred acquisition costs
40,577

 
20,604

 
11

 
 
 
 
 
(39
)
 
(2)
61,153

Insurance administrative expense(1)
 
 
 
 
 
 
 
 
49,248

 
257

 
 
49,505

Parent expense
 
 
 
 
 
 
 
 
1,955

 
 
 
 
1,955

Stock compensation expense
 
 
 
 
 
 
 
 
6,345

 
 
 
 
6,345

Interest expense
 
 
 
 
 
 
20,381

 
 
 
 
 
 
20,381

Total expenses
403,274

 
183,911

 
(2,621
)
 
145,982

 
57,548

 
218

 
 
788,312

Subtotal
143,141

 
53,076

 
2,630

 
56,738

 
(57,349
)
 
(257
)
 
 
197,979

Non-operating items
 
 
 
 
 
 
 
 
 
 
257

 
 
257

Measure of segment profitability (pretax)
$
143,141

 
$
53,076

 
$
2,630

 
$
56,738

 
$
(57,349
)
 
$
—

 
 
198,236

Deduct applicable income taxes
 
 
(58,422
)
Segment profits after tax
 
 
139,814

Add back income taxes applicable to segment profitability
 
 
58,422

Add (deduct) realized investment gains (losses)
 
   
3,482

Add (deduct) non-operating fees
 
 
(257
)
Pretax income from continuing operations per Condensed Consolidated Statements of Operations
 
   
$
201,461


(1) Administrative expense is not allocated to insurance segments.
(2) Elimination of intersegment commission.

 
Nine Months Ended September 30, 2017
 
Life
 
Health
 
Annuity
 
Investment
 
Other &
Corporate
 
Adjustments
 
  
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
1,725,896

 
$
730,557

 
$
9

 

 

 


 

$
2,456,462

Net investment income

 

 

 
$
634,930

 

 


 

634,930

Other income

 

 

 

 
$
1,239

 
$
(99
)
 
(2)
1,140

    Total revenue
1,725,896

 
730,557

 
9

 
634,930

 
1,239

 
(99
)
 

3,092,532

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Policy benefits
1,166,289

 
470,104

 
26,923

 

 

 
2,094

 
(3)
1,665,410

Required interest on reserves
(452,339
)
 
(57,859
)
 
(37,245
)
 
547,443

 

 

 

—

Required interest on DAC
139,042

 
17,530

 
524

 
(157,096
)
 

 

 

—

Amortization of acquisition costs
296,646

 
71,801

 
1,916

 

 

 

 

370,363

Commissions, premium taxes, and non-deferred acquisition costs
132,094

 
64,599

 
25

 


 


 
1,293

 
(2,4)
198,011

Insurance administrative expense(1)


 


 


 


 
155,751

 


 

155,751

Parent expense


 


 


 


 
7,228

 


 

7,228

Stock compensation expense


 


 


 


 
24,809

 


 

24,809

Interest expense


 


 


 
62,825

 


 


 

62,825

Total expenses
1,281,732

 
566,175

 
(7,857
)
 
453,172

 
187,788

 
3,387

 
 
2,484,397

Subtotal
444,164

 
164,382

 
7,866

 
181,758

 
(186,549
)
 
(3,486
)
 
 
608,135

Non-operating items
 
 
 
 
 
 
 
 
 
 
3,486

 
(3,4)
3,486

Measure of segment profitability (pretax)
$
444,164

 
$
164,382

 
$
7,866

 
$
181,758

 
$
(186,549
)
 
$
—

 
 
611,621

Deduct applicable income taxes
 
 
(184,703
)
Segment profits after tax
 
 
426,918

Add back income taxes applicable to segment profitability
 
 
184,703

Add (deduct) realized investment gains (losses)
 
   
6,142

Add (deduct) administrative settlements(3)
 
 
(2,094
)
Add (deduct) guaranty fund assessments (4)
 
 
(1,392
)
Pretax income from continuing operations per Condensed Consolidated Statements of Operations
 
   
$
614,277


(1) Administrative expense is not allocated to insurance segments.
(2) Elimination of intersegment commission.
(3) Administrative settlements.
(4) Guaranty fund assessments.



