News Column

TORCHMARK CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 8, 2014

Results of Operations

Summary of Operations. Torchmark's operations are segmented into its insurance underwriting and investment operations as described in Note F-Business Segments. The measures of profitability described in Note F are useful in evaluating the performance of the segments and the marketing groups within each insurance segment, because each of our distribution units operates in a niche market. These measures enable management to view period-to-period trends, and to make informed decisions regarding future courses of action. The tables in Note F-Business Segments demonstrate how the measures of profitability are determined. Those tables also reconcile our revenues and expenses by segment to major income statement line items for the six month periods ended June 30, 2014 and 2013. Additionally, a table in that note, Analysis of Profitability by Segment, provides a summary of the profitability measures that demonstrates year-to-year comparability and reconciles those measures to our net income. That summary represents our overall operations in the manner that management views the business, and is a basis of the following highlights discussion. A discussion of operations by each segment follows later in this report. These discussions compare the first six months of 2014 with the same period of 2013, unless otherwise noted. The following discussions are presented in the manner we view our operations, as described in Note F-Business Segments. Highlights, comparing the first six months of 2014 with the first six months of 2013. Net income per diluted share increased 9% to $1.97 from $1.80. Included in net income in 2014 were after-tax realized investment gains of $11 million ($.08 per share) compared with gains of $76 thousand or $0 per share in 2013. Realized investment gains and losses are presented more fully under the caption Realized Gains and Losses in this report. We use three statistical measures as indicators of future premium growth: "annualized premium in force," "net sales," and "first-year collected premium." Annualized premium in force is defined as the premium income that would be received over the following twelve months at any given date on all active policies if those policies remain in force throughout the twelve-month period. Annualized premium in force is an indicator of potential growth in premium revenue. Net sales is defined as annualized premium issued, net of cancellations in the first thirty days after issue, except for Direct Response, where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer has expired. Annualized premium issued is the gross premium that would be received during the policies' first year in force, assuming that none of the policies lapsed or terminated. Although lapses and terminations will occur, we believe that net sales is a useful indicator of the rate of acceleration of premium growth. First-year collected premium is the premium collected during the reporting period for all policies in their first policy year. 26



--------------------------------------------------------------------------------

Table of Contents

First-year collected premium takes lapses into account in the first policy year when lapses are more likely to occur, and thus is a useful indicator of how much new premium is expected to be added to premium income in the future. Total premium income rose 3% in 2014 to $1.6 billion. Total net sales rose 26% to $303 million. After removing the impact of sales of Medicare Part D, which increased significantly in 2014 as a result of the addition of automatic enrollees discussed later in this report, net sales rose 12% to $251 million. First-year collected premium was $226 million for the 2014 period, compared with $219 million for the 2013 period. Excluding Part D, there was a 2% increase in first-year collected premium. Life insurance premium income grew 4% to $981 million. Life net sales increased 8% to $190 million. First-year collected life premium gained 2% to $133 million. Life underwriting margins increased 5% to $281 million. Health insurance premium income, excluding Medicare Part D premium, declined 1% to $435 million. Health net sales, led by sales of Medicare Supplement, rose 28% to $61 million for the six-month period. First-year collected health premium rose 4% to $51 million. Health margins declined 1% to $99 million. In the manner we view our Medicare Part D prescription drug business as described in Note F-Business Segments, policyholder premium was $168 million in 2014 compared with $150 million in 2013, an increase of 12%. As discussed under the caption Medicare Part D in this report, the increase in Part D premium resulted primarily from an increase in automatic enrollees. The increase in automatic enrollees, along with an increase in employer group activity, resulted in net sales increasing from $17 million to $52 million in 2014. As explained in Note F-Business Segments, differences in our estimate of interim results for Medicare Part D as we view this product for segment purposes and GAAP financial statement purposes resulted in a $17 million after-tax charge to earnings in 2014 ($.12 per share) and a $10 million charge in 2013 ($.07 per share). We expect our 2014 full year benefit ratios to be approximately the same as those for interim periods, as was the case in 2013 and prior years. For this reason, there should be no difference in our segment versus financial statement reporting by year end 2014, as it relates to Medicare Part D. The increase in this adjustment in 2014 resulted primarily from the increase in volume. Excess investment income per diluted share increased 9% in 2014 to $.85 from $.78, while the dollar amount of excess investment income rose 3% to $114 million. The greater increase in per share excess investment income in relation to the increase in dollar amount resulted from share purchases over the past twelve months, as discussed later in this report. Net investment income rose $11 million or 3% to $378 million, even though our average investment portfolio at amortized cost grew 4% because of a decline in average yields. The average effective yield on the fixed-maturity portfolio, which represented 96% of our investments at amortized cost, decreased to 5.92% in the 2014 period from 5.97% in the prior period, as the impact of the low-interest-rate environment on average yield has moderated. 27



--------------------------------------------------------------------------------

Table of Contents

Excess investment income is negatively impacted by the increase in required interest on net insurance policy liabilities. Required interest rose 5% or $11 million to $226 million, consistent with the growth in average net policy liabilities. Financing costs declined 9% in the period to $38 million, due to the maturity and repayment of our $94 million par amount 7.375% Notes during the third quarter of 2013. Please refer to the discussion under Capital Resources for more information on debt and interest expense. In the first six months of 2014, we invested new money in our fixed-maturity portfolio at an effective annual yield on new investments of 5.00%, compared with 4.21% in the same period of 2013. The portfolio had an average rating of A-, the same as of the previous year end. Approximately 96% of the portfolio at amortized cost was investment grade at June 30, 2014. Cash and short-term investments were $94 million at that date, compared with $114 million at December 31, 2013. The net unrealized gain position in our fixed-maturity portfolio grew from $390 million at December 31, 2013 to $1.4 billion during the first six months of 2014, largely due to a decline in market interest rates during 2014. The fixed-maturity portfolio contains no commercial mortgage-backed securities. We are not a party to any counterparty risk, with no credit default swaps or other derivative contracts. We do not engage in securities lending, and our only direct exposure to European sovereign debt is $10 million of German bonds. 28



--------------------------------------------------------------------------------

Table of Contents

We have an on-going share repurchase program which began in 1986 and was reaffirmed by the Board of Directors at their August, 2013 meeting. With no specified authorization amount, we determine the amount of repurchases based on the amount of our excess cash flow, general market conditions, and other alternative uses. These purchases are made at the Parent with excess cash flow. Share purchases are also made with the proceeds from option exercises by current and former employees, in order to reduce dilution. The following chart summarizes share purchases for the six-month periods ended June 30, 2014 and 2013. Analysis of Share Purchases (Amounts in thousands, except per share amounts) For the six months ended June 30, 2014 2013 Average Average Shares Amount Price Shares Amount Price Purchases with: Excess cash flow 3,682 $ 190,104$ 51.63 4,557 $ 180,008$ 39.50 Option exercise proceeds 910 48,208 53.01 1,664 66,395 39.90 Total 4,592 $ 238,312$ 51.90 6,221 $ 246,403$ 39.61



Throughout the remainder of this discussion, share purchases will only refer to those made from excess cash flow.

A detailed discussion of our operations by component segment follows.

