Postretirement Benefits

Torchmark has qualified noncontributory defined benefit pension plans and contributory savings plans which cover substantially all employees. There are also two nonqualified noncontributory supplemental executive retirement plans (SERPs) which cover a limited number of employees. The total cost of these retirement plans charged to operations was as follows:



Year Ended December 31,	Defined Contribution Plans⁽¹⁾		Defined Benefit Pension Plans⁽²⁾
2017	$	4,145	$	28,828
2016	3,614		24,202
2015	3,429		29,230

(1) 401K plans

(2) Qualified pension plans and SERPs

Torchmark accrues expense for the defined contribution plans based on a percentage of the employees’ contributions. The plans are funded by the employee contributions and a Torchmark contribution equal to the amount of accrued expense. Plan contributions are both mandatory and discretionary, depending on the terms of the plan.

Pension Plans: Cost for the defined benefit pension plans has been calculated on the projected unit credit actuarial cost method. All plan measurements for the defined benefit plans are as of December 31st of the respective year. The defined benefit pension plans covering the majority of employees are qualified and funded. Contributions are made to funded pension plans subject to minimums required by regulation and maximums allowed for tax purposes. Defined benefit plan contributions were $21.3 million in 2017, $15.8 million in 2016, and $15.5 million in 2015. Torchmark estimates as of December 31, 2017 that it will contribute an amount in the range of $30 million to $40 million to these plans in 2018. The actual amount of contribution may be different from this estimate.

Torchmark has two SERPs, one of which is active and provides to a limited number of executives an additional supplemental defined pension benefit. The supplemental benefit is based on the participant’s qualified plan benefit without consideration to the regulatory limits on compensation and benefit payments applicable to qualified plans, except that eligible compensation is capped at $1 million. This SERP is nonqualified and unfunded. However, a Rabbi Trust has been established to support the liability for this plan. This trust consists of life insurance policies on the lives of plan participants with an unaffiliated insurance carrier as well as an investment account.

Since this plan is nonqualified, the investments and the policyholder value of the insurance policies in the Rabbi Trust are not included as defined benefit plan assets, but rather assets of the Company. They are included in “Other Assets” in the Consolidated Balance Sheets.

The second supplemental benefit pension plan is limited to a very select group of employees and was closed as of December 31, 1994. It provides the full benefits that an employee would have otherwise received from a defined benefit plan in the absence of the limitation on benefits payable under a qualified plan. This plan is also nonqualified and unfunded. Pension cost for both supplemental defined benefit plans is determined in the same manner as for the qualified defined benefit plans.

The following table includes activity for the SERPs for the three years ended December 31, 2017.



	Year Ended December 31,
	2017		2016		2015
Premiums paid for insurance coverage	$	2,050	$	2,050	$	10,068

	December 31,
	2017		2016
Total investments:
Company owned life insurance	$	40,273	$	37,267
Exchange traded funds	55,442		48,999
	$	95,715	$	86,266

Liability:
Active plan	$	81,457	$	74,687
Closed plan	$	3,008	$	3,220

Plan assets in the funded plans consist primarily of investments in marketable fixed maturities and equity securities and are valued at fair value. Torchmark measures the fair value of its financial assets, including the assets in its benefit plans, in accordance with accounting guidance which establishes a hierarchy for asset values and provides a methodology for the measurement of value. Please refer to Note 1—Significant Accounting Policies under the caption Fair Value Measurements, Investments in Securities for a complete discussion of valuation procedures. The following table presents the assets of Torchmark’s defined benefit pension plans for the years ended December 31, 2017 and 2016.

Pension Assets by Component at December 31, 2017



	Fair Value Determined by:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Amount		% to Total
Corporate bonds:
Financial	$		$	43,451	$		$	43,451	12
Utilities			46,144				46,144		12
Energy			25,023				25,023		7
Other corporates			65,888				65,888		17
Total corporate bonds	—		180,506		—		180,506		48
Exchange traded fund⁽¹⁾	164,351						164,351		43
Other bonds			256				256		—
Other long-term investments			2,304				2,304		1
Guaranteed annuity contract⁽²⁾			21,202				21,202		6
Short-term investments	3,984						3,984		1
Other	5,021						5,021		1
Grand Total	$	173,356	$	204,268	$	—	$	377,624	100


(1)	A fund including marketable securities that mirror the S&P 500 index.


(2)	Representing a guaranteed annuity contract issued by Torchmark's subsidiary, American Income Life Insurance Company, to fund the obligations of the American Income Pension Plan.

Pension Assets by Component at December 31, 2016



	Fair Value Determined by:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Amount		% to Total
Corporate bonds:
Financial	$		$	41,578	$		$	41,578	13
Utilities			43,890				43,890		13
Energy			25,427				25,427		8
Other corporates			49,141				49,141		15
Total corporate bonds	—		160,036		—		160,036		49
Exchange traded fund⁽¹⁾	134,771						134,771		41
Other bonds			258				258		—
Guaranteed annuity contract⁽²⁾			18,997				18,997		6
Short-term investments	7,391						7,391		2
Other	7,418						7,418		2
Grand Total	$	149,580	$	179,291	$	—	$	328,871	100


(1)	A fund including marketable securities that mirror the S&P 500 index.


