Investments

Portfolio Composition:

A summary of fixed maturities available for sale by cost or amortized cost and estimated fair value at December 31, 2017 and 2016 is as follows:



2017:	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value⁽¹⁾		% of Total Fixed Maturities⁽²⁾
Fixed maturities available for sale:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	390,646	$	18,173	$	(1,373	)	$	407,446	2
States, municipalities, and political subdivisions	1,091,960		127,890		(135		)	1,219,715		7
Foreign governments	20,236		1,782		—			22,018		—
Corporates, by sector:
Financial	3,282,526		475,961		(23,392		)	3,735,095		22
Utilities	1,955,737		369,406		(1,298		)	2,323,845		14
Energy	1,619,349		226,140		(25,392		)	1,820,097		11
Other corporate sectors	6,065,803		747,612		(20,616		)	6,792,799		40
Total corporates	12,923,415		1,819,119		(70,698		)	14,671,836		87
Collateralized debt obligations	59,150		20,084		(7,653		)	71,581		—
Other asset-backed securities	144,520		4,835		—			149,355		1
Redeemable preferred stocks, by sector:
Financial	336,621		62,892		(2,727		)	396,786		3
Utilities	28,553		2,132		(97		)	30,588		—
Total redeemable preferred stocks	365,174		65,024		(2,824		)	427,374		3
Total fixed maturities	$	14,995,101	$	2,056,907	$	(82,683	)	$	16,969,325	100

(1) Amount reported in the balance sheet.

(2) At fair value.



2016:	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value⁽¹⁾		% of Total Fixed Maturities⁽²⁾
Fixed maturities available for sale:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	381,054	$	895	$	(9,151	)	$	372,798	3
States, municipalities, and political subdivisions	1,284,605		126,850		(1,327		)	1,410,128		9
Foreign governments	21,701		1,438		(62		)	23,077		—
Corporates, by sector:
Financial	2,963,584		285,037		(45,885		)	3,202,736		21
Utilities	1,875,946		249,701		(12,604		)	2,113,043		14
Energy	1,542,426		127,989		(44,324		)	1,626,091		11
Other corporate sectors	5,601,136		424,021		(84,547		)	5,940,610		39
Total corporates	11,983,092		1,086,748		(187,360		)	12,882,480		85
Collateralized debt obligations	60,726		13,062		(10,285		)	63,503		—
Other asset-backed securities	56,410		621		(337		)	56,694		—
Redeemable preferred stocks, by sector:
Financial	371,862		43,383		(7,218		)	408,027		3
Utilities	28,600		798		(244		)	29,154		—
Total redeemable preferred stocks	400,462		44,181		(7,462		)	437,181		3
Total fixed maturities	$	14,188,050	$	1,273,795	$	(215,984	)	$	15,245,861	100

(1) Amount reported in the balance sheet.

(2) At fair value.

Securities, cash, and short-term investments held on deposit with various state and federal regulatory authorities had an amortized cost and fair value, respectively, of $657 million and $753 million at December 31, 2017 and $600 million and $663 million at December 31, 2016.

A schedule of fixed maturities available for sale by contractual maturity date at December 31, 2017 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	$	147,457	$	149,495
Due after one year through five years	682,932		720,186
Due after five years through ten years	1,397,473		1,567,972
Due after ten years through twenty years	4,701,591		5,519,917
Due after twenty years	7,861,000		8,789,769
Mortgage-backed and asset-backed securities	204,648		221,986
	$	14,995,101	$	16,969,325

Analysis of investment operations:



	Year Ended December 31,
	2017			2016			2015
Net investment income is summarized as follows:
Fixed maturities available for sale	$	817,213		$	778,912		$	747,663
Policy loans	39,578			38,436			36,763
Other long-term investments	4,991			2,786			2,021
Short-term investments	948			447			95
	862,730			820,581			786,542
Less investment expense	(14,845		)	(13,678		)	(12,591		)
Net investment income	$	847,885		$	806,903		$	773,951