 
Nine Months Ended September 30, 2016
 
Life
 
Health
 
Annuity
 
Investment
 
Other &
Corporate
 
Adjustments
 
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premium
$
1,639,156

 
$
709,936

 
$
34

 
 
 
 
 
 
 

$
2,349,126

Net investment income


 


 


 
$
601,415

 
 
 
 
 

601,415

Other income


 


 


 


 
$
1,086

 
$
(123
)
 
(2)
963

Total revenue
1,639,156

 
709,936

 
34

 
601,415

 
1,086

 
(123
)
 
 
2,951,504

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Policy benefits
1,101,748

 
459,387

 
27,475

 


 


 


 

1,588,610

Required interest on reserves
(430,931
)
 
(54,803
)
 
(38,359
)
 
524,093

 


 


 

—

Required interest on DAC
133,628

 
17,297

 
621

 
(151,546
)
 


 


 

—

Amortization of acquisition costs
281,698

 
67,110

 
4,064

 


 


 


 

352,872

Commissions, premium taxes, and non-deferred acquisition costs
121,968

 
63,733

 
31

 


 


 
(123
)
 
(2)
185,609

Insurance administrative expense (1)


 


 


 


 
146,129

 
257

 

146,386

Parent expense


 


 


 


 
6,360

 


 

6,360

Stock compensation expense


 


 


 


 
20,334

 


 

20,334

Interest expense


 


 


 
62,860

 


 


 

62,860

Total expenses
1,208,111

 
552,724

 
(6,168
)

435,407

 
172,823

 
134

 
 
2,363,031

Subtotal
431,045

 
157,212

 
6,202

 
166,008

 
(171,737
)
 
(257
)
 
 
588,473

Non-operating items
 
 
 
 
 
 
 
 
 
 
257

 
 
257

Measure of segment profitability (pretax)
$
431,045

 
$
157,212

 
$
6,202

 
$
166,008

 
$
(171,737
)
 
$
—

 
 
588,730

Deduct applicable income taxes
 
 
(178,842
)
Segment profits after tax
 
 
409,888

Add back income taxes applicable to segment profitability
 
 
178,842

Add (deduct) realized investment gains (losses)
 
  
7,780

Add (deduct) non-operating fees
 
 
(257
)
Pretax income from continuing operations per Condensed Consolidated Statements of Operations
 
  
$
596,253


(1) Administrative expense is not allocated to insurance segments.
(2) Elimination of intersegment commission.




The following table summarizes the measures of segment profitability for comparison. It also reconciles segment profits to net income.
Analysis of Profitability by Segment
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Life insurance underwriting margin
$
152,731

 
$
143,141

 
$
444,164

 
$
431,045

Health insurance underwriting margin
55,749

 
53,076

 
164,382

 
157,212

Annuity underwriting margin
2,649

 
2,630

 
7,866

 
6,202

Excess investment income
60,936

 
56,738

 
181,758

 
166,008

Other insurance:
 
 
 
 
 
 
 
Other income
361

 
199

 
1,239

 
1,086

Administrative expense
(52,426
)
 
(49,248
)
 
(155,751
)
 
(146,129
)
Corporate and adjustments
(10,593
)
 
(8,300
)
 
(32,037
)
 
(26,694
)
Segment profits before tax
209,407

 
198,236

 
611,621

 
588,730

Applicable taxes
(63,342
)
 
(58,422
)
 
(184,703
)
 
(178,842
)
Segment profits after tax
146,065

 
139,814

 
426,918

 
409,888

Discontinued operations (after tax)
(12
)
 
9,959

 
(3,739
)
 
(447
)
After-tax total, after discontinued operations
146,053

 
149,773

 
423,179

 
409,441


 
 
 
 
 
 
 
Realized gains (losses)—investments (after tax)
8,186

 
2,263

 
6,235

 
5,057

Administrative settlements (after tax)
—

 
—

 
(1,361
)
 
—

Guaranty fund assessments (after tax)
(905
)
 
—

 
(905
)
 
—

Non-operating fees (after tax)
—

 
(167
)
 
—

 
(167
)
Net income
$
153,334

 
$
151,869

 
$
427,148

 
$
414,331