(2)	Representing a guaranteed annuity contract issued by Torchmark's subsidiary, American Income Life Insurance Company, to fund the obligations of the American Income Pension Plan.

Torchmark’s investment objectives for its plan assets include preservation of capital, preservation of purchasing power, and long-term growth. Torchmark seeks to preserve capital through investments made in high quality securities with adequate diversification by issuer and industry sector to minimize risk. The portfolio is monitored continuously for changes in quality and diversification mix. The preservation of purchasing power is intended to be accomplished through asset growth, exclusive of contributions and withdrawals, in excess of the rate of inflation. Torchmark intends to maintain investments that when combined with future plan contributions will produce adequate long-term growth to provide for all plan obligations. It is also Torchmark’s objective that the portfolio’s investment return will meet or exceed the return of a balanced market index.

The majority of the securities in the portfolio are highly marketable so that there will be adequate liquidity to meet projected payments. There are no specific policies calling for asset durations to match those of benefit obligations.

Allowed investments are limited to equities, fixed maturities, and short-term investments (invested cash). The assets are to be invested in a mix of equity and fixed income investments that best serve the objectives of the pension plan. Factors to be considered in determining the asset mix include funded status, annual pension expense, annual pension contributions, and balance sheet liability. Equities can include common and preferred stocks, securities convertible into equities, mutual funds and exchange traded funds that invest in equities, equity interests in limited partnerships, and other equity-related investments. Primarily, equities are listed on major exchanges and adequate market liquidity is required. Fixed maturities primarily consist of marketable debt securities rated investment grade at purchase by a major rating agency. Short-term investments include fixed maturities with maturities less than one year and invested cash. Short-term investments in commercial paper must be rated at least A-2 by Standard & Poor’s with the issuer rated investment grade. Invested cash is limited to banks rated A or higher. Investments outside of the aforementioned list are not permitted, except by prior approval of the Plan’s Trustees.

The investment portfolio is to be well diversified to avoid undue exposure to a single sector, industry, business, or security. The equity and fixed maturity portfolios are not permitted to invest in any single issuer that would exceed 10% of total plan assets at the time of purchase. Torchmark does not employ any other special risk management techniques, such as derivatives, in managing the pension investment portfolio.

Torchmark's equity securities include an exchange traded fund that mirrors the S&P 500 index which better aligns with a passive approach rather than an actively managed portfolio. At December 31, 2017, there were no restricted investments contained in the portfolio. Plan contributions have been invested primarily in fixed maturity and equity securities during the three years ended December 31, 2017.

The following table discloses the assumptions used to determine Torchmark’s pension liabilities and costs for the appropriate periods. The discount and compensation increase rates are used to determine current year projected benefit obligations and subsequent year pension expense. The long-term rate of return is used to determine current year expense. Differences between assumptions and actual experience are included in actuarial gain or loss.

Weighted Average Pension Plan Assumptions



For Benefit Obligations at December 31:	2017		2016
Discount Rate	3.75	%	4.27	%
Rate of Compensation Increase	4.37		4.31



For Periodic Benefit Cost for the Year:	2017		2016		2015
Discount Rate	4.27	%	4.64	%	4.23	%
Expected Long-Term Returns	6.96		7.19		6.96
Rate of Compensation Increase	4.31		4.33		4.35

The discount rate is determined based on the expected duration of plan liabilities. A yield is then derived based on the current market yield of a hypothetical portfolio of higher-quality corporate bonds which match the liability duration. The rate of compensation increase is projected based on Company experience, modified as appropriate for future expectations. The expected long-term rate of return on plan assets is management’s best estimate of the average rate of earnings expected to be received on the assets invested in the plan over the benefit period. In determining this assumption, consideration is given to the historical rate of return earned on the assets, the projected returns over future periods, and the discount rate used to compute benefit obligations.

Net periodic pension cost for the defined benefit plans by expense component was as follows:



	Year Ended December 31,
	2017			2016			2015
Service cost—benefits earned during the period	$	17,942		$	15,502		$	15,902
Interest cost on projected benefit obligation	22,124			21,631			19,887
Expected return on assets	(23,597		)	(23,127		)	(21,204		)
Net amortization	12,281			10,135			14,465
Recognition of actuarial loss	78			61			180
Net periodic pension cost	$	28,828		$	24,202		$	29,230

An analysis of the impact on other comprehensive income (loss) concerning pensions and other postretirement benefits is as follows:



	Year Ended December 31,
	2017			2016			2015
Balance at January 1	$	(173,883	)	$	(152,149	)	$	(152,999	)
Amortization of:
Prior service cost	476			477			377
Net actuarial (gain) loss⁽¹⁾	11,960			9,691			14,209
Total amortization	12,436			10,168			14,586
Plan amendments	—			—			(2,104		)
Experience gain (loss)	(31,933		)	(31,902		)	(11,632		)
Balance at December 31	$	(193,380	)	$	(173,883	)	$	(152,149	)


(1)	Includes amortization of postretirement benefits other than pensions of $155 thousand in 2017, $33 thousand in 2016, and $120 thousand in 2015.

