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 Corporate and 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, the disposals have little effect on the size of the portfolio as the proceeds of the disposals are reinvested in 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. The following tables set forth a reconciliation of Torchmark’s revenues and operations by segment to its pre-tax 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 June 30, 2018
	Life			Health			Annuity			Investment			Corporate & Other			Adjustments				Consolidated
Revenue:
Premium	$	602,534		$	251,440		$	5												$	853,979
Net investment income										$	218,568									218,568
Other income													$	441		$	(25	)	(2)	416
Total revenue	602,534			251,440			5			218,568			441			(25		)		1,072,963
Expenses:
Policy benefits	399,334			160,461			8,582													568,377
Required interest on reserves	(158,101		)	(20,726		)	(11,885		)	190,712										—
Required interest on DAC	48,275			6,079			150			(54,504		)								—
Amortization of acquisition costs	104,599			23,892			586													129,077
Commissions, premium taxes, and non-deferred acquisition costs	47,250			22,196			6									(25		)	(2)	69,427
Insurance administrative expense⁽¹⁾													55,276							55,276
Parent expense													2,847							2,847
Stock-based compensation expense													10,497							10,497
Interest expense										22,411										22,411
Total expenses	441,357			191,902			(2,561		)	158,619			68,620			(25		)		857,912
Subtotal	161,177			59,538			2,566			59,949			(68,179		)	—				215,051
Non-operating items																—				—
Measure of segment profitability (pretax)	$	161,177		$	59,538		$	2,566		$	59,949		$	(68,179	)	$	—			215,051
Deduct applicable income taxes																				(39,991		)
Net operating income																				175,060
Add back income taxes applicable to segment profitability																				39,991
Add (deduct) realized investment gains (losses)																				11,813
Income before income taxes per Condensed Consolidated Statement of Operations																				$	226,864


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


(2)	Elimination of intersegment commission.




	Three Months Ended June 30, 2017
	Life			Health			Annuity			Investment			Corporate & Other			Adjustments				Consolidated
Revenue:
Premium	$	573,836		$	242,775		$	3												$	816,614
Net investment income										$	212,776									212,776
Other income													$	427		$	(34	)	(2)	393
Total revenue	573,836			242,775			3			212,776			427			(34		)		1,029,783
Expenses:
Policy benefits	388,765			156,579			8,977									2,094			(3)	556,415
Required interest on reserves	(150,652		)	(19,267		)	(12,394		)	182,313										—
Required interest on DAC	46,213			5,840			174			(52,227		)								—
Amortization of acquisition costs	98,473			23,016			632													122,121
Commissions, premium taxes, and non-deferred acquisition costs	43,708			21,351			7									(34		)	(2)	65,032
Insurance administrative expense⁽¹⁾													51,412							51,412
Parent expense													2,665							2,665
Stock-based compensation expense													8,351							8,351
Interest expense										21,156										21,156
Total expenses	426,507			187,519			(2,604		)	151,242			62,428			2,060				827,152
Subtotal	147,329			55,256			2,607			61,534			(62,001		)	(2,094		)		202,631
Non-operating items																2,094			(3)	2,094
Measure of segment profitability (pretax)	$	147,329		$	55,256		$	2,607		$	61,534		$	(62,001	)	$	—			204,725
Deduct applicable income taxes																				(62,543		)
Net operating income																				142,182
Add back income taxes applicable to segment profitability																				62,543
Add (deduct) realized investment gains (losses)																				(705		)
Add (deduct) administrative settlements⁽³⁾																				(2,094		)
Income before income taxes per Condensed Consolidated Statement of Operations																				$	201,926


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


(2)	Elimination of intersegment commission.


(3)	Administrative settlements.



	Six Months Ended June 30, 2018
	Life			Health			Annuity			Investment			Corporate & Other			Adjustments				Consolidated
Revenue:
Premium	$	1,200,837		$	503,238		$	10												$	1,704,085
Net investment income										$	436,652									436,652
Other income													$	764		$	(53	)	(2)	711
Total revenue	1,200,837			503,238			10			436,652			764			(53		)		2,141,448
Expenses:
Policy benefits	799,915			321,080			17,271													1,138,266
Required interest on reserves	(314,315		)	(41,130		)	(23,902		)	379,347										—
Required interest on DAC	96,219			12,092			303			(108,614		)								—
Amortization of acquisition costs	208,376			49,149			1,172													258,697
Commissions, premium taxes, and non-deferred acquisition costs	94,644			44,461			14									(53		)	(2)	139,066
Insurance administrative expense⁽¹⁾													110,748							110,748
Parent expense													5,139							5,139
Stock-based compensation expense													19,557							19,557
Interest expense										44,033										44,033
Total expenses	884,839			385,652			(5,142		)	314,766			135,444			(53		)		1,715,506
Subtotal	315,998			117,586			5,152			121,886			(134,680		)	—				425,942
Non-operating items																—				—
Measure of segment profitability (pretax)	$	315,998		$	117,586		$	5,152		$	121,886		$	(134,680	)	$	—			425,942
Deduct applicable income taxes																				(78,712		)
Net operating income																				347,230
Add back income taxes applicable to segment profitability																				78,712
Add (deduct) realized investment gains (losses)																				13,764
Income before income taxes per Condensed Consolidated Statements of Operations																				$	439,706


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


(2)	Elimination of intersegment commission.



	Six Months Ended June 30, 2017
	Life			Health			Annuity			Investment			Corporate & Other			Adjustments				Consolidated
Revenue:
Premium	$	1,149,673		$	487,566		$	6												$	1,637,245
Net investment income										$	421,058									421,058
Other income													$	878		$	(69	)	(2)	809
Total revenue	1,149,673			487,566			6			421,058			878			(69		)		2,059,112
Expenses:
Policy benefits	779,844			314,330			17,923									2,094			(3)	1,114,191
Required interest on reserves	(299,477		)	(38,242		)	(24,812		)	362,531										—
Required interest on DAC	92,149			11,649			352			(104,150		)								—
Amortization of acquisition costs	198,378			48,343			1,308													248,029
Commissions, premium taxes, and non-deferred acquisition costs	87,346			42,853			18									(69		)	(2)	130,148
Insurance administrative expense⁽¹⁾													103,325							103,325
Parent expense													4,898							4,898
Stock-based compensation expense													16,546							16,546
Interest expense										41,855										41,855
Total expenses	858,240			378,933			(5,211		)	300,236			124,769			2,025				1,658,992
Subtotal	291,433			108,633			5,217			120,822			(123,891		)	(2,094		)		400,120
Non-operating items																2,094			(3)	2,094
Measure of segment profitability (pretax)	$	291,433		$	108,633		$	5,217		$	120,822		$	(123,891	)	$	—			402,214
Deduct applicable income taxes																				(121,361		)
Net operating income																				280,853
Add back income taxes applicable to segment profitability																				121,361
Add (deduct) realized investment gains (losses)																				(6,453		)
Add (deduct) administrative settlements⁽³⁾																				(2,094		)
Income before income taxes per Condensed Consolidated Statements of Operations																				$	393,667


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


(2)	Elimination of intersegment commission.


(3)	Administrative settlements.