Business Segments

Torchmark is organized into four segments: life insurance, supplemental health insurance, annuities, and investments. We also have other administrative expenses reported in "Corporate & Other."

Torchmark’s reportable segments are based on the insurance product lines it markets and administers: life insurance, supplemental 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 distribution channels.

Torchmark Corporation

Premium Income by Distribution Channel



	For the Year 2017
	Life			Health			Annuity			Total
Distribution Channel	Amount		% of Total	Amount		% of Total	Amount		% of Total	Amount		% of Total
United American Independent	$	12,547	1	$	364,128	37	$	15	100	$	376,690	12
Liberty National Exclusive	274,635		12	196,207		20				470,842		14
American Income Exclusive	999,279		43	89,036		9				1,088,315		33
Family Heritage Exclusive	3,193		—	253,534		26				256,727		8
Direct Response	812,907		35	73,468		8				886,375		27
Other	203,986		9							203,986		6
	$	2,306,547	100	$	976,373	100	$	15	100	$	3,282,935	100



	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

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 & Other” 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 also included in the “Corporate & Other” segment category.

Torchmark holds a sizable 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.

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.

In 2017, Torchmark recorded $8.7 million in administrative settlements ($5.6 million after tax) where claims were not properly filed or information to support the validity of the claim had not been properly submitted. These administrative settlements were included in "Policyholder benefits" in the Consolidated Statements of Operations in 2017.

As further discussed in Note 15—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 $9.6 million of which $1.8 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.

As a result of the Tax Legislation, which is discussed in Note 1—Significant Accounting Policies, we recorded a one-time increase in stock-based compensation expense of 3.4 million ($2.2 million after tax) due to the impact the Tax Legislation had on certain performance based equity awards.

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.

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 2017
	Life			Health			Annuity			Investment			Corporate & Other			Adjustments				Consolidated
Revenue:
Premium	$	2,306,547		$	976,373		$	15												$	3,282,935
Net investment income										$	847,885									847,885
Other income													$	1,270		$	(128	)	⁽²⁾	1,142
Total revenue	2,306,547			976,373			15			847,885			1,270			(128		)		4,131,962
Expenses:
Policy benefits	1,549,602			628,640			35,836									13,797			^(3,4)	2,227,875
Required interest on:
Policy reserves	(607,007		)	(77,792		)	(49,571		)	734,370										—
Deferred acquisition costs	186,236			23,454			690			(210,380		)								—
Amortization of acquisition costs	396,268			96,519			2,466									(4,850		)	⁽⁴⁾	490,403
Commissions, premium taxes, and non-deferred acquisition costs	177,111			86,044			32									1,673			^(2,5)	264,860
Insurance administrative expense⁽¹⁾													210,590							210,590
Parent expense													9,631							9,631
Stock-based compensation expense													33,654			3,380			⁽⁶⁾	37,034
Interest expense										84,532										84,532
Total expenses	1,702,210			756,865			(10,547		)	608,522			253,875			14,000				3,324,925
Subtotal	604,337			219,508			10,562			239,363			(252,605		)	(14,128		)		807,037
Non-operating items																14,128			^(3,4,5,6)	14,128
Measure of segment profitability (pretax)	$	604,337		$	219,508		$	10,562		$	239,363		$	(252,605	)	$	—			821,165
Deduct applicable income taxes																				(247,484		)
Net operating income from continuing operations																				573,681
Add back income taxes applicable to segment profitability																				247,484
Add (deduct) realized investment gains (losses)																				23,611
Deduct administrative settlements																				(8,659		)
Deduct non-operating expenses																				(288		)
Deduct guaranty fund assessments																				(1,801		)
Deduct increase in stock-based compensation expense due to Tax Legislation																				(3,380		)
Income before income taxes per Consolidated Statement of Operations																				$	830,648


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


(2)	Elimination of intersegment commission.


(3)	Administrative settlements.


(4)	Non-operating expense.


(5)	Guaranty fund assessments.


(6)	Recognition of a one-time increase in stock-based compensation expense due to Tax Legislation.



	For the year 2016
	Life			Health			Annuity			Investment			Corporate & Other			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			231,511			4,189				3,162,394
Subtotal	573,762			210,056			9,394			224,031			(229,977		)	(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		$	(229,977	)	$	—			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																				(3,795		)
Deduct non-operating fees																				(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			Corporate & Other			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			223,858			1,200				2,999,878
Subtotal	569,402			204,377			4,568			219,504			(221,479		)	(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		$	(221,479	)	$	—			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																				(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.

Assets for each segment are reported based on a specific identification basis. The insurance segments’ assets contain DAC. The investment segment includes the investment portfolio, cash, and accrued investment income. Goodwill is assigned to the insurance segments at the time of purchase. 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, 2017
	Life		Health		Annuity		Investment		Other		Consolidated
Cash and invested assets							$	17,853,047			$	17,853,047
Accrued investment income							233,453				233,453
Deferred acquisition costs	$	3,423,296	$	529,068	$	5,699					3,958,063
Goodwill	309,609		131,982								441,591
Other assets									$	988,831	988,831
Total assets	$	3,732,905	$	661,050	$	5,699	$	18,086,500	$	988,831	$	23,474,985



	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

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, 2017
	Life		Health		Annuity		Investment		Other		Consolidated
Future policy benefits	$	10,353,286	$	1,831,338	$	1,254,848					$	13,439,472
Unearned and advance premiums	16,927		44,503								61,430
Policy claims and other benefits payable	186,429		146,865								333,294
Debt							$	1,460,268			1,460,268
Other									$	1,949,100	1,949,100
Total liabilities	$	10,556,642	$	2,022,706	$	1,254,848	$	1,460,268	$	1,949,100	$	17,243,564



	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