Life insurance, comparing the first six months of 2014 with the first six months of 2013. Life insurance is our predominant segment, representing 62% of premium income and 70% of insurance underwriting margin in the first six months of 2014. In addition, investments supporting the reserves for life business generate the majority of excess investment income attributable to the investment segment. Life insurance premium income increased 4% to $981 million. The following table presents Torchmark's life insurance premium by distribution method. 29



--------------------------------------------------------------------------------

Table of Contents Life Insurance Premium by Distribution Method (Dollar amounts in thousands) Six months ended June 30, Increase 2014 2013 (Decrease) % of % of Amount Total Amount Total Amount % American Income Exclusive Agency $ 376,221 38 $ 352,634 37 $ 23,587 7 Direct Response 354,710 36 337,328 36 17,382 5 Liberty National Exclusive Agency 137,048 14 139,436 15 (2,388 ) (2 ) Other Agencies 113,031 12 116,525 12 (3,494 ) (3 ) Total Life Premium $ 981,010 100 $ 945,923 100 $ 35,087 4



Net sales, defined earlier in this report as an indicator of new business production, grew 8% to $190 million. An analysis of life net sales by distribution group is presented below.

Life Insurance Net Sales by Distribution Method (Dollar amounts in thousands) Six months ended June 30, Increase 2014 2013 (Decrease) % of % of Amount Total Amount Total Amount % American Income Exclusive Agency $ 82,753 44 $ 78,380 44 $ 4,373 6 Direct Response 84,857 45 76,781 44 8,076 11 Liberty National Exclusive Agency 16,112 8 15,314 9 798 5 Other Agencies 6,570 3 5,596 3 974 17 Total Life Net Sales $ 190,292 100 $ 176,071 100 $ 14,221 8 30



--------------------------------------------------------------------------------

Table of Contents

First-year collected life premium, defined earlier in this report, was $133 million in the 2014 period, rising 2%. First-year collected life premium by distribution group is presented in the table below.

Life Insurance First-Year Collected Premium by Distribution Method (Dollar amounts in thousands) Six months ended June 30, Increase 2014 2013 (Decrease) % of % of Amount Total Amount Total Amount % American Income Exclusive Agency $ 64,670 48 $ 64,654 49 $ 16 0 Direct Response 50,822 38 47,892 37 2,930 6 Liberty National Exclusive Agency 12,769 10 13,134 10 (365 ) (3 ) Other Agencies 4,904 4 5,258 4 (354 ) (7 ) Total $ 133,165 100 $ 130,938 100 $ 2,227 2 The American Income Exclusive Agency has historically marketed primarily to members of labor unions. While labor unions are still the core market for this agency, American Income has diversified in recent years by focusing heavily on other affinity groups and referrals to help to ensure sustainable growth. The life business of this agency is Torchmark's highest margin life business and it is the largest contributor to life premium of any of Torchmark's distribution systems at 38% of Torchmark's total. This group produced premium income of $376 million, an increase of 7%. First-year collected premium was $65 million, flat with the prior year. Net sales increased 6% to $83 million. Sales growth in our captive agencies is generally dependent on growth in the size of the agency force. The American Income agent count rose 6% to 5,890 at June 30, 2014 over the count a year earlier (5,540), and rose 11% when compared with the count at December 31, 2013 (5,302). The average agent count for the first half of 2014 was 5,521. The American Income Agency has been focusing on growing and strengthening middle management to support sustainable growth of the agency force. To accomplish this, we have placed an increased emphasis on agent training programs and financial incentives that appropriately reward agents at all levels for helping develop and train personnel. The agency has also begun providing more home-office and webinar training programs. These programs are designed to provide each agent, from new recruits to top level managers, coaching and instruction specifically designed for each individual's level of experience and responsibilities. The Direct Response Unit offers adult and juvenile life insurance through a variety of direct-to-consumer marketing approaches, which include direct mailings, insert media, and electronic media. These different approaches support and complement one another in the unit's efforts to reach the consumer. The Direct Response Unit's growth has been fueled by constant innovation. In recent years, electronic media production has grown rapidly as management has aggressively increased marketing activities related to internet and mobile technology, and has focused on driving traffic to the inbound call center. We have introduced certain new initiatives in this unit that have increased response rates. These initiatives include lower premium rates as well as offerings of higher face amounts on the adult products. 31



--------------------------------------------------------------------------------

Table of Contents

While the juvenile market is an important source of sales, it also is a vehicle to reach the parents and grandparents of the juvenile policyholders, who are more likely to respond favorably to a Direct Response solicitation for life coverage on themselves than is the general adult population. Also, both the juvenile policyholders and their parents are low acquisition-cost targets for sales of additional coverage over time. Direct Response's life premium income rose 5% to $355 million, representing 36% of Torchmark's total life premium in the first six months of 2014. Net sales of $85 million for this group increased 11%. First-year collected premium increased 6% to $51 million. The Liberty National Exclusive Agency markets individual and group life insurance to middle-income customers. Life premium income for this agency was $137 million in the 2014 period, a 2% decline from $139 million in the 2013 six months. First-year collected premium declined 3% to $13 million. Net sales for the Liberty Agency increased 5% to $16 million. Liberty had 1,500 producing agents at June 30, 2014, compared with 1,283 a year earlier, an increase of 17%. The agent count has increased 5% since December 31, 2013, when it stood at 1,430. The average agent count for the first half of 2014 was 1,446. Our long term plans to grow this agency involve expansion from small-town markets in the southeast to more densely populated areas with larger pools of potential agent recruits and customers. We believe that expansion of this Agency's presence into more heavily populated, less-penetrated areas will help create long term agency growth. Additionally, a new prospecting training program has helped to improve the ability of agents to develop new worksite marketing business. The Other Agencies distribution systems offering life insurance include the Military Agency, the UA Independent Agency (which predominantly writes health insurance), and various smaller distribution channels. The Other Agencies distribution group contributed $113 million of life premium income, or 12% of Torchmark's total in the first six months of 2014, but contributed only 3% of net sales. 32



--------------------------------------------------------------------------------

Table of Contents Life Insurance Summary of Results (Dollar amounts in thousands) Six months ended June 30, 2014 2013 Increase % of % of Amount Premium Amount Premium Amount % Premium and policy charges $ 981,010 100 $ 945,923 100 $ 35,087 4 Net policy obligations 378,983 38 364,634 39 14,349 4 Commissions and acquisition expense 320,692 33 312,449 33 8,243 3 Insurance underwriting income before other income and administrative expense $ 281,335 29 $ 268,840 28 $ 12,495 5 Life insurance underwriting income before insurance administrative expense was $281 million, increasing 5%. Increases in margin were due in large part to growth in premium income. Margin was also benefitted by a decreased rate of amortization of deferred acquisition costs due to improved persistency resulting from our conservation program, and the deferral of internet-related direct response acquisition costs which began in the second quarter of 2013. As a percentage of premium, underwriting income rose to 29% of premium in the six months ended June 30, 2014, compared with 28% in the same period last year. 33



--------------------------------------------------------------------------------

Table of Contents

Health insurance, comparing the first six months of 2014 with the first six months of 2013. Health insurance sold by Torchmark includes primarily Medicare Supplement insurance, cancer coverage, accident coverage, and other limited-benefit supplemental health products. In this discussion of health business, references to premium income, net sales, and underwriting will exclude our Medicare Part D health business, which will be discussed under another caption. In this analysis, all health coverage plans other than Medicare Supplement are classified as limited-benefit plans. Health premium accounted for 27% of our total premium in the 2014 period, while the health underwriting margin accounted for 25% of total underwriting margin, reflective of the lower underwriting margin as a percent of premium for health compared with life insurance. As noted under the caption Life Insurance, we have emphasized life insurance sales relative to health, due to life's superior profitability and its greater contribution to excess investment income. Health premium declined 1% to $435 million in the 2014 period. Medicare Supplement premium declined 1% to $212 million, while other limited-benefit health premium declined 1% to $223 million. Limited-benefit premium now provides Torchmark with the greatest amount of non-Part D health premium, representing 51% of such premium for the 2014 period. Health net sales increased 28% to $61 million. Medicare Supplement net sales increased 72% to $26 million in the 2014 period. The increase in Medicare Supplement net sales was primarily a result of stronger group sales, which vary from period to period at the United American Independent Agency. Limited-benefit net sales increased 7% to $35 million. Health first-year collected premium rose 4% to $51 million. 34