An analysis of realized gains (losses) from investments is as follows:
Realized investment gains (losses):
Fixed maturities available for sale:
Sales and other	$	35,199		$	(10,645	)	$	(9,479	)
Other-than-temporary impairments	(245		)	—			—
Other investments	(7,302		)	(38		)	688
Loss on redemption on debt	(4,041		)	—			—
	23,611			(10,683		)	(8,791		)
Applicable tax	(6,021		)	3,739			3,077
Realized gains (losses) from investments, net of tax	$	17,590		$	(6,944	)	$	(5,714	)



An analysis of the net change in unrealized investment gains (losses) is as follows:
Fixed maturities available for sale	$	916,413	$	551,658	$	(1,163,295	)
Other investments	5,008		2,143		(2,737		)
Net change in unrealized gains (losses)	$	921,421	$	553,801	$	(1,166,032	)

Additional information about securities sold is as follows:



	At December 31,
	2017			2016			2015
Fixed maturities available for sale:
Proceeds from sales⁽¹⁾	$	67,246		$	358,285		$	226,792
Gross realized gains	5,079			6,133			259
Gross realized losses	(1,100		)	(32,608		)	(16,894		)


(1)	Includes unsettled sales of $17.9 million at December 31, 2016. There were no unsettled sales in 2017 or 2015.

Fair value measurements: The following tables represent the fair value of fixed maturities measured on a recurring basis at December 31, 2017 and 2016:



	Fair Value Measurements at December 31, 2017 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:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	—		$	407,446		$	—		$	407,446
States, municipalities, and political subdivisions	44			1,219,671			—			1,219,715
Foreign governments	—			22,018			—			22,018
Corporates, by sector:
Financial	—			3,673,089			62,006			3,735,095
Utilities	—			2,168,115			155,730			2,323,845
Energy	—			1,779,281			40,816			1,820,097
Other corporate sectors	—			6,468,541			324,258			6,792,799
Total corporates	—			14,089,026			582,810			14,671,836
Collateralized debt obligations	—			—			71,581			71,581
Other asset-backed securities	—			135,306			14,049			149,355
Redeemable preferred stocks, by sector:
Financial	—			396,786			—			396,786
Utilities	—			30,588			—			30,588
Total redeemable preferred stocks	—			427,374			—			427,374
Total fixed maturities	$	44		$	16,300,841		$	668,440		$	16,969,325
Percentage of total	—		%	96.1		%	3.9		%	100.0		%



	Fair Value Measurements at December 31, 2016 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:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	—		$	372,798		$	—		$	372,798
States, municipalities, and political subdivisions	45,302			1,364,826			—			1,410,128
Foreign governments	—			23,077			—			23,077
Corporates, by sector:
Financial	—			3,141,611			61,125			3,202,736
Utilities	—			1,959,143			153,900			2,113,043
Energy	—			1,598,976			27,115			1,626,091
Other corporate sectors	—			5,623,150			317,460			5,940,610
Total corporates	—			12,322,880			559,600			12,882,480
Collateralized debt obligations	—			—			63,503			63,503
Other asset-backed securities	—			56,694			—			56,694
Redeemable preferred stocks, by sector:
Financial	—			408,027			—			408,027
Utilities	—			29,154			—			29,154
Total redeemable preferred stocks	—			437,181			—			437,181
Total fixed maturities	$	45,302		$	14,577,456		$	623,103		$	15,245,861
Percentage of total	0.3		%	95.6		%	4.1		%	100.0		%

The following table represents changes in fixed maturities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).



				Analysis of Changes in Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Asset- backed securities			Collateralized debt Obligations			Corporates			Total
Balance at January 1, 2015	$	—		$	63,232		$	512,714		$	575,946
Total gains or losses:
Included in realized gains/losses	—			—			1,182			1,182
Included in other comprehensive income	—			11,365			(11,925		)	(560		)
Acquisitions	—			—			38,600			38,600
Sales	—			—			—			—
Amortization	—			5,536			17			5,553
Other⁽¹⁾	—			(9,751		)	(9,782		)	(19,533		)
Transfers into (out of) Level 3⁽²⁾	—			—			—			—
Balance at December 31, 2015	—			70,382			530,806			601,188
Total gains or losses:
Included in realized gains/losses	—			—			788			788
Included in other comprehensive income	—			(3,943		)	6,403			2,460
Acquisitions	—			—			33,662			33,662
Sales	—			—			—			—
Amortization	—			5,186			17			5,203
Other⁽¹⁾	—			(8,122		)	(12,076		)	(20,198		)
Transfers into (out of) Level 3⁽²⁾	—			—			—			—
Balance at December 31, 2016	—			63,503			559,600			623,103
Total gains or losses:
Included in realized gains/losses	—			—			—			—
Included in other comprehensive income	410			9,654			10,900			20,964
Acquisitions	14,000			—			21,666			35,666
Sales	—			—			—			—
Amortization	—			4,914			17			4,931
Other⁽¹⁾	(361		)	(6,490		)	(9,373		)	(16,224		)
Transfers into (out of) Level 3⁽²⁾	—			—			—			—
Balance at December 31, 2017	$	14,049		$	71,581		$	582,810		$	668,440

