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.

During the third quarter of 2018, Torchmark recorded $3.6 million in administrative settlements related to state regulatory examinations.

Reconciliation of Segment Operating Information to the Condensed Consolidated Statement of Operations




	Three Months Ended September 30, 2018
	Life			Health			Annuity			Investment			Corporate & Other			Adjustments				Consolidated
Revenue:
Premium	$	605,547		$	255,201		$	2												$	860,750
Net investment income										$	221,627									221,627
Other income													$	416		$	(23	)	(2)	393
Total revenue	605,547			255,201			2			221,627			416			(23		)		1,082,770
Expenses:
Policy benefits	396,701			162,574			8,581													567,856
Required interest on reserves	(160,058		)	(20,965		)	(11,831		)	192,854										—
Required interest on DAC	48,907			6,136			145			(55,188		)								—
Amortization of acquisition costs	103,792			25,162			538													129,492
Commissions, premium taxes, and non-deferred acquisition costs	47,609			22,041			5									(23		)	(2)	69,632
Insurance administrative expense⁽¹⁾													55,812			3,590			(3)	59,402
Parent expense													2,667			1,578			(4)	4,245
Stock-based compensation expense													10,412							10,412
Interest expense										22,433										22,433
Total expenses	436,951			194,948			(2,562		)	160,099			68,891			5,145				863,472
Subtotal	168,596			60,253			2,564			61,528			(68,475		)	(5,168		)		219,298
Non-operating items																5,168			(3,4)	5,168
Measure of segment profitability (pretax)	$	168,596		$	60,253		$	2,564		$	61,528		$	(68,475	)	$	—			224,466
Deduct applicable income taxes																				(41,744		)
Net operating income																				182,722
Add back income taxes applicable to segment profitability																				41,744
Add (deduct) realized investment gains (losses)																				1,032
Add (deduct) administrative settlements																				(3,590		)
Add (deduct) non-operating costs																				(1,578		)
Income before income taxes per Condensed Consolidated Statement of Operations																				$	220,330


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


(2)	Elimination of intersegment commission.


(3)	Administrative settlements.


(4)	Non-operating costs.




	Three Months Ended September 30, 2017
	Life			Health			Annuity			Investment			Corporate & Other			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-based 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		)
Net operating income																				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																				(1,392		)
Income before income taxes per Condensed Consolidated Statement of Operations																				$	220,610


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


(2)	Elimination of intersegment commission.


(3)	Guaranty fund assessments.



	Nine Months Ended September 30, 2018
	Life			Health			Annuity			Investment			Corporate & Other			Adjustments				Consolidated
Revenue:
Premium	$	1,806,384		$	758,439		$	12												$	2,564,835
Net investment income										$	658,279									658,279
Other income													$	1,180		$	(76	)	(2)	1,104
Total revenue	1,806,384			758,439			12			658,279			1,180			(76		)		3,224,218
Expenses:
Policy benefits	1,196,616			483,654			25,852													1,706,122
Required interest on reserves	(474,373		)	(62,095		)	(35,733		)	572,201										—
Required interest on DAC	145,126			18,228			448			(163,802		)								—
Amortization of acquisition costs	312,168			74,311			1,710													388,189
Commissions, premium taxes, and non-deferred acquisition costs	142,253			66,502			19									(76		)	(2)	208,698
Insurance administrative expense⁽¹⁾													166,560			3,590			(3)	170,150
Parent expense													7,806			1,578			(4)	9,384
Stock-based compensation expense													29,969							29,969
Interest expense										66,466										66,466
Total expenses	1,321,790			580,600			(7,704		)	474,865			204,335			5,092				2,578,978
Subtotal	484,594			177,839			7,716			183,414			(203,155		)	(5,168		)		645,240
Non-operating items																5,168			(3,4)	5,168
Measure of segment profitability (pretax)	$	484,594		$	177,839		$	7,716		$	183,414		$	(203,155	)	$	—			650,408
Deduct applicable income taxes																				(120,456		)
Net operating income																				529,952
Add back income taxes applicable to segment profitability																				120,456
Add (deduct) realized investment gains (losses)																				14,796
Add (deduct) administrative settlements																				(3,590		)
Add (deduct) non-operating costs																				(1,578		)
Income before income taxes per Condensed Consolidated Statements of Operations																				$	660,036


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


(2)	Elimination of intersegment commission.


(3)	Administrative settlements.


(4)	Non-operating costs.



	Nine Months Ended September 30, 2017
	Life			Health			Annuity			Investment			Corporate & Other			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-based 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		)
Net operating income																				426,918
Add back income taxes applicable to segment profitability																				184,703
Add (deduct) realized investment gains (losses)																				6,142
Add (deduct) administrative settlements																				(2,094		)
Add (deduct) guaranty fund assessments																				(1,392		)
Income before income taxes 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.