--------------------------------------------------------------------------------

Table of Contents

The following table is an analysis of our health premium by distribution method. Health Insurance Premium by Distribution Method (Dollar amounts in thousands) Six months ended June 30, Increase 2014 2013 (Decrease) % of % of Amount Total Amount Total Amount % United American Independent Agency Limited-benefit plans $ 10,576$ 14,155$ (3,579 ) (25 ) Medicare Supplement 143,359 139,700 3,659 3 153,935 36 153,855 35 80 0 Liberty National Exclusive Agency Limited-benefit plans 72,761 77,720 (4,959 ) (6 ) Medicare Supplement 41,541 47,207 (5,666 ) (12 ) 114,302 26 124,927 29 (10,625 ) (9 ) Family Heritage Agency Limited-benefit plans 100,262 93,680 6,582 7 Medicare Supplement 0 0 0 0 100,262 23 93,680 21 6,582 7 American Income Exclusive Agency Limited-benefit plans 38,678 39,312 (634 ) (2 ) Medicare Supplement 250 298 (48 ) (16 ) 38,928 9 39,610 9 (682 ) (2 ) Direct Response Limited-benefit plans 390 168 222 132 Medicare Supplement 26,716 27,511 (795 ) (3 ) 27,106 6 27,679 6 (573 ) (2 ) Total Health Premium Limited-benefit plans 222,667 51 225,035 51 (2,368 ) (1 ) Medicare Supplement 211,866 49 214,716 49 (2,850 ) (1 ) Total $ 434,533 100 $ 439,751 100 $ (5,218 ) (1 ) 35



--------------------------------------------------------------------------------

Table of Contents

Presented below is a table of health net sales by distribution method.

Health Insurance Net Sales by Distribution Method (Dollar amounts in thousands) Six months ended June 30, Increase 2014 2013 (Decrease) % of % of Amount Total Amount Total Amount % United American Independent Agency Limited-benefit plans $ 458$ 460$ (2 ) 0 Medicare Supplement 22,612 12,720 9,892 78 23,070 38 13,180 28 9,890 75 Liberty National Exclusive Agency Limited-benefit plans 7,916 6,304 1,612 26 Medicare Supplement 133 211 (78 ) (37 ) 8,049 13 6,515 14 1,534 24 Family Heritage Agency Limited-benefit plans 22,744 21,939 805 4 Medicare Supplement 0 0 0 0 22,744 37 21,939 46 805 4 American Income Exclusive Agency Limited-benefit plans 3,997 3,463 534 15 Medicare Supplement 0 0 0 0 3,997 7 3,463 7 534 15 Direct Response Limited-benefit plans 4 529 (525 ) (99 ) Medicare Supplement 2,907 1,984 923 47 2,911 5 2,513 5 398 16 Total Net Sales Limited-benefit plans 35,119 58 32,695 69 2,424 7 Medicare Supplement 25,652 42 14,915 31 10,737 72 Total $ 60,771 100 47,610 100 $ 13,161 28 36



--------------------------------------------------------------------------------

Table of Contents

The following table presents health insurance first-year collected premium by distribution method.

Health Insurance First-Year Collected Premium by Distribution Method (Dollar amounts in thousands) Six months ended June 30, Increase 2014 2013 (Decrease) % of % of Amount Total Amount Total Amount % United American Independent Agency Limited-benefit plans $ 353$ 416$ (63 ) (15 ) Medicare Supplement 20,757 17,842 2,915 16 21,110 41 18,258 37 2,852 16 Liberty National Exclusive Agency Limited-benefit plans 6,352 6,214 138 2 Medicare Supplement 155 312 (157 ) (50 ) 6,507 13 6,526 13 (19 ) 0 Family Heritage Agency Limited-benefit plans 17,723 18,384 (661 ) (4 ) Medicare Supplement 0 0 0 0 17,723 34 18,384 37 (661 ) (4 ) American Income Exclusive Agency Limited-benefit plans 4,143 4,371 (228 ) (5 ) Medicare Supplement 0 0 0 0 4,143 8 4,371 9 (228 ) (5 ) Direct Response Limited-benefit plans 136 283 (147 ) (52 ) Medicare Supplement 1,867 1,683 184 11 2,003 4 1,966 4 37 2 Total First-Year Collected Premium Limited-benefit plans 28,707 56 29,668 60 (961 ) (3 ) Medicare Supplement 22,779 44 19,837 40 2,942 15 Total $ 51,486 100 $ 49,505 100 $ 1,981 4 37



--------------------------------------------------------------------------------

Table of Contents

A discussion of health operations by distribution group follows.

The UA Independent Agency consists of independent agencies appointed with Torchmark who may also sell for other companies. The UA Independent Agency was Torchmark's largest health agency in terms of health premium income. Premium income was $154 million, representing 36% of Torchmark's total health premium. Net sales were $23 million, or 38% of Torchmark's health sales. This agency is Torchmark's largest producer of Medicare Supplement insurance, with Medicare Supplement premium income of $143 million. The UA Independent Agency represents approximately 68% of all Torchmark Medicare Supplement premium and 88% of Medicare Supplement net sales. Medicare Supplement premium in this agency rose 3%, while total health premium was unchanged. Net sales of these products rose 75% in 2014. As noted earlier, Group Medicare Supplement sales have historically fluctuated from period to period. The Family Heritage Agency markets primarily limited-benefit supplemental health insurance in non-urban areas. Most of their policies include a cash-back feature, such as a return of premium whereby any excess of premiums over claims paid is returned to the policyholder at the end of a specified period stated within the insurance policy. Management expects to grow this agency through geographic expansion and incorporation of Torchmark's recruiting programs. The Family Heritage Agency contributed $23 million in net sales in the first half of 2014, compared with $22 million for the same period in 2013, an increase of 4%. Health premium income was $100 million for the six-month period of 2014, representing 23% of Torchmark's health premium. This compared with $94 million or 21% of health premium in the prior year period. The producing agent count was 771 agents at June 30, 2014, compared with 695 at December 31, 2013, and 744 at June 30, 2013. The average agent count for the first half of 2014 was 708. The Liberty National Exclusive Agency represented 26% of all Torchmark health premium income at $114 million in the first six months of 2014. The Liberty Agency markets limited-benefit health supplemental products consisting primarily of cancer insurance. Much of Liberty's health business is now generated through worksite marketing targeting small businesses of 10 to 25 employees. In 2014, health premium income in the Agency declined 9% from prior year premium of $125 million. Liberty's health premium decline has been due primarily to the runoff of a block of discontinued hospital-surgical products and the declining Medicare Supplement block. Other distribution. Certain of our other distribution channels market health products, although their main emphasis is on life insurance. On a combined basis, they accounted for 15% of health premium in the 2014 period. The American Income Exclusive Agency markets a variety of limited-benefit plans, primarily accident. The Direct Response group markets primarily Medicare Supplements to employer or union-sponsored groups. Direct Response is also involved in marketing Medicare Part D. On a combined basis, the health net sales of these agencies increased 16% to $7 million in 2014 from $6 million in 2013. 38



--------------------------------------------------------------------------------

Table of Contents

The following table presents underwriting margin data for health insurance.