The following table presents a reconciliation from the beginning to the end of the year of the projected benefit obligation and plan assets for pensions. This table also presents the amounts previously recognized as a component of accumulated other comprehensive income.

Pension Benefits



	Year Ended December 31,
	2017			2016
Changes in benefit obligation:
Obligation at beginning of year	$	527,522		$	476,581
Service cost	17,942			15,502
Interest cost	22,124			21,631
Plan amendments	—			—
Actuarial loss (gain)	55,369			34,667
Benefits paid	(20,351		)	(20,859		)
Obligation at end of year	602,606			527,522

Changes in plan assets:
Fair value at beginning of year	328,871			307,596
Return on assets	47,832			26,377
Contributions	21,272			15,757
Benefits paid	(20,351		)	(20,859		)
Fair value at end of year	377,624			328,871
Funded status at year end	$	(224,982	)	$	(198,651	)



Amounts recognized in accumulated other comprehensive income consist of:
Net loss (gain)	$	186,563	$	167,313
Prior service cost	4,135		4,611
Net amounts recognized at year end	$	190,698	$	171,924

The portion of other comprehensive income that is expected to be reflected in pension expense in 2018 is as follows:



Amortization of prior service cost	$	476
Amortization of net actuarial loss	14,543
Total	$	15,019

The accumulated benefit obligation (ABO) for Torchmark’s funded defined benefit pension plans was $466 million and $411 million at December 31, 2017 and 2016, respectively. In the nonqualified plans, the ABO was $75 million at December 31, 2017 and $69 million at 2016.

Torchmark has estimated its expected pension benefits to be paid over the next ten years as of December 31, 2017. These estimates use the same assumptions that measure the benefit obligation at December 31, 2016, taking estimated future employee service into account. Those estimated benefits are as follows:



For the year(s)
2018	$	20,375
2019	22,143
2020	23,840
2021	25,239
2022	27,090
2023-2027	160,075

Postretirement Benefit Plans Other Than Pensions: Torchmark provides a small postretirement life insurance benefit for most retired employees, and also provides additional postretirement life insurance benefits for certain key employees. The majority of the life insurance benefits are accrued over the working lives of active employees. Otherwise, Torchmark does not provide postretirement benefits other than pensions and the life insurance benefits described above.

Torchmark’s postretirement defined benefit plans other than pensions are not funded. Liabilities for these plans are measured as of December 31 for the appropriate year.

The components of net periodic postretirement benefit cost for plans other than pensions are as follows:



	Year Ended December 31,
	2017		2016			2015
Service cost	$	—	$	—		$	—
Interest cost on benefit obligation	1,132		1,139			1,075
Expected return on plan assets	—		—			—
Net amortization	155		33			120
Recognition of net actuarial (gain) loss	167		(132		)	367
Net periodic postretirement benefit cost	$	1,454	$	1,040		$	1,562

The following table presents a reconciliation of the benefit obligation and plan assets from the beginning to the end of the year. As these plans are unfunded, funded status is equivalent to the accrued benefit liability.

Benefits Other Than Pensions



	Year Ended December 31,
	2017			2016
Changes in benefit obligation:
Obligation at beginning of year	$	23,721		$	22,479
Service cost	—			—
Interest cost	1,132			1,139
Actuarial loss (gain)	1,045			412
Benefits paid	(285		)	(309		)
Obligation at end of year	25,613			23,721

Changes in plan assets:
Fair value at beginning of year	—			—
Return on assets	—			—
Contributions	285			309
Benefits paid	(285		)	(309		)
Fair value at end of year	—			—
Funded status at year end	$	(25,613	)	$	(23,721	)



Amounts recognized in accumulated other comprehensive income:
Net loss⁽¹⁾	$	2,682	$	1,959
Net amounts recognized at year end	$	2,682	$	1,959


(1)	The net loss for benefit plans other than pensions reduces other comprehensive income.

The table below presents the assumptions used to determine the liabilities and costs of Torchmark’s postretirement benefit plans other than pensions.

Weighted Average Assumptions for Postretirement

Benefit Plans Other Than Pensions



For Benefit Obligations at December 31:	2017		2016
Discount Rate	3.76	%	4.29	%



For Periodic Benefit Cost for the Year:	2017		2016		2015
Discount Rate	4.29	%	4.66	%	4.23	%

Estimated Future Payments for Post-Retirement Benefit Plans Other Than Pensions



For the year(s)
2018	$	1,228
2019	1,278
2020	1,311
2021	1,344
2022	1,386
2023-2027	7,515