(1) Includes foreign exchange adjustments and principal repayments.

(2) There were no transfers in or out of Level 3 during the three years ended 2017.

Acquisitions of Level 3 investments in each of the years 2015 through 2017 are comprised of private-placement fixed maturities managed by an unaffiliated third-party.

Quantitative Information about Level 3

Fair Value Measurements

As of December 31, 2017



	Fair Value		Valuation Techniques	Significant Unobservable Input	Range	Weighted Average
Asset-backed securities	$	14,049	Determination of credit spread	Credit rating	BBB	BBB
			Discounted cash flows	Discount rate	5.35%	5.35%
Collateralized debt obligations	71,581		Discounted cash flows	Discount rate	7.0 - 8.25%	8.03%
Private placement fixed maturities	$	582,810	Determination of credit spread	Credit rating	A+ to BB-	BBB
			Discounted cash flows	Discount rate	2.97 - 7.27%	3.93%
	$	668,440

The private placement fixed maturities and asset-backed securities reported as Level 3 are managed by third party investment managers. These securities are valued based on the contractual cash flows discounted by a yield determined as a treasury benchmark adjusted for a credit spread. The credit spread is developed from observable indices for similar public fixed maturities and unobservable indices for private fixed maturities for corresponding credit ratings. However, the credit ratings for the securities are considered unobservable inputs, as they are assigned by the third party investment manager based on a quantitative and qualitative assessment of the credit underwritten. A higher (lower) credit rating would result in a higher (lower) valuation.

The collateral underlying collateralized debt obligations for which fair values are reported as Level 3 consists primarily of trust preferred securities issued by banks and insurance companies. Collateralized debt obligations are valued at the present value of expected future cash flows using an unobservable discount rate. Expected cash flows are determined by scheduling the projected repayment of the collateral assuming no future defaults, deferrals, or recoveries. The discount rate is risk-adjusted to take these items into account. A significant increase (decrease) in the discount rate will produce a significant decrease (increase) in fair value. Additionally, a significant increase (decrease) in the cash flow expectations would result in a significant increase (decrease) in fair value. For more information regarding valuation procedures, please refer to Note 1—Significant Accounting Policies under the caption Fair Value Measurements, Investments in Securities.

The following table presents transfers in and out of each of the valuation levels of fair values.



	2017								2016								2015
	In		Out			Net			In		Out			Net			In		Out			Net
Level 1	$	42,372	$	(597	)	$	41,775		$	45,344	$	—		$	45,344		$	17,252	$	(49,744	)	$	(32,492	)
Level 2	597		(42,372		)	(41,775		)	—		(45,344		)	(45,344		)	49,744		(17,252		)	32,492
Level 3	—		—			—			—		—			—			—		—			—

Transfers into Level 2 from Level 3 result from the availability of observable market data when a security is valued at the end of a period. Transfers into Level 3 occur when there is a lack of observable market information. Transfers into Level 1 from Level 2 occur when direct quotes are available; transfers from Level 1 into Level 2 result when only observable market data and no direct quotes are available. Transfers between levels are recognized as of the end of the period of transfer.

Other-than-temporary impairments (OTTI): Based on the Company's evaluation of its fixed maturities available for sale in an unrealized loss position in accordance with the OTTI policy as described in Note 1—Significant Accounting Policies, the Company concluded that there was an other-than-temporary impairment of $245 thousand ($159 thousand, net of tax) during the year ended December 31, 2017. For the two years ended December 31, 2016, there were no other-than-temporary impairments.