Health Insurance Summary of Results (Dollar amounts in thousands) Six months ended June 30, 2014 2013 Change % of % of Amount Premium Amount Premium Amount % Premium and policy charges $ 434,533 100 $ 439,751 100 $ (5,218 ) (1 ) Net policy obligations 248,382 57 254,480 58 (6,098 ) (2 ) Commissions and acquisition expense 86,906 20 85,147 19 1,759 2 Insurance underwriting income before other income and administrative expense $ 99,245 23 $ 100,124 23 $ (879 ) (1 ) Underwriting income for health insurance declined slightly to $99 million or 1% in 2014. As a percentage of health premium, underwriting margins were stable at 23%. The improved benefit ratio was largely a result of normal claim fluctuations. 39



--------------------------------------------------------------------------------

Table of Contents

Medicare Part D, comparing the first six months of 2014 with the first six months of 2013. Coverage under Torchmark'sMedicare Part D prescription drug plan for Medicare beneficiaries is provided through United American. The Medicare Part D plan is a stand-alone prescription drug plan for Medicare beneficiaries which is regulated and partially funded by the Centers for Medicare and Medicaid Services (CMS) for participating private insurers. These products are marketed through our Direct Response unit and to groups through our UA Independent Agency. As described in Note F-Business Segments, we report our Medicare Part D business for segment analysis purposes as we view the business, in which expected full-year benefits are matched with the related premium income which is received evenly throughout the policy year. At this time, we have expensed benefits based on our expected benefit ratio of approximately 80% for the entire 2014 contract year. This ratio was 82% for the full year 2013. We describe the differences between the segment analysis and the GAAP operating results in Note F. Due to the design of the Medicare prescription drug product, claims are expected to be heaviest early in the calendar year. Management believes that the use of the full-year loss ratio is an appropriate measure for interim results, and also that these reporting differences will arise only on an interim basis and will be eliminated at the end of a full year, as they were in the full year of 2013. Medicare Part D Selected Financial Information (Dollar amounts in thousands) Six months ended Increase June 30, (Decrease) 2014 2013 Amount % Premium (1) $ 167,990$ 149,809$ 18,181 12 Net Sales (2) 51,612 16,940 34,672 205



First-Year Collected Premium (3) 41,334 38,178 3,156 8

(1) Total Medicare Part D premium excludes the risk-sharing premiums of $35.1

million in 2014 and $14.9 million in 2013 receivable from the CMS consistent

with the Medicare Part D contract. This risk-sharing amount is a portion of

the excess or deficiency of actual over expected claims, and therefore we

view this payment as a component of policyholder benefits in our segment

analysis.

(2) Net sales for Medicare Part D represents only new first-time enrollees.

(3) First-year collected premium for Medicare Part D represents only premium

collected within the first twelve months from new first-time enrollees.

Medicare Part D premium was $168 million in 2014, compared with $150 million in 2013, after removal of the risk-sharing adjustment in both periods. This represents an increase in premium of 12%. Net sales rose $35 million, due to an increase in new Part D auto enrollees and an increase in employer group activity. 40



--------------------------------------------------------------------------------

Table of Contents

Medicare Part D underwriting results are presented in the following chart. The adjustments which reconcile Part D results in accordance with our health segment analysis to Part D results in accordance with GAAP are presented in the charts in Note F-Business Segments. Medicare Part D Summary of Results (Dollar amounts in thousands) Six months ended June 30, 2014 2013 Increase % of % of Amount Premium Amount Premium Amount % Premium and policy charges $ 167,990 100 $ 149,809 100 $ 18,181 12 Net policy obligations 135,233 80 125,191 83 10,042 8 Commissions and acquisition expense 14,546 9 8,382 6 6,164 74 Insurance underwriting income before other income and administrative expense $ 18,211 11 $ 16,236 11 $ 1,975 12 Margins increased 12% in 2014 to $18 million, primarily as a result of the premium increase. Obligation ratios were lower because (1) 2014 premiums were increased to cover higher anticipated non-deferred expenses and (2) 2013 drug rebates received in 2014 were higher than accrued in 2013. Non-deferred acquisition expenses were higher due to the new Affordable Care Act tax, higher costs related to negotiated drug rebates, and higher costs related to the increased volume of enrollees. As a percentage of premium, underwriting margin for the six months totaled 11%. Management anticipates that Medicare Part D claims may be higher than originally anticipated due to the cost of two Hepatitis C drugs that were approved by the U.S. Food and Drug Administration late in 2013. The cost of these drugs was not included in our 2014 pricing, which was submitted to the CMS in June of 2013, but was required to be covered under all Part D plans as of February, 2014. We expect that Part D margin for the full year 2014 will decline approximately 2% to 3% of premium, resulting in a margin in a range of approximately 8% to 11% of premium, primarily due to the impact of the new Hepatitis C drugs.



Since the Medicare Part D plan is a government-sponsored program, regulatory changes could alter the outlook for this market.

41



--------------------------------------------------------------------------------

Table of Contents

Annuities. Annuities represent an insignificant part of our business and are not expected to be an important part of our marketing strategy going forward.

Operating expenses, comparing the first six months of 2014 with the first six months of 2013. Operating expenses consist of insurance administrative expenses and parent company expenses. Also included is stock compensation expense, which is viewed by us as a parent company expense. Insurance administrative expenses relate to premium income for a given period; therefore, we measure those expenses as a percentage of premium income. Total expenses are measured as a percentage of total revenues. An analysis of operating expenses is shown below. Operating Expenses Selected Information (Dollar amounts in thousands) Six months ended June 30, 2014 2013 % of % of Amount Premium Amount Premium Insurance administrative expenses: Salaries $ 41,804 2.6 $ 40,682 2.6 Other employee costs 14,585 0.9 16,935 1.1 Other administrative costs 28,067 1.7 25,605 1.7 Legal expense 5,117 0.3 4,840 0.3 Total insurance administrative expenses 89,573 5.5 88,062 5.7 Parent company expense 4,045 4,927 Stock compensation expense 17,401 12,956 New York Guaranty Fund Assessment 0 1,155 Legal settlement expense 2,337 500 Total operating expenses, per Consolidated Statements of Operations $ 113,356



$ 107,600

Insurance administrative expenses: Increase (decrease) over prior year 1.7 % 9.5 % Total operating expenses: Increase (decrease) over prior year 5.3 %



12.2 %

Insurance administrative expenses were up 2% in 2014 when compared with the prior year period. As a percentage of total premium, insurance administrative expenses declined from 5.7% to 5.5%. Total operating expenses rose $6 million or 5%. In 2014, employee costs declined 14% during the period, primarily as a result of decreased pension benefit costs. Stock compensation expense rose 34% to $17 million, primarily as a result of an increase in the market price of Torchmark stock in 2013 and 2014 that resulted in higher grant prices for restricted stock and options, and positive Company performance that caused an increase in the expense related to performance share grants. As described in Note F in the Consolidated Financial Statements, we recorded legal accruals involving non-insurance matters, partially offset by proceeds for investment litigation. Litigation not related to our direct insurance operations is not considered an insurance administrative expense by Torchmark management and is removed from its analysis of core insurance operations in its segment reporting. 42