As of year end 2017, previously written down securities remaining in the portfolio were carried at a fair value of $59 million, or less than 0.4% of the fair value of the fixed maturity portfolio. Torchmark is continuously monitoring the market conditions impacting its portfolio. While adverse market conditions for an extended duration could lead to some ratings downgrades in certain sectors, Torchmark has the ability and intent to hold these investments to recovery, and does not intend to sell or expect to be required to sell any of its securities in such a position.

Unrealized gains/loss analysis: The following tables disclose gross unrealized investment losses by class and major sector of investments at December 31, 2017 and December 31, 2016 for the respective periods of time in a loss position. Torchmark considers these investments to be only temporarily impaired.

ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES

At December 31, 2017



	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:
Investment grade securities:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	34,388	$	(422	)	$	47,514	$	(951	)	$	81,902	$	(1,373	)
States, municipalities and political subdivisions	4,561		(21		)	1,771		(9		)	6,332		(30		)
Foreign governments	—		—			—		—			—		—
Corporates, by sector:
Financial	133,080		(652		)	35,302		(1,429		)	168,382		(2,081		)
Utilities	48,562		(569		)	32,345		(729		)	80,907		(1,298		)
Energy	23,463		(81		)	67,775		(3,682		)	91,238		(3,763		)
Metals and mining	—		—			—		—			—		—
Other corporate sectors	220,661		(2,312		)	163,886		(4,257		)	384,547		(6,569		)
Total corporates	425,766		(3,614		)	299,308		(10,097		)	725,074		(13,711		)
Other asset-backed securities	—		—			—		—			—		—
Redeemable preferred stocks, by sector:
Utilities	—		—			5,953		(97		)	5,953		(97		)
Total redeemable preferred stocks	—		—			5,953		(97		)	5,953		(97		)
Total investment grade securities	464,715		(4,057		)	354,546		(11,154		)	819,261		(15,211		)

Below investment grade securities:
States, municipalities and political subdivisions	200		(105		)	—		—			200		(105		)
Corporates, by sector:
Financial	—		—			84,432		(21,311		)	84,432		(21,311		)
Energy	8,114		(104		)	75,204		(21,525		)	83,318		(21,629		)
Metals and mining	—		—			—		—			—		—
Other corporate sectors	25,334		(5,066		)	54,383		(8,981		)	79,717		(14,047		)
Total corporates	33,448		(5,170		)	214,019		(51,817		)	247,467		(56,987		)
Collateralized debt obligations	—		—			12,347		(7,653		)	12,347		(7,653		)
Redeemable preferred stocks, by sector:
Financial	—		—			24,376		(2,727		)	24,376		(2,727		)
Total redeemable preferred stocks	—		—			24,376		(2,727		)	24,376		(2,727		)
Total below investment grade securities	33,648		(5,275		)	250,742		(62,197		)	284,390		(67,472		)
Total fixed maturities	$	498,363	$	(9,332	)	$	605,288	$	(73,351	)	$	1,103,651	$	(82,683	)

ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES

At December 31, 2016



	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:
Investment grade securities:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	321,133	$	(8,553	)	$	1,404	$	(598	)	$	322,537	$	(9,151	)
States, municipalities and political subdivisions	32,178		(1,114		)	683		(19		)	32,861		(1,133		)
Foreign governments	4,416		(62		)	—		—			4,416		(62		)
Corporates, by sector:
Financial	479,669		(18,666		)	64,335		(4,627		)	544,004		(23,293		)
Utilities	290,732		(11,000		)	16,977		(1,604		)	307,709		(12,604		)
Energy	83,064		(1,076		)	154,908		(18,127		)	237,972		(19,203		)
Metals and mining	5,936		(231		)	5,789		(187		)	11,725		(418		)
Other corporate sectors	1,564,273		(65,131		)	68,968		(6,495		)	1,633,241		(71,626		)
Total corporates	2,423,674		(96,104		)	310,977		(31,040		)	2,734,651		(127,144		)
Other asset-backed securities	41,498		(337		)	—		—			41,498		(337		)
Redeemable preferred stocks, by sector:
Utilities	5,857		(244		)	—		—			5,857		(244		)
Total redeemable preferred stocks	5,857		(244		)	—		—			5,857		(244		)
Total investment grade securities	2,828,756		(106,414		)	313,064		(31,657		)	3,141,820		(138,071		)