--------------------------------------------------------------------------------

Table of Contents

Investments (excess investment income), comparing the first six months of 2014 with the first six months of 2013. We manage our capital resources including investments, debt, and cash flow through the investment segment. Excess investment income represents the profit margin attributable to investment operations. It is the measure that we use to evaluate the performance of the investment segment as described in Note F-Business Segments in the Notes to



the

Consolidated Financial Statements. It is defined as net investment income less the required interest on net policy liabilities and the interest cost associated with capital funding or "financing costs." We also view excess investment income per diluted share as an important and useful measure to evaluate the performance of the investment segment. It is defined as excess investment income divided by the total diluted weighted average shares outstanding, representing the contribution by the investment segment to the consolidated earnings per share of the Company. Since implementing our share repurchase program in 1986, we have used $5.9 billion of cash flow to repurchase Torchmark shares after determining that the repurchases provided a greater return than other investment alternatives. Share repurchases reduce excess investment income because of the foregone earnings on the cash that would otherwise have been invested in interest-bearing assets, but they also reduce the number of shares outstanding. In order to put all capital resource uses on a comparable basis, we believe that excess investment income per diluted share is an appropriate measure of the investment segment.



The following table summarizes Torchmark's investment income, excess investment income, and excess investment income per diluted share.

Excess Investment Income (Dollar amounts in thousands) Six months Increase ended June 30, (Decrease) 2014 2013 Amount % Net investment income * $ 377,981$ 367,204$ 10,777 3 Required interest on net insurance policy liabilities (225,728 ) (215,030 ) (10,698 ) 5 Financing costs: Interest on funded debt (35,528 ) (39,029 ) 3,501 (9 ) Interest on short-term debt (2,558 ) (2,676 ) 118 (4 ) Total financing costs (38,086 ) (41,705 ) 3,619 (9 ) Excess investment income $ 114,167$ 110,469$ 3,698 3



Excess investment income per diluted share $ 0.85$ 0.78$ 0.07 9

Average invested assets (at amortized cost) $ 13,197,905$ 12,732,318$ 465,587 4 Average net insurance policy liabilities ** 8,138,684 7,738,234 400,450 5 Average debt and preferred securities (at amortized cost) 1,281,317 1,361,229 (79,912 ) (6 )



* Net investment income per Torchmark's segment analysis does not agree with Net

investment income per the Consolidated Statements of Operations because

management views the amortization of certain low-income housing interests as

an adjustment to increase tax expense while GAAP requires that it reduce net

investment income, as presented in the Reconciliation in Note F - Business

Segments.

** Net of deferred acquisition costs, excluding the attributed unrealized gains

and losses thereon. 43



--------------------------------------------------------------------------------

Table of Contents

Excess investment income for the 2014 period increased 3% to $114 million. On a per share basis, excess investment income increased an even greater 9% as a result of our share purchases over the past 12 months. While excess investment income has been pressured in recent years as a result of the impact that lower interest rates have had on net investment income, it has increased in 2014 as the impact of portfolio turnover has moderated. The increase in excess investment income was also due, in part, to the decline in financing costs related to the August, 2013 maturity and repayment of $94 million principal amount of our 7 3/8% Notes. Net investment income rose $11 million or 3% in 2014, while average invested assets (with fixed maturities at amortized cost) rose 4% year over year. The effective annual yield on the fixed maturity portfolio was 5.92% in the first six months of 2014, compared with 5.97% a year earlier. The reduction in the average portfolio yield rate was primarily a result of investing new money at rates lower than the portfolio average yield and reinvesting proceeds from bonds that were called or matured in 2013 at yield rates less than the rates we earned on the bonds before they were called or matured. At current new money rates, we would expect to see only modest declines in the average portfolio yield rate over the next few years compared with the larger declines in recent years, as only 1% to 2% of fixed maturities on average are expected to run off each year over the next five years. Should interest rates rise, especially long-term rates, Torchmark would benefit due to higher net investment income on new purchases. Even a sudden, significant increase in interest rates would be beneficial because Torchmark has very little disintermediation risk. Also, we are not concerned with potential interest-rate driven unrealized losses in our fixed maturity portfolio because we have the intent, and more importantly, the ability to hold our fixed maturities to maturity. Net investment income could be negatively affected in future periods due to calls of fixed maturity securities. Fixed maturity securities are more likely to be called in a declining interest-rate environment, as higher-yielding callable securities can often be refinanced at lower prevailing rates. Of our $12.7 billion fixed maturity portfolio at amortized cost as of June 30, 2014, we held $314 million book value of securities with a weighted average yield of 6.29% that are currently callable at the discretion of the issuer without a make-whole provision and $348 million book value of securities with a weighted average yield of 6.53% that become callable over the next three years. Many factors can be involved in an issuer's decision to call a bond and it is difficult to predict if and when one might be called. If bonds are called, future net investment income would be negatively affected if the average yield on called securities exceeds prevailing new money rates. Required interest on net insurance policy liabilities reduces excess investment income because we consider these amounts to be components of the profitability of our insurance segments. Required interest is based on the actuarial interest assumptions used in discounting the benefit reserve liability and the 44



--------------------------------------------------------------------------------

Table of Contents

amortization of deferred acquisition costs for our insurance policies in force. The great majority of our life and health insurance policies are fixed interest-rate protection policies, not investment products, and are accounted for under current accounting guidance for long-duration insurance products under ASC 944-20-05 (formerly SFAS 60) which mandates that interest rate assumptions be "locked in" for the life of that block of business. Each calendar year, we set the discount rate to be used to calculate the benefit reserve liability and the amortization of the deferred acquisition cost asset for all insurance policies issued that year. That rate is based on the new money yields that we expect to earn on premiums received in the future from policies of that issue year, and cannot be changed. The discount rate used for policies issued in the current year has no impact on the in force policies issued in prior years as the rates of all prior issue years are also locked in. As such, the overall discount rate for the entire in force block is a weighted average of the discount rates being used from all issue years. Changes in the overall weighted-average discount rate over time are caused by changes in the mix of the reserves and the deferred acquisition cost asset by issue year on the entire block of in force business. Business issued in the current year has very little impact on the overall weighted-average discount rate due to the size of our in force business. Required interest on net insurance policy liabilities increased $11 million or 5% to $226 million. The increase in required interest correlated with the 5% growth in average net interest-bearing insurance policy liabilities.



Financing costs declined 9% or $4 million to $38 million, as a result of a decline in interest cost from the previously mentioned maturity of our $94 million 7 3/8% Notes in August, 2013. More information concerning debt can be found in the Capital Resources section of this report.

Investments (acquisitions), comparing the first six months of 2014 with the first six months of 2013. Torchmark's investment policy calls for investing in fixed maturities that are investment grade and meet our quality and yield objectives. We generally prefer to invest in securities with longer maturities because they more closely match the long-term nature of our policy liabilities. We believe this strategy is appropriate because our cash flows are generally stable and predictable. If available longer-term securities do not meet our quality and yield objectives, new money is generally invested in shorter-term fixed maturities. The following table summarizes selected information for fixed-maturity purchases. The effective annual yield shown is the yield calculated to the "worst call date." For non-callable bonds, the worst-call date is always the maturity date. For callable bonds, the worst-call date is the call date that produces the lowest yield (or the maturity date, if the yield calculated to the maturity date is lower than the yield calculated to each call date). 45



--------------------------------------------------------------------------------

Table of Contents

Fixed Maturity Acquisitions Selected Information (Dollar amounts in millions) For the six months ended June 30, 2014 2013 Cost of acquisitions: Investment-grade corporate securities $ 319$ 688 Other 7 4 Total fixed-maturity acquisitions $ 326$ 692 Effective annual yield * 5.00 % 4.21 % Average life, in years to: Next call 23.0 26.3 Maturity 23.2 26.5 Average rating BBB BBB+



* One-year compounded yield on a tax-equivalent basis, whereby the yield on

tax-exempt securities is adjusted to produce a yield equivalent to the pretax yield on taxable securities.



Acquisitions in both periods consisted primarily of corporate bonds, with securities spanning a diversified range of issuers, industry sectors, and geographical regions. All of the acquired securities were investment grade. While the BBB average rating for 2014 purchases is lower than the A- to BBB+ average in recent years, the weighted average was just below BBB+, and the investment-grade bonds acquired meet our long-standing credit criteria.

Investments (portfolio composition). The composition of the investment portfolio at book value on June 30, 2014 was as follows:

Invested Assets At June 30, 2014 (Dollar amounts in millions) % of Amount Total Fixed maturities(at amortized cost) $ 12,699 96 % Equities (at cost) 1 0 Policy loans 458 4 Other long-term investments 12 0 Short-term investments 49 0 Total $ 13,219 100 % Approximately 96% of our investments at book value are in a diversified fixed-maturity portfolio. Policy loans, which are secured by policy cash values, make up approximately 4% of our investments. We also have insignificant investments in equity securities and other long-term investments. Because fixed maturities represent such a significant portion of our investment portfolio, the remainder of the discussion of portfolio composition will focus on fixed maturities. 46



--------------------------------------------------------------------------------

Table of Contents

Fixed Maturities. The following table summarizes certain information about our fixed-maturity portfolio by component at June 30, 2014.

Fixed Maturities by Component (Dollar amounts in millions) Cost or Gross Gross % of Total Fixed Maturities Amortized Unrealized Unrealized Fair at Amortized at Fair Cost Gains Losses Value Cost Value Corporates $ 10,359$ 1,360$ (81 )$ 11,638 82 82 Redeemable preferred stock 497 52 (6 ) 543 4 4 Municipals 1,278 133 (2 ) 1,409 10 10 Government-sponsored enterprises 350 0 (30 ) 320 2 2 Governments & agencies 116 1 (2 ) 115 1 1 Residential mortgage-backed* 6 0 0 6 0 0 Collateralized debt obligations 65 8 (7 ) 66 1 1 Other asset-backed securities 28 3 0 31 0 0 Total fixed maturities $ 12,699$ 1,557$ (128 )$ 14,128 100 100 * Includes GNMA's At June 30, 2014, fixed maturities had a fair value of $14.1 billion, compared with $12.9 billion at December 31, 2013. The net unrealized gain position in the fixed-maturity portfolio increased from a net gain of $390 million at December 31, 2013 to a net gain of $1.4 billion at June 30, 2014, as a result of a decrease in market interest rates. The June 30, 2014 net unrealized gain consisted of gross unrealized gains of $1.6 billion offset by $128 million of gross unrealized losses, compared with the December, 2013 net unrealized gain which consisted of a gross unrealized gain of $801 million and a gross unrealized loss of $411 million. 47



--------------------------------------------------------------------------------

Table of Contents

Investments in fixed-maturity securities are diversified over a wide range of industry sectors. The following table summarizes certain information about our fixed-maturity portfolio by sector at June 30, 2014. Fixed Maturities by Sector (Dollar amounts in millions) Cost or Gross Gross % of Total Fixed Maturities Amortized Unrealized Unrealized Fair Amortized Fair Cost Gains Losses Value Cost Value Financial - Life/Health/PC Insurance $ 1,745$ 255$ (6 )$ 1,994 14 % 14 % Financial - Bank 706 80 (7 ) 779 6 6 Financial - Other 601 80 (9 ) 672 5 5 Subtotal Financial 3,052 415 (22 ) 3,445 25 25 Utilities 2,251 311 (17 ) 2,545 18 18 Energy 1,446 224 (6 ) 1,664 11 12 Government (US, municipal, and foreign) 1,744 134 (34 ) 1,844 14 13 Basic Materials 1,003 101 (4 ) 1,100 8 8 Consumer, Non-cyclical 813 98 (9 ) 902 6 6 Other Industrials 808 85 (12 ) 881 6 6 Communications 547 71 (6 ) 612 4 4 Transportation 560 64 (10 ) 614 4 4 Consumer, Cyclical 404 46 (1 ) 449 3 3 Collateralized debt obligations 65 8 (7 ) 66 1 1 Mortgage-backed Securities 6 0 0 6 0 0 Total fixed maturities $ 12,699$ 1,557$ (128 )$ 14,128 100 % 100 % At June 30, 2014, approximately 43% of the fixed-maturity assets at amortized cost and fair value were in the financial and utility sectors. The balance of the portfolio is spread among 398 issuers in a wide variety of sectors. The financial sector had a net unrealized gain of $393 million at June 30, 2014, compared with a gain of $180 million at December 31, 2013. We expect our investment in temporarily impaired securities to be fully recoverable. 48



--------------------------------------------------------------------------------

Table of Contents

An analysis of the fixed-maturity portfolio at June 30, 2014 by a composite quality rating is shown in the table below. The composite rating for each security is the average of the security's ratings as assigned by Moody's Investor Service, Standard & Poor's, Fitch Ratings, and Dominion Bond Rating Service, LTD. The ratings assigned by these four nationally recognized statistical rating organizations are evenly weighted when calculating the average. Fixed Maturities by Rating (Dollar amounts in millions) Amortized Fair Cost % Value % Investment grade: AAA $ 759 6 $ 752 5 AA 1,306 10 1,455 10 A 3,755 30 4,295 31 BBB+ 2,441 19 2,731 19 BBB 2,973 24 3,339 24 BBB- 902 7 996 7 Investment grade 12,136 96 13,568 96 Below investment grade: BB 334 2 338 2 B 100 1 100 1 Below B 129 1 122 1 Below investment grade 563 4 560 4 $ 12,699 100 $ 14,128 100 Of the $12.7 billion of fixed maturities at amortized cost as of June 30, 2014, $12.1 billion or 96% were investment grade with an average rating of A-. Below-investment-grade bonds were $563 million with an average rating of B+. Below-investment-grade bonds at amortized cost were 16% of our shareholders' equity, excluding the effect of unrealized gains and losses on fixed maturities as of June 30, 2014. Overall, the total portfolio was rated A- based on amortized cost, the same as at the end of 2013. 49



--------------------------------------------------------------------------------

Table of Contents

An analysis of the changes in our portfolio of below-investment-grade bonds at amortized cost during the first six months of 2014 is as follows:

(Dollar amounts in millions) Balance as of December 31, 2013 $ 566 Downgrades by rating agencies 16 Upgrades by rating agencies (18 ) Disposals (3 ) Amortization and other 2 Balance as of June 30, 2014 $ 563 Our investment policy is to acquire only investment-grade obligations. Thus, any increases in below-investment-grade issues are a result of ratings downgrades of existing holdings. Our investment portfolio contains no commercial mortgage-backed securities. We have no direct investments in residential mortgages, nor do we have any counterparty risks as we are not a party to any credit default swaps or other derivative contracts. We do not participate in securities lending, we have no off-balance sheet investments, and we have only insignificant exposure to European Sovereign debt consisting of $10 million in German bonds. Additional information concerning the fixed-maturity portfolio is as follows. Fixed Maturity Portfolio Selected Information At At At June 30, December 31, June 30, 2014 2013 2013 Average annual effective yield (1) 5.91 % 5.91 % 5.93 % Average life, in years, to: Next call (2) 18.1 18.3 18.4 Maturity (2) 21.1 21.5 21.7 Effective duration to: Next call (2), (3) 10.8 10.4 10.5 Maturity (2), (3) 12.0 11.7 11.8 (1) Tax-equivalent basis, whereby the yield on tax-exempt securities is



adjusted to produce a yield equivalent to the pretax yield on taxable

securities.