Below investment grade securities:
States, municipalities and political subdivisions	—		—			357		(194		)	357		(194		)
Corporates, by sector:
Financial	—		—			83,174		(22,592		)	83,174		(22,592		)
Energy	15,567		(385		)	91,165		(24,736		)	106,732		(25,121		)
Metals and mining	32,478		(172		)	34,463		(2,023		)	66,941		(2,195		)
Other corporate sectors	51,640		(291		)	95,679		(10,017		)	147,319		(10,308		)
Total corporates	99,685		(848		)	304,481		(59,368		)	404,166		(60,216		)
Collateralized debt obligations	—		—			9,714		(10,285		)	9,714		(10,285		)
Redeemable preferred stocks, by sector:
Financial	—		—			19,912		(7,218		)	19,912		(7,218		)
Total redeemable preferred stocks	—		—			19,912		(7,218		)	19,912		(7,218		)
Total below investment grade securities	99,685		(848		)	334,464		(77,065		)	434,149		(77,913		)
Total fixed maturities	$	2,928,441	$	(107,262	)	$	647,528	$	(108,722	)	$	3,575,969	$	(215,984	)

Gross unrealized losses decreased from $216 million at year end 2016 to $83 million at year end 2017, a decrease of $133 million. The decrease in the gross unrealized losses from prior year was primarily attributable to the improved conditions during 2017 in the energy sector and broadly across all sectors.

Additional information about fixed maturities available for sale 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 December 31, 2017	92	102	194
As of December 31, 2016	407	94	501

Torchmark’s entire fixed maturity portfolio consisted of 1,502 issues at December 31, 2017 and 1,565 issues at December 31, 2016. The weighted-average quality rating of all unrealized loss positions at amortized cost was BBB- for 2017 and BBB+ for 2016.

Other investment information:

Other long-term investments consist of the following:



	Year Ended December 31,
	2017		2016
Investment in limited partnerships	$	66,522	$	51,509
Commercial mortgage participations⁽¹⁾	39,489		—
Other	2,548		2,343
Total	$	108,559	$	53,852

(1) A mortgage participation is a legal right to a prorata interest in a mortgage loan.

Torchmark did not have any invested assets that were non-income producing during the twelve months ended December 31, 2017.

Concentrations of Credit Risk: Torchmark maintains a diversified investment portfolio with limited concentration in any given issuer. At December 31, 2017, the investment portfolio, at fair value, consisted of the following:



Investment grade fixed maturities:
Corporate securities	82	%
Securities of state and municipal governments	7
Government-sponsored enterprises	2
Other	1
Below investment grade fixed maturities:
Corporate securities	3
Other	1
Policy loans, which are secured by the underlying insurance policy values	3
Other investments	1
	100	%

As of December 31, 2017, securities of state and municipal governments represented 7% of invested assets at fair value. Such investments are made throughout the U.S. At yearend 2017, the state and municipal bond portfolio at fair value was invested in securities issued within the following states: Texas (29%), Ohio (9%), Washington (8%), Illinois (7%), Michigan (5%), and Georgia (5%). Otherwise, there was no concentration within any given state greater than 5%.

Corporate debt securities and redeemable preferred stocks represent 85% of Torchmark's investment portfolio. These investments are spread across a wide range of industries. Below are the ten largest industry concentrations held in the corporate portfolio of corporate debt securities and redeemable preferred stocks at December 31, 2017, based on fair value:



Insurance	16	%
Electric utilities	12
Oil and natural gas pipelines	7
Banks	6
Transportation	4
Oil and natural gas exploration and production	4
Chemicals	4
Real estate investment trusts	4
Food	3
Metals and mining	3

At yearend 2017, 4% of invested assets at fair value were represented by fixed maturities rated below investment grade. Par value of these investments was $790 million, amortized cost was $702 million, and fair value was $679 million. While these investments could be subject to additional credit risk, such risk should generally be reflected in their fair value.