(2) Torchmark calculates the average life and duration of the fixed-maturity

portfolio two ways: (a) based on the next call date which is the next call

date for callable bonds and the maturity date for noncallable bonds, and

(b) based on the maturity date of all bonds, whether callable or not.

(3) Effective duration is a measure of the price sensitivity of a fixed-income

security to a particular change in interest rates. 50



--------------------------------------------------------------------------------

Table of Contents

Realized Gains and Losses, comparing the first six months of 2014 with the first six months of 2013. As discussed in Note F-Business Segments, our core business of providing insurance coverage requires us to maintain a large and diverse investment portfolio to support our insurance liabilities. From time to time, investments are disposed of or written down prior to maturity, resulting in realized gains or losses. Because these dispositions and writedowns are outside the course of our normal operations, management removes the effects of such gains and losses when evaluating its overall core operating results. The following table summarizes our tax-effected realized gains (losses) by component. Analysis of Realized Gains (Losses), Net of Tax (Dollar amounts in thousands, except for per share data) Six months ended June 30, 2014 2013 Amount Per Share Amount



Per Share

Fixed maturities and equities:

Investment sales $ 10,975$ 0.08 $ (1,233



) $ (0.01 )

Investments called or tendered 202 0.00 2,184 0.02



Real estate:

Sold 0 0.00 16 0.00 Other-than-temporary impairments 0 0.00 (1,741 ) (0.02 ) Other investments 0 0.00 850 0.01 Total $ 11,177$ 0.08$ 76$ 0.00 51



--------------------------------------------------------------------------------

Table of Contents

Financial Condition Liquidity. Liquidity provides Torchmark with the ability to meet on demand the cash commitments required by our business operations and financial obligations. Our liquidity is evidenced by positive cash flow, a portfolio of marketable investments, and the availability of a line of credit facility. Insurance subsidiary liquidity. The operations of our insurance subsidiaries have historically generated substantial cash inflows in excess of immediate cash needs. Sources of cash flows for the insurance subsidiaries include primarily premium and investment income. Cash outflows from operations include policy benefit payments, commissions, administrative expenses, and taxes. The funds to provide for policy benefits, the majority of which are paid in future periods, are invested primarily in long-term fixed maturities to meet these long-term obligations. In addition to investment income, maturities and scheduled repayments in the investment portfolio are sources of cash. Excess cash available from the insurance subsidiaries' operations is generally distributed as a dividend to the parent company, subject to regulatory restriction. The dividends are generally paid in amounts equal to the subsidiaries' prior year statutory net income excluding realized capital gains. Parent Company liquidity. An important source of Parent Company liquidity is the dividends from the insurance subsidiaries noted above. These dividends are used by the Parent Company to pay dividends on common and preferred stock, interest and principal repayment requirements on Parent Company debt, and operating expenses of the Parent Company. In the first six months of 2014, the Parent Company received $193 million of cash dividends from subsidiaries, compared with $221 million in 2013. For the full year 2014, cash dividends from subsidiaries are expected to total approximately $479 million. Additional sources of liquidity for the Parent Company are cash, intercompany receivables, and a credit facility. At June 30, 2014, the Parent Company had $47 million of invested cash and net intercompany receivables. The credit facility is discussed below under the caption "Short-term borrowings." Short-term borrowings. As of July 16, 2014, we entered into a new credit facility with a group of lenders allowing for unsecured borrowings and stand-by letters of credit up to $750 million. This facility replaces our previous facility that had a maximum limitation of $600. Up to $250 million in letters of credit can be issued against the new facility. The facility is further designated as a back-up credit line for a commercial paper program under which we may either borrow from the credit line or issue commercial paper at any time, with total commercial paper outstanding not to exceed the facility maximum, less any letters of credit issued. Interest is charged at variable rates. The facility has no ratings-based acceleration triggers which would require early repayment. The facility terminates July 16, 2019. In accordance with the agreement, we are subject to certain covenants regarding capitalization, as was the case with our previous credit facility. As of June 30, 2014, we were in full compliance with the covenants of both facilities. 52



--------------------------------------------------------------------------------

Table of Contents

Short-term debt consists of our commercial paper outstanding as noted above. The following table presents certain information about our commercial paper borrowings. Short-term Borrowings - Commercial Paper (Dollar amounts in millions) At At At June 30, December 31, June 30, 2014 2013 2013 Balance at end of period (par value) $ 275.0$ 229.1$ 255.0 Annualized interest rate .24 % .30 % .33 % Letters of credit outstanding $ 198.0$ 198.0$ 198.0 Remaining amount available under credit line $ 127.0$ 172.9$ 147.0 For the six months ended June 30, June 30, 2014 2013 Average balance outstanding during period (par value) $ 290.1 $



277.3

Daily-weighted average interest rate (annualized) .23 % .32 % Maximum daily amount outstanding during period (par value) $ 335.0 $



314.0

Our balance of commercial paper outstanding at June 30, 2014 was $275 million compared with $229 million at the previous year end. We have had no difficulties in accessing the commercial paper market under this facility during the six-month periods ended June 30, 2014 and 2013. In summary, Torchmark expects to have readily available funds for the foreseeable future to conduct its operations and to maintain target capital ratios in the insurance subsidiaries through internally generated cash flow and the credit facility. In the unlikely event that more liquidity is needed, the Company could generate additional funds through multiple sources including, but not limited to, the issuance of debt, an additional short-term credit facility, and intercompany borrowing. Consolidated liquidity. Consolidated net cash inflows from operations were $419 million in the first six months of 2014, compared with $492 million in the same period of 2013. In addition to cash inflows from operations, our companies have received $47 million in investment calls and tenders and $61 million in scheduled maturities or repayments during the 2014 period. As previously noted under the caption Short-term borrowings, we have in place a line of credit facility. The insurance companies have no additional outstanding credit facilities. 53



--------------------------------------------------------------------------------

Table of Contents

Cash and short term investments were $94 million at June 30, 2014, compared with $114 million at December 31, 2013. In addition to these liquid assets, the entire $14.1 billion (fair value at June 30, 2014) portfolio of fixed-income and equity securities is available for sale in the event of an unexpected need. Substantially all of our fixed-income and equity securities are publicly traded. We generally expect to hold fixed-income securities to maturity, and even though these securities are classified as available for sale, we have the ability and intent to hold any securities which are temporarily impaired until they mature. Our strong cash flows from operations, investment maturities, and credit line availability make any need to sell securities for liquidity highly unlikely. Capital Resources. Our insurance subsidiaries maintain capital at a level adequate to support their current operations and meet the requirements of the regulatory authorities and the rating agencies. Our insurance subsidiaries generally target a capital ratio of around 325% of Company Action Level required regulatory capital under Risk-Based Capital (RBC), a measure established by insurance regulatory authorities to monitor the adequacy of capital. The 325% target is considered sufficient because of the insurance companies' strong reliable cash flows, the relatively low risk of their product mix, and because that ratio exceeds regulatory requirements and is in line with rating agency expectations for Torchmark. As of December 31, 2013, our insurance subsidiaries had a consolidated RBC ratio of 341%. In the event of a decline in the RBC ratios of the insurance companies due to ratings downgrades in the investment portfolios, impairments, or other circumstances, we have available cash on hand and credit availability at the Parent Company to make additional contributions as necessary to maintain the ratio at or above 325%. On a consolidated basis, Torchmark's capital structure consists of short-term debt (comprised of the commercial paper outstanding discussed above), long-term funded debt, and shareholders' equity. The outstanding long-term debt at book value was $991 million at June 30, 2014, as it also was at December 31, 2013. An analysis of long-term debt issues outstanding is as follows at June 30, 2014. Long Term Debt at June 30, 2014 (Dollar amounts in millions) Year Interest Par Book Fair Instrument Due Rate Value Value Value Senior Notes 2016 6.375 % $ 250.0$ 249.0$ 274.8 Senior Notes 2019 9.250 292.7 290.4 376.3 Senior Notes (1) 2022 3.800 150.0 147.5 153.5 Notes 2023 7.875 165.6 163.7 213.8 Junior Subordinated Debentures 2052 5.875 125.0 120.9 123.0 Junior Subordinated Debentures 2036 3.531 (2) 20.0 20.0 20.0 Total long-term debt $ 1,003.3$ 991.5$ 1,161.4



(1) An additional $150 million par value and book value is held by insurance

subsidiaries that eliminates in consolidation.

(2) Interest paid at 3 month LIBOR plus 330 basis points, resets each quarter.

54



--------------------------------------------------------------------------------

Table of Contents

As previously noted under the caption Highlights in this report, we acquired 3.7 million of our outstanding common shares under our share repurchase program during the first six months of 2014. These shares were acquired at a cost of $190 million (average of $51.63 per share), compared with purchases of 4.6 million shares at a cost of $180 million in the first six months of 2013. Shareholders' equity was $4.5 billion at June 30, 2014. This compares with $3.8 billion at December 31, 2013 and at June 30, 2013. During the six months since December 31, 2013, shareholders' equity was increased by $671 million of after-tax unrealized gains in the fixed-maturity portfolio, as interest rates have declined over the period. Net income added another $264 million for the six months, but the share purchases of $238 million noted above during the period reduced shareholders' equity.



We are required by GAAP to revalue our available-for-sale fixed-maturity portfolio to fair market value at the end of each accounting period. These changes, net of their associated impact on deferred acquisition costs and income tax, are reflected directly in shareholders' equity.

While GAAP requires our fixed-maturity assets to be revalued, it does not permit interest-bearing insurance policy liabilities supported by those assets to be valued at fair value in a consistent manner, with changes in value applied directly to shareholders' equity. However, due to the size of both the investment portfolio and our policy liabilities, this inconsistency in measurement can have a material impact on shareholders' equity. Because of the long-term nature of our fixed maturities and liabilities and the strong cash flows generated by our insurance subsidiaries, we have the intent and ability to hold our securities to maturity. As such, we do not expect to incur realized gains or losses due to fluctuations in the market value of fixed maturities caused by interest rate changes or losses caused by temporarily illiquid markets. Accordingly, management removes the effect of this rule when analyzing Torchmark's balance sheet, capital structure, and financial ratios in order to provide a more consistent and meaningful portrayal of the Company's financial position from period to period. The following table presents selected data related to capital resources. Additionally, the table presents the effect of this GAAP requirement on relevant line items, so that investors and other financial statement users may determine its impact on our capital structure. 55



--------------------------------------------------------------------------------

Table of Contents Selected Financial Data At June 30, 2014 At December 31, 2013 At June 30, 2013 Effect of Effect of Effect of Accounting Accounting Accounting Rule Rule Rule Requiring Requiring Requiring GAAP Revaluation(1) GAAP Revaluation(1) GAAP Revaluation(1) Fixed maturities (millions) $ 14,128 $ 1,429 $ 12,879 $ 390 $ 12,863 $



652

Deferred acquisition costs (millions) (2) 3,398 (18 ) 3,338 (10 ) 3,263 (15 ) Total assets (millions) 19,652 1,411 18,192 380 18,141 637 Short-term debt (millions) 275 0 229 0 349 0 Long-term debt (millions) 991 0 991 0 990 0 Shareholders' equity (millions) 4,509 917 3,776 247 3,822



414

Book value per diluted share 33.93 6.91 27.66 1.81 27.46



2.98

Debt to capitalization (3) 21.9 % (4.1 )% 24.4 % (1.3 )% 25.9 %



(2.3 )%

Diluted shares outstanding (thousands) 132,897 136,537 139,201 Actual shares outstanding (thousands) 131,032 134,252 137,390



(1) Amount added to (deducted from) comprehensive income to produce the stated

GAAP item, per accounting rule ASC 320-10-35-1, formerly SFAS 115.

(2) Includes the value of insurance purchased.

(3) Torchmark's debt covenants require that the effect of this accounting rule be

removed to determine this ratio. This ratio is computed by dividing total

debt by the sum of total debt and shareholders' equity.

Interest coverage was 10.9 times in the 2014 six months, compared with 9.8 times in the 2013 period. Interest coverage is computed by dividing interest expense into the sum of pretax income and interest expense. Cautionary Statements We caution readers regarding certain forward-looking statements contained in the previous discussion and elsewhere in this document, and in any other statements made by, or on behalf of Torchmark whether or not in future filings with the Securities and Exchange Commission. Any statement that is not a historical fact or that might otherwise be considered an opinion or projection concerning Torchmark or its business, whether express or implied, is meant as and should be considered a forward-looking statement. Such statements represent management's opinions concerning future operations, strategies, financial results or other developments. We specifically disclaim any obligation to update or revise any forward-looking statement because of new information, future developments, or otherwise. 56



--------------------------------------------------------------------------------

Table of Contents

Forward-looking statements are based upon estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control. If these estimates or assumptions prove to be incorrect, the actual results of Torchmark may differ materially from the forward-looking statements made on the basis of such estimates or assumptions. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments, which may be national in scope, related to the insurance industry generally, or applicable to Torchmark specifically. Such events or developments could include, but are not necessarily limited to:



1) Changing general economic conditions leading to unexpected changes in

lapse rates and/or sales of our policies, as well as levels of mortality,

morbidity, and utilization of health care services that differ from Torchmark's assumptions;



2) Regulatory developments, including changes in governmental regulations

(particularly those impacting taxes and changes to the Federal Medicare

program that would affect Medicare Supplement and Medicare Part D insurance); 3) Market trends in the senior-aged health care industry that provide alternatives to traditional Medicare (such as Health Maintenance Organizations and other managed care or private plans) and that could affect the sales of traditional Medicare Supplement insurance; 4) Interest rate changes that affect product sales and/or investment portfolio yield;



5) General economic, industry sector or individual debt issuers' financial

conditions that may affect the current market value of securities we own,

or that may impair an issuer's ability to make principal and/or interest

payments due on those securities; 6) Changes in pricing competition; 7) Litigation results;



8) Levels of administrative and operational efficiencies that differ from our

assumptions;

9) Our inability to obtain timely and appropriate premium rate increases for

health insurance policies due to regulatory delay; 10) The customer response to new products and marketing initiatives; and 11) Reported amounts in the financial statements which are based on



management's estimates and judgments which may differ from the actual

amounts ultimately realized.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters