GL 10-Q Quarterly Report Sept. 30, 2018 | Alphaminr
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10-Q 1 tmk201810-qq3document.htm 10-Q 3RD QTR 2018 Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2018
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _________to_________
Commission File Number 1-8052
torchmarklogocolora01rgba37.jpg
TORCHMARK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
63-0780404
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3700 South Stonebridge Drive, McKinney, Texas
75070
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (972) 569-4000
NONE
Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý
Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the last practicable date.
CLASS
OUTSTANDING AT October 30, 2018
Common Stock,
$1.00 Par Value
111,540,403


INDEX
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.


PART I–FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Financial Statements

TORCHMARK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollar amounts in thousands, except per share data)
September 30,
2018
December 31,
2017
Assets:

Investments:
Fixed maturities—available for sale, at fair value (amortized cost: 2018—$15,462,364; 2017—$14,995,101)
$
16,231,471

$
16,969,325

Policy loans
543,836

529,529

Other long-term investments (includes: 2018—$107,996; 2017—$0, under the fair value option)
191,191

108,559

Short-term investments
633,490

127,071

Total investments
17,599,988

17,734,484

Cash
77,439

118,563

Accrued investment income
244,851

233,453

Other receivables
406,907

391,775

Deferred acquisition costs
4,091,601

3,958,063

Goodwill
441,591

441,591

Other assets
538,540

528,536

Assets related to discontinued operations
68,571

68,520

Total assets
$
23,469,488

$
23,474,985

Liabilities:
Future policy benefits
$
13,842,694

$
13,439,472

Unearned and advance premiums
62,139

61,430

Policy claims and other benefits payable
337,981

333,294

Other policyholders' funds
97,007

97,635

Total policy liabilities
14,339,821

13,931,831

Current and deferred income taxes payable
1,072,856

1,312,002

Other liabilities
493,726

489,609

Short-term debt
615,011

328,067

Long-term debt (estimated fair value: 2018—$1,387,229; 2017—$1,228,392)
1,358,947

1,132,201

Liabilities related to discontinued operations
50,222

49,854

Total liabilities
17,930,583

17,243,564

Commitments and Contingencies ( Note 6 )


Shareholders’ equity:
Preferred stock, par value $1 per share—Authorized 5,000,000 shares; outstanding: 0 in 2018 and 2017
—

—

Common stock, par value $1 per share—Authorized 320,000,000 shares; outstanding: (2018— 124,218,183 issued, less 12,050,407 held in treasury and 2017—124,218,183 issued, less 9,625,104 held in treasury)
124,218

124,218

Additional paid-in capital
527,489

508,476

Accumulated other comprehensive income
477,624

1,424,274

Retained earnings
5,267,964

4,806,208

Treasury stock, at cost
(858,390
)
(631,755
)
Total shareholders’ equity
5,538,905

6,231,421

Total liabilities and shareholders’ equity
$
23,469,488

$
23,474,985


See accompanying Notes to Condensed Consolidated Financial Statements.

1
TMK 2018 FORM 10-Q QTR 3


TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2018
2017
2018
2017
Revenue:
Life premium
$
605,547

$
576,223

$
1,806,384

$
1,725,896

Health premium
255,201

242,991

758,439

730,557

Other premium
2

3

12

9

Total premium
860,750

819,217

2,564,835

2,456,462

Net investment income
221,627

213,872

658,279

634,930

Realized investment gains (losses)
1,032

12,595

14,796

6,142

Other income
393

331

1,104

1,140

Total revenue
1,083,802

1,046,015

3,239,014

3,098,674

Benefits and expenses:
Life policyholder benefits
396,701

386,445

1,196,616

1,168,383

Health policyholder benefits
162,574

155,774

483,654

470,104

Other policyholder benefits
8,581

9,000

25,852

26,923

Total policyholder benefits
567,856

551,219

1,706,122

1,665,410

Amortization of deferred acquisition costs
129,492

122,334

388,189

370,363

Commissions, premium taxes, and non-deferred acquisition costs
69,632

67,863

208,698

198,011

Other operating expense
74,059

63,019

209,503

187,788

Interest expense
22,433

20,970

66,466

62,825

Total benefits and expenses
863,472

825,405

2,578,978

2,484,397

Income before income taxes
220,330

220,610

660,036

614,277

Income taxes
(41,630
)
(67,264
)
(123,232
)
(183,390
)
Income from continuing operations
178,700

153,346

536,804

430,887

Income (loss) from discontinued operations, net of tax
24

(12
)
(55
)
(3,739
)
Net income
$
178,724

$
153,334

$
536,749

$
427,148

Basic net income (loss) per common share:

Continuing operations
$
1.59

$
1.32

$
4.74

$
3.69

Discontinued operations
—

—

(0.01
)
(0.03
)
Total basic net income per common share
$
1.59

$
1.32

$
4.73

$
3.66

Diluted net income (loss) per common share:

Continuing operations
$
1.55

$
1.29

$
4.64

$
3.61

Discontinued operations
—

—

—

(0.03
)
Total diluted net income per common share
$
1.55

$
1.29

$
4.64

$
3.58

Dividends declared per common share
$
0.16

$
0.15

$
0.48

$
0.45






See accompanying Notes to Condensed Consolidated Financial Statements.

2
TMK 2018 FORM 10-Q QTR 3


TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollar amounts in thousands)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2018
2017
2018
2017
Net income
$
178,724

$
153,334

$
536,749

$
427,148

Other comprehensive income (loss):
Investments:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period
(173,598
)
83,216

(1,202,762
)
692,747

Reclassification adjustment for (gains) losses on securities included in net income
(1,510
)
(12,910
)
(12,327
)
(13,264
)
Reclassification adjustment for amortization of (discount) and premium
1,052

119

2,612

(379
)
Foreign exchange adjustment on securities recorded at fair value
8,624

1,173

7,360

1,418

Unrealized gains (losses) on securities
(165,432
)
71,598

(1,205,117
)
680,522

Unrealized gains (losses) on other investments
1,310

473

(492
)
3,544

Total unrealized investment gains (losses)
(164,122
)
72,071


(1,205,609
)

684,066

Less applicable tax (expense) benefit
34,464

(25,225
)
253,176

(239,479
)
Unrealized investment gains (losses), net of tax
(129,658
)
46,846

(952,433
)
444,587

Deferred acquisition costs:
Unrealized gains (losses) attributable to deferred acquisition costs
1,178

505

3,669

(992
)
Less applicable tax (expense) benefit
(248
)
(177
)
(771
)
347

Unrealized gains (losses) attributable to deferred acquisition costs, net of tax
930

328

2,898

(645
)
Foreign exchange translation:
Foreign exchange translation adjustments, other than securities
(168
)
8,533

(7,684
)
16,049

Less applicable tax (expense) benefit
36

(2,986
)
1,615

(4,567
)
Foreign exchange translation adjustments, other than securities, net of tax
(132
)
5,547

(6,069
)
11,482

Pension:
Amortization of pension costs
3,778

3,108

11,334

9,326

Experience gain (loss)
—

—

—

371

Pension adjustments
3,778

3,108

11,334

9,697

Less applicable tax (expense) benefit
(793
)
(1,087
)
(2,380
)
(3,393
)
Pension adjustments, net of tax
2,985

2,021

8,954

6,304

Other comprehensive income (loss)
(125,875
)
54,742

(946,650
)
461,728

Comprehensive income (loss)
$
52,849

$
208,076

$
(409,901
)
$
888,876


See accompanying Notes to Condensed Consolidated Financial Statements.

3
TMK 2018 FORM 10-Q QTR 3


TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(Dollar amounts in thousands, except per share data)
Preferred Stock
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Treasury Stock
Total Shareholders’ Equity
Balance at January 1, 2017
$
—

$
127,218

$
490,421

$
577,574

$
3,890,798

$
(519,150
)
$
4,566,861

Comprehensive income (loss)



461,728

427,148


888,876

Common dividends declared ($0.45 per share)




(52,304
)

(52,304
)
Acquisition of treasury stock





(301,448
)
(301,448
)
Stock-based compensation


17,965


(606
)
7,450

24,809

Exercise of stock options





(25,454
)
66,345

40,891

Balance at September 30, 2017
$
—

$
127,218

$
508,386

$
1,039,302

$
4,239,582

$
(746,803
)
$
5,167,685

Preferred Stock
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Treasury Stock
Total Shareholders’ Equity
Balance at January 1, 2018
$
—

$
124,218

$
508,476

$
1,424,274

$
4,806,208

$
(631,755
)
$
6,231,421

Adoption of ASU 2016-01 (1)
4,896

4,896

Comprehensive income (loss)



(946,650
)
536,749


(409,901
)
Common dividends declared ($0.48 per share)




(54,231
)

(54,231
)
Acquisition of treasury stock





(298,314
)
(298,314
)
Stock-based compensation


19,013


(1,803
)
12,759

29,969

Exercise of stock options





(23,855
)
58,920

35,065

Balance at September 30, 2018
$
—

$
124,218

$
527,489

$
477,624

$
5,267,964

$
(858,390
)
$
5,538,905


(1)











See accompanying Notes to Condensed Consolidated Financial Statements.

4
TMK 2018 FORM 10-Q QTR 3


TORCHMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollar amounts in thousands)

Nine Months Ended
September 30,
2018
2017
Cash provided from operating activities
$
937,289

$
1,085,842

Cash provided from (used for) investing activities:
Investments sold or matured:
Fixed maturities available for sale—sold
12,162

52,951

Fixed maturities available for sale—matured, called, and repaid
266,736

306,132

Other long-term investments
47

3,523

Total investments sold or matured
278,945

362,606

Acquisition of investments:
Fixed maturities—available for sale
(727,296
)
(1,042,705
)
Other long-term investments
(74,396
)
(16,775
)
Total investments acquired
(801,692
)
(1,059,480
)
Net (increase) decrease in policy loans
(14,307
)
(15,343
)
Net (increase) decrease in short-term investments
(506,419
)
6,556

Additions to property and equipment
(27,316
)
(13,451
)
Sale of other assets
17

18

Investment in low-income housing interests
(19,075
)
(13,852
)
Cash provided from (used for) investing activities
(1,089,847
)
(732,946
)
Cash provided from (used for) financing activities:
Issuance of common stock
35,065

40,891

Cash dividends paid to shareholders
(53,481
)
(51,532
)
Proceeds from issuance of debt
550,000

—

Payment for debt issuance costs
(6,797
)
—

Repayment of debt
(23,125
)
(1,250
)
Net borrowing (repayment) of commercial paper
(7,196
)
42,652

Acquisition of treasury stock
(298,314
)
(301,448
)
Net receipts (payments) from deposit-type product
(87,561
)
(65,912
)
Cash provided from (used for) financing activities
108,591

(336,599
)
Effect of foreign exchange rate changes on cash
2,843

(3,998
)
Net increase (decrease) in cash
(41,124
)
12,299

Cash at beginning of year
118,563

76,163

Cash at end of period
$
77,439

$
88,462









See accompanying Notes to Condensed Consolidated Financial Statements.

5
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)



Note 1—Significant Accounting Policies
Basis of Presentation: The accompanying condensed consolidated financial statements of Torchmark Corporation (Torchmark or alternatively, the Company) have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all of the annual disclosures required by accounting principles generally accepted in the United States of America (GAAP). However, in the opinion of management, these statements include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the condensed consolidated financial position at September 30, 2018 , and the condensed consolidated results of operations, comprehensive income, and cash flows for the periods ended September 30, 2018 and 2017 . The interim period condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements that are included in the Form 10-K filed with the Securities Exchange Commission (SEC) on February 26, 2018.
Note 2—New Accounting Standards
Accounting Pronouncements Adopted in the Current Year:
ASU 2016-01: In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which primarily revises the classification and measurement of certain equity investments such that they will be measured at fair value through net income. Additionally, the guidance eliminates the cost method for partnerships and joint ventures and requires these types of investments to be accounted for under the fair value through net income or equity method. This standard became effective for the Company on January 1, 2018.
On January 1, 2018, the Company adopted this standard on a modified retrospective basis for two types of investments: equity securities and certain limited partnerships. The adoption resulted in a $4.9 million after-tax positive adjustment to the opening balance of retained earnings. Subsequent to the adoption, the Company elected to measure its investment in certain limited partnerships at fair value in accordance with the fair value option for financial instruments with changes recognized in "Realized Investment Gains (Losses)" in the Condensed Consolidated Statements of Operations . As of September 30, 2018 , the fair value balance of the limited partnerships were $108 million . See Note 4—Investments for further discussion.
ASU 2016-15: In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments to provide uniformity in the classification of cash receipts and payments recorded in the statement of cash flows including debt prepayment or debt extinguishment costs, settlement of zero-coupon bonds, and proceeds from the settlement of insurance claims. This standard became effective on January 1, 2018 and did not have a significant impact to the classification on the Condensed Statement of Cash Flows .
ASU 2016-16: In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other Than Inventory. This guidance was issued to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory by allowing the immediate recognition of the current and deferred income tax effects. Current guidance prohibits the recognition of current and deferred income taxes for an intra-entity transfer until the asset has been sold to an outside party. This guidance is applied on a modified retrospective approach and became effective on January 1, 2018. This adoption did not have a significant impact on the financial statements.
ASU 2017-07: In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This guidance was issued to simplify the reporting of pension costs by disaggregating the service-cost component from the other components of net benefit costs and reporting it separately on the income statement. The service-cost component is the only component of net benefit cost that will be eligible for capitalization. The guidance became effective on January 1, 2018 with a retrospective transition method for separation of net benefit costs and a prospective transition method for the capitalization of service costs. The Company will record approximately $3.2 million in additional expense to the 2018 Condensed Consolidated Statements of Operations due to the elimination of the ability to capitalize a portion of the benefit costs. For the nine months ended September 30, 2018 , the Company recorded $2.4 million in additional expense.

6
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 2—New Accounting Standards (continued)


ASU 2017-09: In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. This guidance was issued to provide clarity and guidance regarding changes to the terms or conditions of a share-based payment award that requires an entity to apply modification accounting. It became effective on January 1, 2018. The adoption had no significant impact on the financial statements as modifications to stock compensation are infrequent.
ASU 2018-02 : In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI) . This guidance was issued to allow the reclassification of taxes from AOCI to retained earnings as a result of the reduction in corporate income tax rates due to the Tax Cuts and Jobs Act of 2017 (Tax Legislation). Current accounting requires the effect of changes in tax rates used to measure deferred tax assets and liabilities to be reported in net income as of the date of enactment even though deferred taxes were previously recognized in AOCI (stranded taxes). This guidance, however, allows a company to elect to reclassify the stranded taxes in AOCI to retained earnings and is effective for years beginning after December 15, 2018, with early adoption permitted. The Company elected to early adopt this guidance resulting in a reclassification of $252 million from AOCI to retained earnings for the period ended December 31, 2017.
Accounting Pronouncements Not Yet Adopted
ASU 2016-02/ASU 2018-11: In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , with clarification guidance issued in July 2018. The guidance requires lessees to record a right-of-use asset and corresponding lease liability on the balance sheet for all operating leases that do not qualify for the practical expedients allowed for in this standard. Additional qualitative and quantitative disclosures will be required. This standard will become effective for the Company beginning January 1, 2019. The Company plans to adopt the optional transition method allowed for under ASU 2018-11 by not restating comparative periods and recognizing a cumulative-effect adjustment to the opening balance of retained earnings on the period of adoption. The Company is not a lessor.
The Company has made significant progress during 2018 and has implemented appropriate solutions to identify and quantify applicable operating leases in accordance with this guidance. The Company is in the process of finalizing the analysis of the impact of the new guidance, but does not expect the adoption to have a significant impact on the financial statements. Refer to Note 15—Commitments and Contingencies of the 2017 10-K for consideration of the noncancelable operating lease commitments.
ASU 2016-13: In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments as well as to change the loss impairment methodology for available-for-sale debt securities by use of an allowance rather than a direct write-down. This standard will become effective on January 1, 2020. The applicable section of the standard related to debt securities requires a prospective transition. The Company does not expect the adoption to have a significant impact on the financial statements as we have limited credit losses with respect to our current available-for-sale portfolio.
ASU 2017-04: In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance was issued to simplify the subsequent measurement of goodwill through the elimination of Step 2 from the goodwill impairment test which required a hypothetical purchase price allocation. It will become effective on January 1, 2020 and should be applied on a prospective basis. This adoption will not have an impact on the financial statements.
ASU 2017-08: In March 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities. This guidance was issued to shorten the amortization period for certain callable debt securities held at a premium. The guidance requires the premium to be amortized to the earliest call date. It will become effective on January 1, 2019 with early adoption permitted, including during interim periods. The adoption is to be applied on a modified retrospective basis through an adjustment to retained earnings. This adoption will not have a significant impact on the financial statements.

7
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 2—New Accounting Standards (continued)


ASU 2018-12: In August 2018, the FASB issued ASU No. 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts . The guidance was primarily issued to 1) improve the timeliness of recognizing changes in the liability for future policy benefits and modify the rate used to discount future cash flows, 2) simplify and improve the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts, 3) simplify the amortization of deferred acquisition costs, and 4) improve the effectiveness of the required disclosures. This guidance is effective beginning January 1, 2021, and should be applied on a retrospective basis. Early adoption of the amendments is permitted. ASU 2018-12 will require changes to the Company's actuarial systems and data inputs related to the valuation of the liabilities. The Company is in the process of evaluating the impact this guidance will have on the financial statements and cannot reasonably estimate at this time.
ASU 2018-13: In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement . The amendment modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The revised guidance is effective beginning January 1, 2020. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. Early adoption of the amendments is permitted. The Company does not expect the adoption of this guidance to have a material impact on the financial statements.
ASU 2018-14: In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20), Changes to the Disclosure Requirements for Defined Benefit Plans . The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. This guidance is effective beginning January 1, 2021, and will be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on the financial statements.
ASU 2018-15: In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The guidance was issued to align the accounting for implementation costs of hosting arrangements, regardless of whether they convey a license to the hosted software. Accordingly, the standard requires the capitalization of implementation costs incurred in a hosting arrangement that is a service contract, similar to the treatment for developed or obtained internal-use software. The guidance is effective beginning January 1, 2020, and the Company plans to apply the standards on a prospective basis. Early adoption of the amendments is also permitted. The Company is in the process of determining the impact this guidance will have on the financial statements.



8
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)


Note 3—Supplemental Information about Changes to Accumulated Other Comprehensive Income

An analysis of the change in balance by component of Accumulated Other Comprehensive Income is as follows for the three and nine month periods ended September 30, 2018 and 2017 .

Components of Accumulated Other Comprehensive Income
Three Months Ended September 30, 2017
Available
for Sale
Assets
Deferred
Acquisition
Costs
Foreign
Exchange
Pension
Adjustments
Total
Balance at July 1, 2017
$
1,090,055

$
(7,655
)
$
10,902

$
(108,742
)
$
984,560

Other comprehensive income (loss) before reclassifications, net of tax
55,160

328

5,547

—

61,035

Reclassifications, net of tax
(8,314
)
—

—

2,021

(6,293
)
Other comprehensive income (loss)
46,846

328

5,547

2,021

54,742

Balance at September 30, 2017
$
1,136,901

$
(7,327
)
$
16,449

$
(106,721
)
$
1,039,302

Three Months Ended September 30, 2018
Available
for Sale
Assets
Deferred
Acquisition
Costs
Foreign
Exchange
Pension
Adjustments
Total
Balance at July 1, 2018
$
746,514

$
(6,579
)
$
10,365

$
(146,801
)
$
603,499

Other comprehensive income (loss) before reclassifications, net of tax
(129,296
)
930

(132
)
—

(128,498
)
Reclassifications, net of tax
(362
)
—

—

2,985

2,623

Other comprehensive income (loss)
(129,658
)
930

(132
)
2,985

(125,875
)
Balance at September 30, 2018
$
616,856

$
(5,649
)
$
10,233

$
(143,816
)
$
477,624











9
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except, per share data)

Note 3—Supplemental Information about Changes to Accumulated Other Comprehensive Income (continued)



Nine Months Ended September 30, 2017
Available
for Sale
Assets
Deferred
Acquisition
Costs
Foreign
Exchange
Pension
Adjustments
Total
Balance at January 1, 2017
$
692,314

$
(6,682
)
$
4,967

$
(113,025
)
$
577,574

Other comprehensive income (loss) before reclassifications, net of tax
453,455

(645
)
11,482

241

464,533

Reclassifications, net of tax
(8,868
)
—

—

6,063

(2,805
)
Other comprehensive income (loss)
444,587

(645
)
11,482

6,304

461,728

Balance at September 30, 2017
$
1,136,901

$
(7,327
)
$
16,449

$
(106,721
)
$
1,039,302

Nine Months Ended September 30, 2018
Available
for Sale
Assets
Deferred
Acquisition
Costs
Foreign
Exchange
Pension
Adjustments
Total
Balance at January 1, 2018
$
1,569,289

$
(8,547
)
$
16,302

$
(152,770
)
$
1,424,274

Other comprehensive income (loss) before reclassifications, net of tax
(944,758
)
2,898

(6,069
)
—

(947,929
)
Reclassifications, net of tax
(7,675
)
—

—

8,954

1,279

Other comprehensive income (loss)
(952,433
)
2,898

(6,069
)
8,954

(946,650
)
Balance at September 30, 2018
$
616,856

$
(5,649
)
$
10,233

$
(143,816
)
$
477,624


10
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except, per share data)

Note 3—Supplemental Information about Changes to Accumulated Other Comprehensive Income (continued)




Reclassifications out of Accumulated Other Comprehensive Income are presented below for the three and nine month periods ended September 30, 2018 and 2017 .
Reclassification Adjustments
Three Months Ended
September 30,
Nine Months Ended
September 30,
Affected line items in the
Statement of Operations
2018
2017
2018
2017
Unrealized investment gains (losses) on available for sale assets:
Realized (gains) losses
$
(1,510
)
$
(12,910
)
$
(12,327
)
$
(13,264
)
Realized investment gains (losses)
Amortization of (discount) premium
1,052

119

2,612

(379
)
Net investment income
Total before tax
(458
)
(12,791
)
(9,715
)
(13,643
)
Tax
96

4,477

2,040

4,775

Income taxes
Total after-tax
(362
)
(8,314
)
(7,675
)
(8,868
)
Pension adjustments:
Amortization of prior service cost
119

118

357

356

Other operating expense
Amortization of actuarial gain (loss)
3,659

2,990

10,977

8,970

Other operating expense
Total before tax
3,778

3,108

11,334

9,326

Tax
(793
)
(1,087
)
(2,380
)
(3,263
)
Income taxes
Total after-tax
2,985

2,021

8,954

6,063

Total reclassifications (after-tax)
$
2,623

$
(6,293
)
$
1,279

$
(2,805
)


11
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)


Note 4—Investments
Portfolio Composition :
A summary of fixed maturities available for sale by cost or amortized cost and estimated fair value at September 30, 2018 and December 31, 2017 is as follows:
September 30, 2018
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value (1)
% of Total
Fixed
Maturities (2)
Fixed maturities available for sale:
U.S. Government direct, guaranteed, and government-sponsored enterprises
$
392,779

$
255

$
(11,643
)
$
381,391

3
States, municipalities, and political subdivisions
1,262,710

84,503

(4,853
)
1,342,360

8
Foreign governments
18,918

1,721

—

20,639

—
Corporates, by sector:
Financial
3,363,794

239,614

(62,445
)
3,540,963

21
Utilities
1,964,029

215,959

(21,005
)
2,158,983

13
Energy
1,635,710

136,144

(37,978
)
1,733,876

11
Other corporate sectors
6,242,246

329,169

(165,172
)
6,406,243

40
Total corporates
13,205,779

920,886

(286,600
)
13,840,065

85
Collateralized debt obligations
57,794

26,119

(4,997
)
78,916

—
Other asset-backed securities
150,218

1,845

(872
)
151,191

1
Redeemable preferred stocks, by sector:
Financial
345,651

46,022

(4,197
)
387,476

3
Utilities
28,515

1,332

(414
)
29,433

—
Total redeemable preferred stocks
374,166

47,354

(4,611
)
416,909

3
Total fixed maturities
$
15,462,364

$
1,082,683

$
(313,576
)
$
16,231,471

100
(1)
Amounts reported on the balance sheet.
(2)
At fair value.

12
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 4—Investments (continued)

December 31, 2017
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value (1)
% of Total
Fixed
Maturities (2)
Fixed maturities available for sale:
U.S. Government direct, guaranteed, and government-sponsored enterprises
$
390,646

$
18,173

$
(1,373
)
$
407,446

2
States, municipalities, and political subdivisions
1,091,960

127,890

(135
)
1,219,715

7
Foreign governments
20,236

1,782

—

22,018

—
Corporates, by sector:


Financial
3,282,526

475,961

(23,392
)
3,735,095

22
Utilities
1,955,737

369,406

(1,298
)
2,323,845

14
Energy
1,619,349

226,140

(25,392
)
1,820,097

11
Other corporate sectors
6,065,803

747,612

(20,616
)
6,792,799

40
Total corporates
12,923,415

1,819,119

(70,698
)
14,671,836

87
Collateralized debt obligations
59,150

20,084

(7,653
)
71,581

—
Other asset-backed securities
144,520

4,835

—

149,355

1
Redeemable preferred stocks, by sector:
Financial
336,621

62,892

(2,727
)
396,786

3
Utilities
28,553

2,132

(97
)
30,588

—
Total redeemable preferred stocks
365,174

65,024

(2,824
)
427,374

3
Total fixed maturities
$
14,995,101

$
2,056,907

$
(82,683
)
$
16,969,325

100
(1)
Amounts reported on the balance sheet.
(2)
At fair value.

A schedule of fixed maturities available for sale by contractual maturity date at September 30, 2018 is shown below on an amortized cost basis and on a fair value basis. Actual disposition dates could differ from contractual maturities due to call or prepayment provisions.
September 30, 2018
Amortized
Cost
Fair Value
Fixed maturities available for sale:
Due in one year or less
$
189,867

$
193,934

Due after one year through five years
611,511

632,417

Due after five years through ten years
1,686,348

1,820,952

Due after ten years through twenty years
5,023,824

5,505,111

Due after twenty years
7,742,061

7,848,163

Mortgage-backed and asset-backed securities
208,753

230,894

$
15,462,364

$
16,231,471







13
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 4—Investments (continued)

Selected information about sales of fixed maturities available for sale is as follows.
Three Months Ended
September 30,
Nine Months Ended
September 30,
2018
2017
2018
2017
Fixed maturities available for sale:
Proceeds from sales
$
12,162

$
52,951

$
12,162

$
52,951

Gross realized gains
66

4,851

66

4,851

Gross realized losses
—

—

—

—



Fair Value Measurements : The following tables represent the fair value of fixed maturities available for sale measured on a recurring basis at September 30, 2018 and December 31, 2017 .
Fair Value Measurements at September 30, 2018 using:
Description
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total Fair
Value
Fixed maturities available for sale:
U.S. Government direct, guaranteed, and government-sponsored enterprises
$
—

$
381,391

$
—

$
381,391

States, municipalities, and political subdivisions
—

1,342,360

—

1,342,360

Foreign governments
—

20,639

—

20,639

Corporates, by sector:
Financial
—

3,497,807

43,156

3,540,963

Utilities
—

2,006,462

152,521

2,158,983

Energy
—

1,694,481

39,395

1,733,876

Other corporate sectors
—

6,085,281

320,962

6,406,243

Total corporates
—

13,284,031

556,034

13,840,065

Collateralized debt obligations
—

—

78,916

78,916

Other asset-backed securities
—

138,407

12,784

151,191

Redeemable preferred stocks, by sector:
Financial
—

387,476

—

387,476

Utilities
—

29,433

—

29,433

Total redeemable preferred stocks
—

416,909

—

416,909

Total fixed maturities
$
—

$
15,583,737

$
647,734

$
16,231,471

Percent of total
—
%
96.0
%
4.0
%
100.0
%

14
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 4—Investments (continued)

Fair Value Measurements at December 31, 2017 using:
Description
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total Fair
Value
Fixed maturities available for sale:
U.S. Government direct, guaranteed, and government-sponsored enterprises
$
—

$
407,446

$
—

$
407,446

States, municipalities, and political subdivisions
44

1,219,671

—

1,219,715

Foreign governments
—

22,018

—

22,018

Corporates, by sector:


Financial
—

3,673,089

62,006

3,735,095

Utilities
—

2,168,115

155,730

2,323,845

Energy
—

1,779,281

40,816

1,820,097

Other corporate sectors
—

6,468,541

324,258

6,792,799

Total corporates
—

14,089,026

582,810

14,671,836

Collateralized debt obligations
—

—

71,581

71,581

Other asset-backed securities
—

135,306

14,049

149,355

Redeemable preferred stocks, by sector:
Financial
—

396,786

—

396,786

Utilities
—

30,588

—

30,588

Total redeemable preferred stocks
—

427,374

—

427,374

Total fixed maturities
$
44

$
16,300,841

$
668,440

$
16,969,325

Percentage of total
—
%
96.1
%
3.9
%
100.0
%

The following tables represent an analysis of changes in fair value measurements using significant unobservable inputs (Level 3) for the nine months ended September 30, 2018 and 2017 .
Analysis of Changes in Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
Nine Months Ended September 30, 2018
Asset-
Backed
Securities
Collateralized
Debt
Obligations
Corporates (1)
Total
Balance at January 1, 2018
$
14,049

$
71,581

$
582,810

$
668,440

Total gains or losses:
Included in realized gains/losses
—

—

698

698

Included in other comprehensive income
(950
)
8,691

(21,854
)
(14,113
)
Acquisitions
—

—

27,453

27,453

Sales
—

—

—

—

Amortization
—

3,572

13

3,585

Other (2)
(315
)
(4,928
)
(37,619
)
(42,862
)
Transfers in and/or out of Level 3 (3)
—

—

4,533

4,533

Balance at September 30, 2018
$
12,784

$
78,916

$
556,034

$
647,734

Percent of total fixed maturities
0.1
%
0.5
%
3.4
%
4.0
%
(1)
Includes redeemable preferred stocks.
(2)
Includes capitalized interest, foreign exchange adjustments, and principal repayments.
(3)
Considered to be transferred at the end of the period. Transfers into Level 3 occur when observable inputs are no longer available. Transfers out of Level 3 occur when observable inputs become available.

15
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 4—Investments (continued)


Nine Months Ended September 30, 2017
Asset-
Backed
Securities
Collateralized
Debt
Obligations
Corporates (1)
Total
Balance at January 1, 2017
$
—

$
63,503

$
559,600

$
623,103

Total gains or losses:
Included in realized gains/losses
—

—

—

—

Included in other comprehensive income
595

7,787

10,614

18,996

Acquisitions
14,000

—

21,666

35,666

Sales
—

—

—

—

Amortization
—

3,705

14

3,719

Other (2)
(212
)
(5,227
)
(7,411
)
(12,850
)
Transfers in and/or out of Level 3 (3)
—

—

—

—

Balance at September 30, 2017
$
14,383

$
69,768

$
584,483

$
668,634

Percent of total fixed maturities
0.1
%
0.4
%
3.5
%
4.0
%
(1)
Includes redeemable preferred stocks.
(2)
Includes capitalized interest, foreign exchange adjustments, and principal repayments.
(3)
Considered to be transferred at the end of the period. Transfers into Level 3 occur when observable inputs are no longer available. Transfers out of Level 3 occur when observable inputs become available.


The following table presents transfers in and out of each of the valuation levels of fair values.
Nine Months Ended September 30,
2018
2017
In
Out
Net
In
Out
Net
Level 1
$
—

$
—

$
—

$
42,328

$
(597
)
$
41,731

Level 2
—

(4,533
)
(4,533
)
597

(42,328
)
(41,731
)
Level 3
4,533

—

4,533

—

—

—



16
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 4—Investments (continued)

Fair Value Option :

As discussed in Note 2—New Accounting Standards , the Company elected the fair value option in the first quarter of 2018, subsequent to the adoption of ASU 2016-01, to record its investment in certain limited partnerships at fair value with changes recognized in "Realized Investment Gains (Losses)" in the Condensed Consolidated Statements of Operations . Distributions received on a semi-annual basis are recorded in Net Investment Income. The limited partnerships are recorded in Other Long-Term Investments on the Condensed Consolidated Balance Sheets .

The following table represents the fair value of investments elected for the fair value option method measured on a recurring basis at September 30, 2018 , and the changes in fair value for the nine months ended September 30, 2018 .
Fair Value Measurements at September 30, 2018
Changes in Fair Values for the Period for Items Measured at Fair Value Pursuant to Election of the Fair Value Option
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs
(Level 3)
Total Fair Value
Net Gains and Losses Recognized During the Period
Less Net Gains and Losses Recognized due to Sales
Total Changes in Fair Values Included in Current-Period Earnings
Limited partnerships
$
—

$
107,996

$
—

$
107,996

$
2,405

$
—

$
2,405


Other-Than-Temporary Impairments :

In accordance with the other-than-temporary impairment (OTTI) policy, the Company evaluated its fixed maturities available for sale in an unrealized loss position to determine if there was any impairment for the quarter. Gross unrealized losses may fluctuate quarter over quarter due to adverse factors in the market that affect our holdings, such as changes in the interest rates or credit spreads. While the Company holds securities that may be in an unrealized loss position from time to time, Torchmark has the ability and intent to hold these investments to recovery. Additionally, Torchmark does not expect to be required to sell any of its securities due to the strong cash flows generated by its insurance operations.

For the nine months ended September 30, 2018 , the Company concluded that there were no other-than-temporary impairments. For the nine months ended September 30, 2017 , the Company recorded $245 thousand ( $159 thousand , net of tax) in OTTI.

Unrealized Loss Analysis :

The following table discloses information about fixed maturities available for sale in an unrealized loss position.
Less than
Twelve Months
Twelve Months
or Longer
Total
Number of issues (CUSIP numbers) held:
As of September 30, 2018
598

122

720

As of December 31, 2017
92

102

194


Torchmark’s entire fixed maturity portfolio consisted of 1,538 issues at September 30, 2018 and 1,502 issues at December 31, 2017 . The weighted average quality rating of all unrealized loss positions as of September 30, 2018 was BBB+ compared with BBB- as of December 31, 2017 .

17
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 4—Investments (continued)

The following tables disclose unrealized investment losses by class and major sector of fixed maturities available for sale at September 30, 2018 and December 31, 2017 , respectively. Torchmark considers these investments to be only temporarily impaired.
Analysis of Gross Unrealized Investment Losses
At September 30, 2018
Less than
Twelve Months
Twelve Months
or Longer
Total
Description of Securities
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fixed maturities available for sale:
Investment grade securities:
U.S. Government direct, guaranteed, and government-sponsored enterprises
$
291,797

$
(8,844
)
$
66,160

$
(2,799
)
$
357,957

$
(11,643
)
States, municipalities and political subdivisions
181,894

(4,832
)
1,632

(21
)
183,526

(4,853
)
Corporates, by sector:
Financial
934,194

(38,148
)
69,993

(5,518
)
1,004,187

(43,666
)
Utilities
420,921

(17,417
)
45,084

(3,540
)
466,005

(20,957
)
Energy
216,903

(8,981
)
49,052

(7,689
)
265,955

(16,670
)
Other corporate sectors
2,611,151

(122,430
)
235,655

(25,153
)
2,846,806

(147,583
)
Total corporates
4,183,169

(186,976
)
399,784

(41,900
)
4,582,953

(228,876
)
Other asset-backed securities
64,963

(872
)
—

—

64,963

(872
)
Redeemable preferred stocks, by sector:
Financial
10,050

(725
)
—

—

10,050

(725
)
Utilities
—

—

5,594

(414
)
5,594

(414
)
Total redeemable preferred stocks
10,050

(725
)
5,594

(414
)
15,644

(1,139
)
Total investment grade securities
4,731,873

(202,249
)
473,170

(45,134
)
5,205,043

(247,383
)
Below investment grade securities:
Corporates, by sector:








Financial
24,873

(5,895
)
62,073

(12,884
)
86,946

(18,779
)
Utilities
15,059

(48
)
—

—

15,059

(48
)
Energy
12,647

(533
)
68,890

(20,775
)
81,537

(21,308
)
Other corporate sectors
47,218

(1,713
)
68,813

(15,876
)
116,031

(17,589
)
Total corporates
99,797

(8,189
)
199,776

(49,535
)
299,573

(57,724
)
Collateralized debt obligations
—

—

15,003

(4,997
)
15,003

(4,997
)
Redeemable preferred stocks, by sector:
Financial
—

—

23,611

(3,472
)
23,611

(3,472
)
Total redeemable preferred stocks
—

—

23,611

(3,472
)
23,611

(3,472
)
Total below investment grade securities
99,797

(8,189
)
238,390

(58,004
)
338,187

(66,193
)
Total fixed maturities
$
4,831,670

$
(210,438
)
$
711,560

$
(103,138
)
$
5,543,230

$
(313,576
)


18
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 4—Investments (continued)

Analysis of Gross Unrealized Investment Losses
At December 31, 2017
Less than
Twelve Months
Twelve Months
or Longer
Total
Description of Securities
Fair
Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fixed maturities available for sale:
Investment grade securities:
U.S. Government direct, guaranteed, and government-sponsored enterprises
$
34,388

$
(422
)
$
47,514

$
(951
)
$
81,902

$
(1,373
)
States, municipalities and political subdivisions
4,561

(21
)
1,771

(9
)
6,332

(30
)
Corporates, by sector:
Financial
133,080

(652
)
35,302

(1,429
)
168,382

(2,081
)
Utilities
48,562

(569
)
32,345

(729
)
80,907

(1,298
)
Energy
23,463

(81
)
67,775

(3,682
)
91,238

(3,763
)
Other corporate sectors
220,661

(2,312
)
163,886

(4,257
)
384,547

(6,569
)
Total corporates
425,766

(3,614
)
299,308

(10,097
)
725,074

(13,711
)
Redeemable preferred stocks, by sector:
Utilities
—

—

5,953

(97
)
5,953

(97
)
Total redeemable preferred stocks
—

—

5,953

(97
)
5,953

(97
)
Total investment grade securities
464,715

(4,057
)
354,546

(11,154
)
819,261

(15,211
)
Below investment grade securities:
States, municipalities and political subdivisions
200

(105
)
—

—

200

(105
)
Corporates, by sector:
Financial
—

—

84,432

(21,311
)
84,432

(21,311
)
Energy
8,114

(104
)
75,204

(21,525
)
83,318

(21,629
)
Other corporate sectors
25,334

(5,066
)
54,383

(8,981
)
79,717

(14,047
)
Total corporates
33,448

(5,170
)
214,019

(51,817
)
247,467

(56,987
)
Collateralized debt obligations
—

—

12,347

(7,653
)
12,347

(7,653
)
Redeemable preferred stocks, by sector:
Financial
—

—

24,376

(2,727
)
24,376

(2,727
)
Total redeemable preferred stocks
—

—

24,376

(2,727
)
24,376

(2,727
)
Total below investment grade securities
33,648

(5,275
)
250,742

(62,197
)
284,390

(67,472
)
Total fixed maturities
$
498,363

$
(9,332
)
$
605,288

$
(73,351
)
$
1,103,651

$
(82,683
)



19
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)


Note 5—Income Taxes

In 2017, the newly enacted tax legislation revised the corporate income tax rate from 35% to 21%, effective January 1, 2018. The change in tax rates was the primary reason for the difference in the Company’s effective tax rate as compared with the prior year periods.

The effective income tax rate differed from the expected rate for the three and nine month periods ended September 30, 2018 and 2017 as shown below:
Three Months Ended September 30,
2018
%
2017
%
Expected income taxes
$
46,270

21.0

$
77,214

35.0

Increase (reduction) in income taxes resulting from:
Low income housing investments
(2,779
)
(1.3
)
(4,367
)
(2.0
)
Share-based awards
(2,601
)
(1.2
)
(5,075
)
(2.3
)
Other
740

0.4

(508
)
(0.2
)
Income tax expense (benefit) from continuing operations
$
41,630

18.9

$
67,264

30.5


Nine Months Ended September 30,
2018
%
2017
%
Expected income taxes
$
138,608

21.0

$
214,997

35.0

Increase (reduction) in income taxes resulting from:
Low income housing investments
(9,428
)
(1.4
)
(13,665
)
(2.2
)
Share-based awards
(6,855
)
(1.0
)
(14,513
)
(2.4
)
Other
907

0.1

(3,429
)
(0.5
)
Income tax expense (benefit) from continuing operations
$
123,232

18.7

$
183,390

29.9


As of December 31, 2017, the Company recorded $877 million of tax benefits in net income, which results from remeasuring its deferred tax assets and liabilities using the lower corporate tax rate as of the legislation’s enactment date. The Company was able to determine that the adjustment recorded in 2017 was a reasonable estimate of the impact of the tax legislation in accordance with SAB 118. The guidance allows companies up to one year to finalize the impact. The Company did not make any adjustments to this estimate for the period ended September 30, 2018 . However, the Company will continue to analyze relevant information to complete the accounting for income taxes process in the fourth quarter of 2018.

Note 6—Commitments and Contingencies

Litigation :

Torchmark and its subsidiaries, in common with the insurance industry in general, are subject to litigation involving various matters where we are either the defendant or the plaintiff. Torchmark subsidiaries are also currently the subject of audits regarding the identification, reporting and escheatment of unclaimed property arising from life insurance policies and a limited number of annuity contracts. In each of these matters, based upon information presently available, management does not believe that such litigation or audits will have a material adverse effect on Torchmark’s financial condition, future operating results or liquidity.

On February 1, 2018, putative class action litigation was filed against American Income Life Insurance Company in U.S. District Court for the Northern District of Texas, Dallas Division ( Bruce v. American Income Life Insurance Company, et al. , Case No. 3:18-cv-00258-G). The plaintiff, a former insurance sales agent of American Income who is suing on

20
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 6—Commitments and Contingencies (continued)


behalf of all current and former American Income sales agents contracted through State General Agent Stephen Jubrey’s agency office at any time since January 31, 2015 through the final disposition of this matter, asserts that such agents are employees rather than independent contractors as they are classified by American Income. He alleges failure to pay minimum wages, overtime wages and other applicable monies in accordance with the Fair Labor Standards Act. The plaintiff seeks, in a jury trial, actual and punitive damages, pre- and post-judgment interest, attorney fees, costs and other relief, including injunctive relief. On February 27, 2018, the Company filed a motion to compel arbitration of this matter and on July 27, 2018, the Court granted the Company’s motion.

On September 12, 2018, putative class action litigation was filed against American Income Life Insurance Company in California’s Contra Costa County Superior Court ( Joh v. American Income Life Insurance Company , Case No. C18-01863). The plaintiff, a former insurance sales agent of American Income, is suing on behalf of all current and former sales agents who sold insurance for American Income in the state of California for the last four years prior to the filing of the complaint. The complaint alleges that sales agents are employees and asserts claims under the California Labor Code and California Business and Professions Code. The complaint seeks compensatory damages, penalties and attorney fees on claims for failure to pay wages/commissions, failure to appropriately pay agents at termination, failure to provide itemized wage statements, failure to reimburse expenses and unfair business practices. The Company continues to assess the amount and thus does not have a reasonable estimate of any potential liability.

On October 18, 2018, putative class action litigation was filed against Torchmark Corporation and American Income Life Insurance Company in California’s Los Angeles County Superior Court ( Golz v. American Income Life Insurance Company , et al Case No. 18STCV01354). The complaint alleges that the putative class members are employees and asserts claims under the California Labor Code, California Business and Professions Code, and the Fair Labor Standards Act. The complaint alleges that plaintiff was an American Income insurance agent trainee in California who seeks to represent classes of individuals whom American Income classified as independent contractors during the class periods alleged. One class period based on California Labor Code claims is alleged to begin four years prior to the complaint’s filing. Another class period, which is based on the Fair Labor Standards Act claim, is alleged to begin three years prior to the complaint’s filing and is pleaded as a national class. The complaint seeks compensatory damages, penalties, and attorney fees on claims for failure to pay wages due, failure to appropriately pay wages at termination, failure to provide itemized wage statements, and unfair business practices. The Company continues to assess the amount and thus does not have a reasonable estimate of any potential liability.
With respect to current litigation, at this time management believes that the possibility of a material judgment adverse to Torchmark is remote, and no estimate of range can be made for loss contingencies that are at least reasonably possible but not accrued.

Guarantees:

Torchmark has guaranteed letters of credit in connection with its credit facility with a group of banks. The letters of credit were issued by TMK Re, Ltd., a wholly-owned subsidiary, to secure TMK Re, Ltd.’s obligation for claims on certain policies reinsured by TMK Re, Ltd. that were sold by other Torchmark insurance companies. These letters of credit facilitate TMK Re, Ltd.’s ability to reinsure the business of Torchmark’s insurance carriers. The agreement expires in 2021. The maximum amount of letters of credit available is $250 million . Torchmark would be liable to the extent that TMK Re, Ltd. does not pay the reinsured party. On March 14, 2018, the letters of credit were amended to reduce the current amount outstanding to $155 million from $177 million as of December 31, 2017.


21
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)


Note 7—Liability for Unpaid Claims

Activity in the liability for unpaid health claims is summarized as follows:
Nine Months Ended
September 30,
2018
2017
Balance at beginning of period
$
146,865

$
143,128

Incurred related to:
Current year
411,662

393,747

Prior years
(3,795
)
(10,745
)
Total incurred
407,867

383,002

Paid related to:
Current year
293,800

279,563

Prior years
113,109

103,010

Total paid
406,909

382,573

Balance at end of period
$
147,823

$
143,557


Below is the reconciliation of the liability for "Policy claims and other benefits payable" in the Condensed Consolidated Balance Sheets .
September 30,
2018
December 31, 2017
Policy claims and other benefits payable:
Life insurance
$
190,158

$
186,429

Health insurance
147,823

146,865

Total
$
337,981

$
333,294



22
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)


Note 8—Postretirement Benefits
The following tables present a summary of post-retirement benefit costs by component for the three and nine month periods ended September 30, 2018 and 2017 .
Components of Post-Retirement Benefit Costs
Three Months Ended September 30,
Pension Benefits
Other Benefits
2018
2017
2018
2017
Service cost
$
5,277

$
4,486

$
—

$
—

Interest cost
5,496

5,552

228

249

Expected return on assets
(6,363
)
(5,900
)
—

—

Amortization:
Prior service cost
119

118

—

—

Actuarial (gain) loss
3,636

2,952

23

38

Direct recognition of expense
—

—

80

111

Net periodic benefit cost
$
8,165

$
7,208

$
331

$
398

Nine Months Ended September 30,
Pension Benefits
Other Benefits
2018
2017
2018
2017
Service cost
$
15,831

$
13,457

$
—

$
—

Interest cost
16,482

16,653

684

749

Expected return on assets
(19,089
)
(17,697
)
—

—

Amortization:
Prior service cost
357

356

—

—

Actuarial (gain) loss
10,908

8,855

69

115

Direct recognition of expense
—

—

305

323

Net periodic benefit cost
$
24,489

$
21,624

$
1,058

$
1,187



23
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)

Note 8—Postretirement Benefit Plans (continued)

The following tables present the assets of Torchmark’s defined benefit pension plans at September 30, 2018 and December 31, 2017 .
Pension Assets by Component at September 30, 2018
Fair Value Determined by:
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total
Amount
% to
Total
Corporate bonds:
Financial
$
$
47,522

$
$
47,522

11
Utilities
39,258

39,258

9
Energy
23,632

23,632

6
Other corporates
84,388

84,388

20
Total corporate bonds
—

194,800

—

194,800

46
Exchange traded fund (1)
181,449

181,449

43
Other bonds
242

242

—
Other long-term investments
5,366

5,366

1
Guaranteed annuity contract (2)
26,418

26,418

7
Short-term investments
9,304

9,304

2
Other
4,179

4,179

1
Total Pension Assets
$
194,932

$
226,826

$
—

$
421,758

100
(1)
A fund including marketable securities that mirror the S&P 500 index.
(2)
Representing a guaranteed annuity contract issued by Torchmark's subsidiary, American Income Life Insurance Company, to fund the obligations of the American Income Pension Plan.
Pension Assets by Component at December 31, 2017
Fair Value Determined by:
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total
Amount
% to
Total
Corporate bonds:
Financial
$
$
43,451

$
$
43,451

12
Utilities
46,144

46,144

12
Energy
25,023

25,023

7
Other corporates
65,888

65,888

17
Total corporate bonds
—

180,506

—

180,506

48
Exchange traded fund (1)
164,351

164,351

43
Other bonds
256

256

—
Other long-term investments
2,304

2,304

1
Guaranteed annuity contract (2)
21,202

21,202

6
Short-term investments
3,984

3,984

1
Other
5,021

5,021

1
Total Pension Assets
$
173,356

$
204,268

$
—

$
377,624

100
(1)
A fund including marketable securities that mirror the S&P 500 index.
(2)
Representing a guaranteed annuity contract issued by Torchmark's subsidiary, American Income Life Insurance Company, to fund the obligations of the American Income Pension Plan.


24
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands except per share data)

Note 8—Postretirement Benefit Plans (continued)


The following table presents liabilities for the defined-benefit pension plans at September 30, 2018 and December 31, 2017 .
Pension Liability
September 30,
2018
December 31, 2017
Funded defined benefit pension
$
494,323

$
518,141

SERP (1)
85,732

84,465

Pension Benefit Obligation
$
580,055

$
602,606

(1)
Supplemental executive retirement plan (SERP).

The following table includes information regarding the SERP at September 30, 2018 and December 31, 2017 .
September 30,
2018
December 31, 2017
Premiums paid for insurance coverage
$
2,997

$
2,050

Total investments:
Company owned life insurance
$
43,976

$
40,273

Exchange traded funds
56,776

55,442

$
100,752

$
95,715



Liability:


Active plan
$
83,320

$
81,457

Closed plan
2,412

3,008

$
85,732

$
84,465


Note 9—Earnings Per Share
A reconciliation of basic and diluted weighted-average shares outstanding is as follows:
Three Months Ended September 30,
Nine Months Ended
September 30,
2018
2017
2018
2017
Basic weighted average shares outstanding
112,587,623

115,921,134

113,366,465

116,772,652

Weighted average dilutive options outstanding
2,386,831

2,521,815

2,418,281

2,540,955

Diluted weighted average shares outstanding
114,974,454

118,442,949

115,784,746

119,313,607

Antidilutive shares
1,375,186

—

1,097,439

1,174,469



25
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)


Note 10—Debt
Issuance of long-term debt: On September 27, 2018, Torchmark completed the issuance and sale of $550 million in aggregate principal of Torchmark’s 4.55% Senior Notes due September 15, 2028 . The notes were sold pursuant to Torchmark’s shelf registration statement on Form S-3. The net proceeds from the sale of the notes were $543 million , after giving effect to the underwriting discounts and commissions and offering expenses payable by Torchmark. Torchmark used the net proceeds from the sale of the notes to redeem the $293 million outstanding principal amount on Torchmark’s 9.25% Senior Notes on October 29, 2018, the payment of $10.7 million for the make-whole premium plus accrued and unpaid interest to, but excluding, the date of redemption of such Senior Notes, and to fund $150 million of additional capital to its insurance subsidiaries. Torchmark intends to use any remaining net proceeds for general corporate purposes, which may include additional holding company liquidity and the repayment of a portion of Torchmark’s outstanding commercial paper.

Note 11—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

26
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 11—Business Segments (continued)

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.


27
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 11—Business Segments (continued)

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.


28
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 11—Business Segments (continued)


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.













29
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 11—Business Segments (continued)

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.








30
TMK 2018 FORM 10-Q QTR 3

TORCHMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share data)

Note 11—Business Segments (continued)

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.








31
TMK 2018 FORM 10-Q QTR 3


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations

How Torchmark Views Its Operations: Torchmark is the holding company for a group of insurance companies which primarily market individual life and supplemental health insurance to middle income households throughout the United States. We view our operations by segments, which are the insurance product lines of life, health, and annuities, and the investment segment that supports the product lines. Segments are aligned based on their common characteristics, comparability of the profit margins, and management techniques used to operate each segment.
Insurance Product Line Segments. The insurance product line segments involve the marketing, underwriting, and the administration of policies. Each product line is further segmented by the various distribution units that market the insurance policies. Each distribution unit operates in a niche market offering insurance products designed for that particular market. Whether analyzing profitability of a segment as a whole, or the individual distribution units within the segment, the measure of profitability used by management is the underwriting margin, which is:
Premium revenue
Less:
Policy obligations
Policy acquisition costs and commissions
Investment Segment. The investment segment involves the management of our capital resources, including investments and the management of corporate debt and liquidity. Our measure of profitability for the investment segment is excess investment income, which is:
Net investment income
Less:
Required interest on net policy liabilities
Financing costs

See analysis of profitability by segment below.
















32
TMK 2018 FORM 10-Q QTR 3


Current Highlights, comparing the first nine months of 2018 with the first nine months of 2017 .
•
Net income as a return on equity (ROE) was 12.4% (1) and net operating income as an ROE, excluding net unrealized gains on the fixed maturity portfolio was 14.7% (1,2) .

•
Total premium increased 4% over the prior year to $2.6 billion . Life premium increased 5% over the prior year to $1.8 billion . Life underwriting margin increased 9% from $444 million in 2017 to $485 million in 2018 .

•
Through September 30, 2018 , the Company repurchased 3 million shares at a total cost of $250 million for an average share price of $85.54 .

The following represents net income and net operating income for the nine months ended September 30, 2018 and 2017 .
a10qchartni.jpg a10qchartnoi.jpg
(1)
In 2017, new tax legislation revised the corporate income tax rate from 35% to 21% effective January 1, 2018. See Note 5—Income Taxes for further discussion. In 2018 , income tax expense was calculated based on the 21% rate as compared with a 35% rate for 2017 .
(2)
Net operating income is considered a non-GAAP measure and it has been used consistently by Torchmark’s management for many years to evaluate the operating performance of the Company, and is a measure commonly used in the life insurance industry. It differs from net income primarily because it excludes certain non-operating items such as realized investment gains and losses and certain significant and unusual items included in net income. Net income is the most directly comparable GAAP measure.
Net operating income as an ROE, excluding net unrealized gains on the fixed maturity portfolio, is also considered a non-GAAP measure. Management utilizes this measure to view the business without the effect of the unrealized gains or losses, which are primarily attributable to fluctuation in interest rates on the available for sale portfolio.

Summary of Operations . Net income increased 26% to $537 million during the first nine months of 2018, compared with $427 million in the same period in 2017. This increase was primarily related to the tax reform enacted in 2017 which reduced corporate income tax rates. Included in net income were after-tax realized gains of $12 million in 2018 , compared with realized after-tax gains of $6 million for the same period in 2017 . On a diluted per common share basis, net income per common share for the nine months ended September 30, 2018 increased 30% from $3.58 to $4.64 . The per share results have exceeded the growth in dollar amounts due to our share repurchase program. Realized gains and losses are presented more fully under the caption Realized Gains and Losses in this report.
Net operating income is the consolidated total of segment profits after-tax and as such is considered a non-GAAP measure. Net operating income increased 24% , or $103 million , to $530 million for the nine months ended September 30, 2018 , compared with $427 million for the same 2017 period.



33
TMK 2018 FORM 10-Q QTR 3


Torchmark's operations on a segment-by-segment basis are discussed in depth below. The life insurance segment is our strongest segment and the largest contributor to earnings in each year presented.

Analysis of Profitability by Segment
(Dollar amounts in thousands)
Nine Months Ended
September 30,
2018
2017
Change
%
Life insurance underwriting margin
$
484,594

$
444,164

$
40,430

9

Health insurance underwriting margin
177,839

164,382

13,457

8

Annuity underwriting margin
7,716

7,866

(150
)
(2
)
Excess investment income
183,414

181,758

1,656

1

Other insurance:
Other income
1,180

1,239

(59
)
(5
)
Administrative expense
(166,560
)
(155,751
)
(10,809
)
7

Corporate and other
(37,775
)
(32,037
)
(5,738
)
18

Pre-tax total
650,408

611,621

38,787

6

Applicable taxes
(120,456
)
(184,703
)
64,247

(35
)
Net operating income
529,952

426,918

103,034

24

Reconciling items, net of tax:

Realized gains (losses)
11,689

6,235

5,454

Part D adjustment - discontinued operations
(55
)
(3,739
)
3,684

Non-operating costs
(1,247
)
—

(1,247
)
Administrative settlements
(3,590
)
(1,361
)
(2,229
)
Guaranty Fund Assessment
—

(905
)
905

Net income
$
536,749

$
427,148

$
109,601

26

Total premium income rose 4% for the nine months ended September 30, 2018 to $2.6 billion . Total net sales increased 2% to $428 million , when compared with the same period in 2017 . First-year collected premium was $350 million for the 2018 period, compared with $339 million for the 2017 period.
Life insurance premium income increased 5% to $1.8 billion over the prior year total of $1.7 billion . Life net sales fell 1% to $313 million for the nine month period of 2018 . First-year collected life premium rose 1% to $241 million . Life underwriting margins, as a percent of premium, increased to 27% in 2018 from 26% in the prior year period, due to lower policy obligations. Underwriting income increased to $485 million for the first nine months of 2018 , 9% over the same period in 2017 .
Health insurance premium income increased 4% to $758 million over the prior year total of $731 million . Health net sales rose 11% to $115 million for the nine month period of 2018 . First-year collected health premium rose 9% to $109 million . Health underwriting margins, as a percent of premium, were flat at 23% in both 2018 and 2017 . Underwriting income increased to $178 million for the first nine months of 2018 , 8% over the same period in 2017 .
Excess investment income, the measure of profitability of our investment segment, increased 1% during the first nine months of 2018 to $183 million from $182 million in the same period in 2017 . Growth in excess investment income continues to be impeded by investing at yields lower than the yield on dispositions and the average yield on the entire portfolio. Excess investment income per common share, reflecting the impact of our share repurchase program, increased 4% in 2018 to $1.58 from $1.52 in the same period last year.
Insurance administrative expenses were up 6.9% in 2018 when compared with the prior year period. These expenses were 6.5% as a percentage of premium during the first nine months of 2018 compared with 6.3% a year earlier. The increase in administrative expenses was primarily due to an increase in pension and other employee costs and investments in information technology.


34
TMK 2018 FORM 10-Q QTR 3


Share Repurchases. We have an on-going share repurchase program which began in 1986 that is reviewed quarterly and is reaffirmed by the Board of Directors on an annual basis. The program was reaffirmed on August 7, 2018 . 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 Company with excess cash flow. Excess cash flow is primarily made up of cash received from the insurance subsidiaries less dividends paid to shareholders and interest paid on our debt. See further discussion in the Capital Resources section below. 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 nine month periods ended September 30, 2018 and 2017 .

Analysis of Share Purchases
(Amounts in thousands, except per share data)
Nine Months Ended September 30,
2018
2017
Shares
Amount
Average
Price
Shares
Amount
Average
Price
Purchases with:
Excess cash flow at the Parent Company
2,919

$
249,670

$
85.54

3,176

$
242,841

$
76.46

Option exercise proceeds
555

48,644

87.57

760

58,607

77.16

Total
3,474

$
298,314

$
85.87

3,936

$
301,448

$
76.59

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

A detailed discussion of our operations by component segment follows.
Life insurance, comparing the first nine months of 2018 with the first nine months of 2017 . Life insurance is our predominant segment, representing 70% of premium income and 72% of insurance underwriting margin in the first nine months of 2018 . In addition, investments supporting the reserves for life business generate the majority of investment income attributable to the investment segment.

We use three statistical measures as indicators of premium growth and sales over the near term: “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 annualized premium issued (Gross premium that would be received during the policies' first year in force and assuming that none of the policies lapsed or terminated.), net of cancellations in the first thirty days after issue, except in the case of Globe Life Direct Response where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer period has expired. We believe that net sales is a better indicator of the rate of premium growth as compared to annualized premium issued.

•
First-year collected premium is defined as the premium collected during the reporting period for all policies in their first policy year. First-year collected premium takes lapses into account in the first 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.


35
TMK 2018 FORM 10-Q QTR 3


The following table presents the summary of results for life insurance.
Life Insurance
Summary of Results
(Dollar amounts in thousands)
Nine Months Ended September 30,
Increase
2018
2017
(Decrease)
Amount
% of
Premium
Amount
% of
Premium
Amount
%
Premium and policy charges
$
1,806,384

100

$
1,725,896

100

$
80,488

5
Policy obligations
1,196,616

66

1,166,289

67

30,327

3
Required interest on reserves
(474,373
)
(26
)
(452,339
)
(26
)
(22,034
)
5
Net policy obligations
722,243

40

713,950

41

8,293

1
Commissions, premium taxes, and non-deferred acquisition expenses
142,253

8

132,094

8

10,159

8
Amortization of acquisition costs
457,294

25

435,688

25

21,606

5
Total expense
1,321,790

73

1,281,732

74

40,058

3
Insurance underwriting margin before other income and administrative expenses
$
484,594

27

$
444,164

26

$
40,430

9

The following table presents Torchmark’s life insurance premium by distribution channel.
Life Insurance
Premium by Distribution Channel
(Dollar amounts in thousands)
Nine Months Ended September 30,
Increase
2018
2017
(Decrease)
Amount
% of
Total
Amount
% of
Total
Amount

%
American Income Exclusive Agency
$
805,372

45
$
741,392

43
$
63,980

9

Globe Life Direct Response
628,525

35
613,568

35
14,957

2

Liberty National Exclusive Agency
209,224

11
205,775

12
3,449

2

Other Agencies
163,263

9
165,161

10
(1,898
)
(1
)
Total
$
1,806,384

100
$
1,725,896

100
$
80,488

5


Annualized life premium in force was $2.5 billion at September 30, 2018 , an increase of 4% over $2.4 billion a year earlier.


36
TMK 2018 FORM 10-Q QTR 3


An analysis of life net sales, an indicator of new business production, by distribution channel is presented below.
Life Insurance
Net Sales by Distribution Channel
(Dollar amounts in thousands)
Nine Months Ended September 30,
Increase
2018
2017
(Decrease)
Amount
% of
Total
Amount
% of
Total
Amount
%
American Income Exclusive Agency
$
169,442

54
$
167,478

53
$
1,964

1

Globe Life Direct Response
96,978

31
106,652

34
(9,674
)
(9
)
Liberty National Exclusive Agency
36,189

12
34,609

11
1,580

5

Other Agencies
9,901

3
7,501

2
2,400

32

Total
$
312,510

100
$
316,240

100
$
(3,730
)
(1
)

First-year collected life premium by distribution channel is presented in the table below.
Life Insurance
First-Year Collected Premium by Distribution Channel
(Dollar amounts in thousands)
Nine Months Ended September 30,
Increase
2018
2017
(Decrease)
Amount
% of
Total
Amount
% of
Total
Amount

%
American Income Exclusive Agency
$
143,498

60
$
135,935

57
$
7,563

6

Globe Life Direct Response
62,889

26
70,989

30
(8,100
)
(11
)
Liberty National Exclusive Agency
27,369

11
24,587

10
2,782

11

Other Agencies
7,424

3
7,325

3
99

1

Total
$
241,180

100
$
238,836

100
$
2,344

1


While American Income Exclusive Agency has historically marketed primarily to members of labor unions, this agency has diversified in recent years by focusing heavily on other affinity groups, third party internet vendor leads, and referrals which has driven growth despite declines in North American union membership. This agency is Torchmark’s largest contributor to life premium at 45% of Torchmark’s 2018 year-to-date total. This agency produced premium income during the first nine months of $805 million , an increase of 9% over the comparable prior year period of $741 million . First-year collected premium was $143 million , an increase of 6% . Net sales increased 1% to $169 million in 2018 over the 2017 total of $167 million . Over the long-term, sales growth in our exclusive agencies is generally dependent on growth in the size of the agency force. The American Income Exclusive Agency's average agent count was flat at 6,983 for the nine months ended September 30, 2018 , compared with 6,962 for the same period in 2017 . As is the case with all Torchmark agencies, the average agent count is based on the actual count at the end of each week during the period.
The American Income Exclusive Agency continues to focus on growing and strengthening middle management to support sustainable growth of the agency force. To accomplish this, the agency places an emphasis on agent training programs and financial incentives that appropriately reward agents at all levels for helping develop and train its agents, including 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 their level of experience and responsibility. We have made considerable investments in information technology in support of the agency, including the launching of a lead mapping and management tool to the agency force. We anticipate this tool will help the agency enhance agent productivity and agent retention.

37
TMK 2018 FORM 10-Q QTR 3


The Globe Life 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 Globe Life Direct Response channel’s growth has been fueled over the years 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 continually introduce new initiatives in this unit in an attempt to increase response rates.
While the juvenile market is an important source of sales, it also is a vehicle to reach the parents and grandparents of juvenile policyholders, who are more likely to respond favorably to a Globe Life Direct Response solicitation for life coverage on themselves than is the general adult population. Also, both juvenile policyholders and their parents are low acquisition-cost targets for sales of additional coverage over time.
Globe Life Direct Response’s life premium income rose 2% to $629 million , representing 35% of Torchmark’s total life premium in the first nine months of 2018 . Net sales for this group decreased 9% due to operational changes designed to maximize profitability on new business. We expect the decline in sales to moderate over the remainder of 2018 . First-year collected premium decreased 11% to $63 million . The underwriting margin, as a percent of premium, was 17% , up from 15% in the nine months ended September 30, 2017 . This increase was primarily attributable to favorable claims in the first nine months compared to higher-than-normal claims in the same period in 2017 .
The Liberty National Exclusive Agency markets individual and group life insurance to middle-income customers. Life premium income for this agency was $209 million in the first nine months of 2018 compared with $206 million for the same period in 2017 . Net sales for the Liberty National Agency increased 5% to $36 million . The continued increases in net sales reflect changes in the structure of the agency that were put in place several years ago. Recent growth in middle management within the agency will help continue this growth. First-year collected premium increased 11% to $27 million . The underwriting margin as a percent of premium was 24% , down from 27% for the nine months ended September 30, 2017 . The decrease is primarily attributable to higher policy obligations during the first nine months compared with slightly lower policy obligations during the same period in 2017. The agency also incurred higher acquisition costs associated with investments in technology and other areas to maximize long term business profits.
The Liberty National average agent count increased 8% to 2,151 for the nine months ended September 30, 2018 compared with 1,985 for the same period in 2017 . We continue to execute our long term plan to grow this agency through expansion from small-town markets in the southeast to more densely populated areas with larger pools of potential agent recruits and customers. Continued expansion of this agency’s presence into more heavily populated, less-penetrated areas will help create long term agency growth. Additionally, the agency's prospecting training program continues to help improve the ability of agents to develop new worksite marketing business.
The Other Agencies distribution channels primarily include independent agencies selling predominantly life insurance. The Other Agencies contributed $163 million of life premium income, or 9% of Torchmark’s total in the first nine months of 2018 , but contributed only 3% of net sales for the period.

38
TMK 2018 FORM 10-Q QTR 3


Health insurance, comparing the first nine months of 2018 with the first nine months of 2017 . Health insurance sold by Torchmark includes Medicare Supplement insurance and limited-benefit plans (e.g. dread disease and critical illness coverage).
Health premium accounted for 30% of our total premium in the 2018 period. Health underwriting margin accounted for 27% of total underwriting margin, reflective of the lower underwriting margin as a percentage 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 investment income.

The following table presents underwriting margin data for health insurance.

Health Insurance
Summary of Results
(Dollar amounts in thousands)
Nine Months Ended September 30,
Increase
2018
2017
(Decrease)
Amount
% of
Premium
Amount
% of
Premium
Amount
%
Premium
$
758,439

100

$
730,557

100

$
27,882

4
Policy obligations
483,654

64

470,104

64

13,550

3
Required interest on reserves
(62,095
)
(8
)
(57,859
)
(8
)
(4,236
)
7
Net policy obligations
421,559

56

412,245

56

9,314

2
Commissions, premium taxes, and non-deferred acquisition expenses
66,502

9

64,599

9

1,903

3
Amortization of acquisition costs
92,539

12

89,331

12

3,208

4
Total expense
580,600

77

566,175

77

14,425

3
Insurance underwriting margin before other income and administrative expense
$
177,839

23

$
164,382

23

$
13,457

8



39
TMK 2018 FORM 10-Q QTR 3



The following table is an analysis of our health premium by distribution channel.

Health Insurance
Premium by Distribution Channel
(Dollar amounts in thousands)
Nine Months Ended September 30,
Increase
2018
2017
(Decrease)
Amount
% of
Total
Amount
% of
Total
Amount
%
United American Independent Agency
Limited-benefit plans
$
8,370

$
8,686

$
(316
)
(4
)
Medicare Supplement
275,365

263,904

11,461

4

283,735

37
272,590

37
11,145

4

Family Heritage Agency
Limited-benefit plans
202,915

188,350

14,565

8

Medicare Supplement
—

—

—

—

202,915

27
188,350

26
14,565

8

Liberty National Exclusive Agency
Limited-benefit plans
110,617

108,085

2,532

2

Medicare Supplement
33,981

39,988

(6,007
)
(15
)
144,598

19
148,073

20
(3,475
)
(2
)
American Income Exclusive Agency
Limited-benefit plans
69,579

66,077

3,502

5

Medicare Supplement
172

198

(26
)
(13
)
69,751

9
66,275

9
3,476

5

Direct Response
Limited-benefit plans
338

425

(87
)
(20
)
Medicare Supplement
57,102

54,844

2,258

4

57,440

8
55,269

8
2,171

4

Total Health Premium
Limited-benefit plans
391,819

52
371,623

51
20,196

5

Medicare Supplement
366,620

48
358,934

49
7,686

2


$
758,439

100
$
730,557

100
$
27,882

4


40
TMK 2018 FORM 10-Q QTR 3


We market supplemental health insurance products through a number of distribution channels. Presented below is a table of health net sales by distribution channel.
Health Insurance
Net Sales by Distribution Channel
(Dollar amounts in thousands)
Nine Months Ended September 30,
Increase
2018
2017
(Decrease)
Amount
% of
Total
Amount
% of
Total
Amount
%
United American Independent Agency
Limited-benefit plans
$
347

$
388

$
(41
)
(11
)
Medicare Supplement
39,868

33,052

6,816

21

40,215

35
33,440

32
6,775

20

Family Heritage Agency
Limited-benefit plans
45,047

41,755

3,292

8

Medicare Supplement
—

—

—

—

45,047

39
41,755

40
3,292

8

Liberty National Exclusive Agency
Limited-benefit plans
15,706

14,558

1,148

8

Medicare Supplement
—

—

—

—

15,706

14
14,558

14
1,148

8

American Income Exclusive Agency
Limited-benefit plans
10,697

10,369

328

3

Medicare Supplement
—

—

—

—

10,697

9
10,369

10
328

3

Direct Response
Limited-benefit plans
—

—

—

—

Medicare Supplement
3,439

3,790

(351
)
(9
)
3,439

3
3,790

4
(351
)
(9
)
Total Net Sales
Limited-benefit plans
71,797

62
67,070

65
4,727

7

Medicare Supplement
43,307

38
36,842

35
6,465

18


$
115,104

100
$
103,912

100
$
11,192

11


41
TMK 2018 FORM 10-Q QTR 3


The following table presents health insurance first-year collected premium by distribution channel.
Health Insurance
First-Year Collected Premium by Distribution Channel
(Dollar amounts in thousands)
Nine Months Ended September 30,
Increase
2018
2017
(Decrease)
Amount
% of
Total
Amount
% of
Total
Amount
%
United American Independent Agency
Limited-benefit plans
$
296

$
344

$
(48
)
(14
)
Medicare Supplement
44,721

39,306

5,415

14

45,017

41

39,650

40

5,367

14

Family Heritage Agency
Limited-benefit plans
35,196

33,116

2,080

6

Medicare Supplement
—

—

—

—

35,196

32

33,116

33

2,080

6

Liberty National Exclusive Agency
Limited-benefit plans
13,330

12,256

1,074

9

Medicare Supplement
—

2

(2
)
(100
)
13,330

12

12,258

12

1,072

9

American Income Exclusive Agency
Limited-benefit plans
11,352

10,840

512

5

Medicare Supplement
—

—

—

—

11,352

11

10,840

11

512

5

Direct Response
Limited-benefit plans
—

—

—

—

Medicare Supplement
3,862

4,108

(246
)
(6
)
3,862

4

4,108

4

(246
)
(6
)
Total First-Year Collected Premium


Limited-benefit plans
60,174

55

56,556

57

3,618

6

Medicare Supplement
48,583

45

43,416

43

5,167

12


$
108,757

100

$
99,972

100

$
8,785

9


A discussion of health operations by distribution channel follows.
The UA Independent Agency consists of independent agencies appointed with Torchmark who can also sell for other companies. The UA Independent Agency was Torchmark’s largest health agency in terms of health premium income. Premium income was $284 million , representing 37% of Torchmark’s total health premium. Net sales were $40 million , or 35% of Torchmark’s health sales. This agency primarily produces Medicare Supplement insurance, with Medicare Supplement premium income of $275 million . The UA Independent Agency represents approximately 75% of all Torchmark Medicare Supplement premium and 92% of Medicare Supplement net sales. Medicare Supplement premium in this agency rose 4% . Net sales of the Medicare Supplement product has increased 21% in 2018 primarily as a result of an increase in individual sales. First-year collected health premium rose 14% to $45 million .
The Family Heritage Agency primarily markets 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. The Family Heritage Agency contributed $45 million , representing 39% of Torchmark's total net health sales in the first nine months of 2018 . Health premium income was $203 million for the nine month period of 2018 , representing 27% of Torchmark’s health premium compared with $188 million or 26% of health premium in the prior year period. Underwriting margin as a percent of premium was 24% , up from 22% for the nine months ended September 30, 2017 . The increase was primarily attributed to the runoff of older business and the growing portion of new business sold at higher margins. The

42
TMK 2018 FORM 10-Q QTR 3


average agent count was 1,042 for the nine months ended September 30, 2018 compared with 984 for the same period in 2017 , an increase of 6% .
The Liberty National Exclusive Agency represented 19% of all Torchmark health premium income at $145 million in the nine months of 2018 . The Liberty Agency markets limited-benefit health supplemental products consisting primarily of critical illness insurance. Much of Liberty’s health business is now generated through worksite marketing targeting small businesses of 10 to 25 employees. In 2018 , health premium income in the Liberty Agency declined $3 million to $145 million from prior year premium. Liberty’s health premium decline is primarily due to the runoff of a block of discontinued Medicare Supplement policies previously sold by the agency.
Other distribution . While some of the Company's distribution channels market health products, their main emphasis is on life insurance. On a combined basis, they accounted for 17% of health premium in the 2018 period. The American Income Exclusive Agency primarily markets accident plans. The Direct Response unit markets primarily Medicare Supplements to employer or union-sponsored groups.

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 nine months of 2018 with the first nine months of 2017 . Operating expenses consist of insurance administrative expenses and Parent Company expenses. Also included is stock compensation expense, which is viewed by us as 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)
Nine Months Ended September 30,
2018
2017
Amount
% of
Premium
Amount
% of
Premium
Insurance administrative expenses:
Salaries
$
74,844

2.9
$
70,505

2.9
Other employee costs
27,169

1.1
25,320

1.0
Information technology costs
20,878

0.8
19,325

0.8
Legal costs
6,371

0.2
6,520

0.2
Other administrative costs
37,298

1.5
34,081

1.4
Total insurance administrative expenses
166,560

6.5
155,751

6.3
Parent company expense
7,806

7,228

Stock compensation expense
29,969

24,809

Administrative settlements
3,590

—

Non-operating costs
1,578

—

Total operating expenses, per Condensed Consolidated Statements of Operations
$
209,503

$
187,788

Insurance administrative expenses:
Increase (decrease) over prior year
6.9
%
6.6
%
Total operating expenses:
Increase (decrease) over prior year
11.6
%
8.5
%

The 6.9% increase in administrative expenses was primarily due to an increase in other employee costs and information technology salaries and expenses. The increase in other employee costs was primarily attributed to higher pension expense driven by lower interest rates.


43
TMK 2018 FORM 10-Q QTR 3


The increase in information technology costs reflects investments related to data analytics capabilities, systems modernizations, customer experience enhancements, and information security programs.

The increase in stock compensation expense was primarily due to higher expense associated with equity awards, reflecting Torchmark's higher share price as compared with the same period a year ago.
During the third quarter of 2018, Torchmark recorded $3.6 million in administrative settlements related to state regulatory examinations.

Investments (excess investment income), comparing the first nine months of 2018 with the first nine months of 2017 . 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 and is the measure that we use to evaluate the performance of the investment segment as described in Note 11—Business Segments . 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 common 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 $7.4 billion of cash flow to repurchase Torchmark shares (average split-adjusted price per diluted common share of $ 16.51 ) after determining that the repurchases provided a greater return than other investment alternatives. If we had not used this excess cash to repurchase shares, but had instead invested it in interest-bearing assets, we would have earned more investment income and had more shares outstanding. Because excess investment income per diluted common share incorporates all capital resources, we believe that excess investment income per diluted share is a useful measure to evaluate the investment segment.
The following table summarizes Torchmark’s investment income, excess investment income, and excess investment income per diluted common share.
Excess Investment Income
(Dollar amounts in thousands)
Nine Months Ended
September 30,
Increase
(Decrease)
2018
2017
Amount
%
Net investment income
$
658,279

$
634,930

$
23,349

4
Interest on net insurance policy liabilities:
Interest on reserves
(572,201
)
(547,443
)
(24,758
)
5
Interest on deferred acquisition costs
163,802

157,096

6,706

4
Net required interest
(408,399
)
(390,347
)
(18,052
)
5
Financing costs
(66,466
)
(62,825
)
(3,641
)
6
Excess investment income
$
183,414

$
181,758

$
1,656

1
Excess investment income per diluted share
$
1.58

$
1.52

$
0.06

4
Mean invested assets (at amortized cost)
$
16,101,519

$
15,275,412

$
826,107

5
Average net insurance policy liabilities (1)
9,702,313

9,306,010

396,303

4
Average debt and preferred securities (at amortized cost)
1,648,035

1,471,616

176,419

12
(1)
Net of deferred acquisition costs, excluding the associated unrealized gains and losses thereon.

As indicated in the table above, excess investment income increased 1% compared with the year-ago period, while on a per diluted common share basis increased 4% from the year-ago period. Excess investment income per diluted common share generally increases at a faster pace than excess investment income because the number of diluted common shares outstanding generally decreases from year to year as result of our share repurchase program.

44
TMK 2018 FORM 10-Q QTR 3


Net investment income during the nine months ending September 30, 2018 is $23 million or 4% greater than the same period last year. Mean invested assets during the first nine months of 2018 were 5% higher than they were during the same period last year. The effective annual yield rate earned on the fixed maturity portfolio was 5.57% in the first nine months of 2018 , compared with 5.68% a year earlier. Growth in net investment income has been negatively impacted in recent years by the low interest rate environment during which time we have invested new money at rates less than the average portfolio yield rate and reinvested the proceeds from dispositions at yield rates less than what we earned on these bonds prior to disposition. As a result, growth in net investment income has been slower than the growth in mean invested assets in recent years. We currently expect that the average annual turnover of fixed maturity assets during the next five years will not exceed 1% to 3% of the portfolio and will not have a material negative impact on investment income.
Should long-term interest rates rise, Torchmark's net investment income would benefit due to higher interest rates on new investments. While such a rise in interest rates could adversely affect the fair value of the fixed maturities portfolio, we could withstand an increase in interest rates of approximately 45 to 50 basis points before the net unrealized gains on our fixed maturity portfolio as of September 30, 2018 would be eliminated. Should interest rates increase further than that, we would not be 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.
Required interest on net insurance policy liabilities is the amount of net investment income considered by management necessary to “fund” net insurance policy liabilities, which is the net of the benefit reserve liability and deferred acquisition cost asset. As such, it is removed from the investment segment and applied to the insurance segments to offset the effect of the interest required by the insurance segments. As discussed in Note 11—Business Segments , management believes this provides a more meaningful analysis of the investment and insurance segments. Required interest is based on the actuarial interest assumptions used to discount the benefit reserve liability and to amortize the 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 which mandates that interest rate assumptions for a particular block of business be “locked in” for the life of that block. Each calendar year, we set the discount rate to be used to calculate the benefit reserve liability and 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 cash flow 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 $18 million or 5% to $408 million , in line with the growth in average net interest-bearing insurance policy liabilities.
Financing costs for the segment primarily consist of interest on our various debt instruments. Interest on our debt increased in the first nine months of 2018 to $66 million compared with $63 million for the same period last year. The increase in financing costs was primarily due to higher interest rates on short-term debt. We expect the fourth quarter interest expense to be slightly higher due to costs of carrying the redeemed obligation for a portion of the quarter.
More information concerning debt can be found in the Capital Resources section of this report.

45
TMK 2018 FORM 10-Q QTR 3


Analysis of Financing Costs
(Dollar amounts in thousands)
Nine Months Ended
September 30,
Increase
(Decrease)
2018
2017
Amount
%
Interest on funded debt
$
54,631

$
55,089

$
(458
)
(1
)
Interest on term loan
2,298

1,706

592

35

Interest on short-term debt
9,533

6,026

3,507

58

Other
4

4

—

—

Financing costs
$
66,466

$
62,825

$
3,641

6


Realized Gains and Losses, comparing the first nine months of 2018 with the first nine months of 2017 . 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. Since these dispositions and write-downs are outside the course of our normal operations, management removes the effects of such gains and losses when evaluating its overall core operating results.
As discussed in Note 4—Investments , during the first quarter of 2018, the Company elected to measure its investment in certain limited partnerships at fair value in accordance with the fair value option for financial instruments with changes recognized in "Realized Investment Gains (Losses)" in the Condensed Consolidated Statements of Operations.
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 per share data)
Nine Months Ended September 30,
2018
2017
Amount
Per Share
Amount
Per Share
Fixed maturities:
Sales
$
52

$
—

$
3,153

$
0.02

Called or tendered
9,686

0.08

5,628

0.05

Write-downs
—

—

(159
)
—

Other long-term investments
1,905

0.02

—

—

Other
46

—

(2,387
)
(0.02
)
Total
$
11,689

$
0.10

$
6,235

$
0.05

1) Written down due to other-than-temporary impairment

Investments (acquisitions), comparing the first nine months of 2018 with the first nine months of 2017 . Torchmark’s investment policy calls for investing primarily in investment grade fixed maturities that 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 from operations and invested assets are positive, stable and predictable. If longer-term securities that meet our quality and yield objectives are not available, we do not relax our quality objectives; instead, we consider investing in shorter or lower yielding securities taking into consideration the slope of the yield curve and other factors.


46
TMK 2018 FORM 10-Q QTR 3


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).

Fixed Maturity Acquisitions Selected Information
(Dollar amounts in thousands)
Nine Months Ended
September 30,
2018
2017
Cost of acquisitions:


Investment-grade corporate securities
$
566,250

$
1,046,773

Tax-exempt municipal securities
171,572

—

Other investment-grade securities
8,708

5,932

Total fixed maturity acquisitions
$
746,530

$
1,052,705

Effective annual yield (one year compounded) (1)
4.82
%
4.74
%
Average life (in years, to next call)
16.6

22.8

Average life (in years, to maturity)
22.9

23.7

Average rating
A-
BBB+


(1)
Tax-equivalent basis, where 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. The average rating was higher during the first nine months ended September 30, 2018 due to investing in higher rated tax-exempt municipal bonds. All of the acquired securities were investment grade.
Investments (portfolio composition). The composition of the investment portfolio at book value on September 30, 2018 and December 31, 2017 was as follows:
Invested Assets at September 30, 2018
(Dollar amounts in thousands)
At September 30, 2018
At December 31, 2017
Amount
% of
Total
Amount
% of
Total
Fixed maturities (at amortized cost)
$
15,462,364

92
$
14,995,101

95
Policy loans
543,836

3
529,529

3
Other long-term investments (1)
182,583

1
107,953

1
Short-term investments
633,490

4
127,071

1
Total
$
16,822,273

100
$
15,759,654

100

(1)
Includes investments accounted for under the fair value option at amortized cost of $100 million (fair value of $108 million ) as of September 30, 2018 .

At September 30, 2018 , approximately 92% 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 3% of our investments. We also have insignificant investments in equity securities and other long-term investments. The increase in short-term investments is due to proceeds from the issuance of the 4.55% Senior Notes on September 27, 2018 . 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.


47
TMK 2018 FORM 10-Q QTR 3


Fixed Maturities. The following tables summarize certain information about the major corporate sectors and security types held in our fixed maturity portfolio at September 30, 2018 and December 31, 2017 .

Fixed Maturities by Sector
At September 30, 2018
(Dollar amounts in thousands)

Below Investment Grade
Total Fixed Maturities
% of Total Fixed Maturities
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
At Amortized Cost
At Fair Value
Corporates:
Financial
Insurance - life, health, P&C
$
66,356

$
3,137

$
(5,895
)
$
63,598

$
1,979,977

$
196,468

$
(19,561
)
$
2,156,884

13
13
Banks
27,083

—

(3,472
)
23,611

785,443

56,838

(13,269
)
829,012

5
5
Other financial
74,957

—

(12,884
)
62,073

944,025

32,330

(33,812
)
942,543

6
6
Total financial
168,396

3,137

(22,251
)
149,282

3,709,445

285,636

(66,642
)
3,928,439

24
24
Utilities
Electric
20,107

356

(48
)
20,415

1,460,497

189,662

(10,936
)
1,639,223

10
10
Gas and water
—

—

—

—

532,047

27,629

(10,483
)
549,193

3
3
Total utilities
20,107

356

(48
)
20,415

1,992,544

217,291

(21,419
)
2,188,416

13
13
Industrial - Energy
Pipelines
40,563

478

(1,782
)
39,259

907,381

71,015

(14,145
)
964,251

6
6
Exploration and production
28,136

1,230

(146
)
29,220

526,801

46,877

(4,100
)
569,578

3
3
Oil field services
33,857

—

(8,340
)
25,517

83,699

6,519

(8,339
)
81,879

1
1
Refiner
—

—

—

—

72,992

11,733

(354
)
84,371

1
1
Driller
44,837

—

(11,040
)
33,797

44,837

—

(11,040
)
33,797

—
—
Total energy
147,393

1,708

(21,308
)
127,793

1,635,710

136,144

(37,978
)
1,733,876

11
11
Industrial - Basic materials
Chemicals
—

—

—

—

554,326

13,517

(15,004
)
552,839

4
3
Metals and mining
57,416

3,740

—

61,156

386,986

44,657

(262
)
431,381

2
3
Forestry products and paper
—

—

—

—

111,757

8,255

(781
)
119,231

1
1
Total basic materials
57,416

3,740

—

61,156

1,053,069

66,429

(16,047
)
1,103,451

7
7
Industrial - Consumer, non-cyclical
21,332

—

(5,256
)
16,076

1,965,304

79,373

(63,245
)
1,981,432

13
12
Other industrials
46,925

1,928

(809
)
48,044

1,351,458

79,074

(29,951
)
1,400,581

9
9
Industrial -
Transportation
26,328

1,161

(601
)
26,888

560,482

48,812

(7,452
)
601,842

3
4
Other corporate sectors
135,952

2,687

(10,923
)
127,716

1,311,933

55,481

(48,477
)
1,318,937

8
8
Total corporates
623,849

14,717

(61,196
)
577,370

13,579,945

968,240

(291,211
)
14,256,974

88
88
Other fixed maturities:
Government (U.S., municipal, and foreign)
306

126

—

432

1,673,666

86,433

(16,496
)
1,743,603

11
11
Collateralized debt obligations
57,794

26,119

(4,997
)
78,916

57,794

26,119

(4,997
)
78,916

—
—
Other asset-backed securities
—

—

—

—

149,866

1,818

(872
)
150,812

1
1
Mortgage-backed securities (1)
—

—

—

—

1,093

73

—

1,166

—
—
Total fixed maturities
$
681,949

$
40,962

$
(66,193
)
$
656,718

$
15,462,364

$
1,082,683

$
(313,576
)
$
16,231,471

100
100
(1)
Includes GNMA's.


48
TMK 2018 FORM 10-Q QTR 3


Fixed Maturities by Sector
At December 31, 2017
(Dollar amounts in thousands)
Below Investment Grade
Total Fixed Maturities
% of Total Fixed Maturities
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
At Amortized Cost
At Fair Value
Corporates:
Financial
Insurance - life, health, P&C
$
66,489

$
3,896

$
(3,650
)
$
66,735

$
2,018,315

$
346,364

$
(4,588
)
$
2,360,091

14
14

Banks
27,104

—

(2,727
)
24,377

747,249

117,724

(3,007
)
861,966

5
5

Other financial
74,956

—

(17,661
)
57,295

853,583

74,765

(18,524
)
909,824

6
6

Total financial
168,549

3,896

(24,038
)
148,407

3,619,147

538,853

(26,119
)
4,131,881

25
25

Utilities
Electric
20,713

1,159

—

21,872

1,463,872

306,812

(1,275
)
1,769,409

10
11

Gas and water
—

—

—

—

520,418

64,726

(120
)
585,024

3
3

Total utilities
20,713

1,159

—

21,872

1,984,290

371,538

(1,395
)
2,354,433

13
14

Industrial - Energy
Pipelines
40,590

937

(1,092
)
40,435

880,379

117,765

(2,320
)
995,824

6
6

Exploration and production
28,174

1,180

(85
)
29,269

527,581

79,784

(2,620
)
604,745

4
4

Oil field services
33,867

—

(6,004
)
27,863

83,722

11,074

(6,004
)
88,792

1
1

Refiner
—

—

—

—

73,106

17,430

—

90,536

—
—

Driller
54,561

87

(14,448
)
40,200

54,561

87

(14,448
)
40,200

—
—

Total energy
157,192

2,204

(21,629
)
137,767

1,619,349

226,140

(25,392
)
1,820,097

11
11

Industrial - Basic materials
Chemicals
—

—

—

—

541,785

59,216

(20
)
600,981

3
3

Metals and mining
57,438

7,727

—

65,165

387,134

85,105

—

472,239

3
3

Forestry products and paper
—

—

—

—

112,175

16,911

—

129,086

1
1

Total basic materials
57,438

7,727

—

65,165

1,041,094

161,232

(20
)
1,202,306

7
7

Industrial - Consumer, non-cyclical
21,334

—

(4,498
)
16,836

1,834,778

192,887

(6,494
)
2,021,171

12
12

Other industrials
47,136

2,965

—

50,101

1,326,051

179,694

(671
)
1,505,074

9
9

Industrial -
Transportation
26,443

1,581

(162
)
27,862

553,435

90,211

(195
)
643,451

3
4

Other corporate sectors
143,995

5,076

(9,387
)
139,684

1,310,445

123,588

(13,236
)
1,420,797

9
8

Total corporates
642,800

24,608

(59,714
)
607,694

13,288,589

1,884,143

(73,522
)
15,099,210

89
90

Other fixed maturities:
Government (U.S., municipal, and foreign)
306

—

(105
)
201

1,501,865

147,772

(1,507
)
1,648,130

10
9

Collateralized debt obligations
59,150

20,084

(7,653
)
71,581

59,150

20,084

(7,653
)
71,581

—
—

Other asset-backed securities
—

—

—

—

144,040

4,790

—

148,830

1
1

Mortgage-backed securities (1)
—

—

—

—

1,457

118

(1
)
1,574

—
—

Total fixed maturities
$
702,256

$
44,692

$
(67,472
)
$
679,476

$
14,995,101

$
2,056,907

$
(82,683
)
$
16,969,325

100
100

(1)
Includes GNMA's.


49
TMK 2018 FORM 10-Q QTR 3


At September 30, 2018 , fixed maturities had a fair value of $16.2 billion , compared with $17.0 billion at December 31, 2017 . The net unrealized gain position in the fixed-maturity portfolio decreased from $2.0 billion at December 31, 2017 to $769 million at September 30, 2018 due to increases in interest rates during the period. The September 30, 2018 net unrealized gain consisted of gross unrealized gains of $1.1 billion offset by $314 million of gross unrealized losses, compared with the December 31, 2017 net unrealized gain which consisted of a gross unrealized gain of $2.1 billion and a gross unrealized loss of $83 million .
Corporate securities, which consist of bonds and redeemable preferred stocks, were the largest component of the fixed maturity portfolio, representing 88% of amortized cost and fair value. The remainder of the portfolio is invested primarily in securities issued by the U.S. government and U.S. municipalities. The Company holds insignificant amounts in foreign government bonds, collateralized debt obligations, asset-backed securities, and agency mortgage-backed securities. Corporate securities are diversified over a variety of industry sectors and issuers; the total fixed maturity portfolio consisted of 612 issuers.
An analysis of the fixed maturity portfolio at September 30, 2018 and December 31, 2017 by a composite quality rating is shown in the table below. The composite quality 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. The composite quality rating is created using a methodology developed by Torchmark Corporation using ratings from the various rating agencies noted above (It should be noted that the composite quality rating is not a Standard & Poor's credit rating. Standard and Poor's does not sponsor, endorse or promote the composite quality rating and shall not be liable for any use of the composite quality rating.) Included in the chart below are private placement fixed maturity holdings of $601 million at amortized cost ( $598 million at fair value). The ratings for these holdings were assigned by the third party managers of those securities.

Fixed Maturities by Rating
(Dollar amounts in thousands)
September 30, 2018
Amortized
Cost
%
Fair
Value
%
Investment grade:
AAA
$
717,886

5
$
717,161

4
AA
1,164,908

8
1,223,593

8
A
4,238,263

27
4,679,228

29
BBB+
3,400,528

22
3,546,631

22
BBB
3,517,209

23
3,622,670

22
BBB-
1,741,621

11
1,785,470

11
Investment grade
14,780,415

96
15,574,753

96
Below investment grade:
BB
385,562

2
371,341

2
B
164,070

1
136,638

1
Below B
132,317

1
148,739

1
Below investment grade
681,949

4
656,718

4

$
15,462,364

100
$
16,231,471

100












50
TMK 2018 FORM 10-Q QTR 3


Fixed Maturities by Rating
(Dollar amounts in thousands)
December 31, 2017
Amortized
Cost
%
Fair
Value
%
Investment grade:
AAA
$
649,559

4
$
689,356

4
AA
1,095,502

7
1,222,148

7
A
4,139,252

28
4,959,570

29
BBB+
3,493,309

23
3,936,939

23
BBB
3,302,118

22
3,696,880

22
BBB-
1,613,105

11
1,784,956

11
Investment grade
14,292,845

95
16,289,849

96
Below investment grade:
BB
413,425

3
397,063

2
B
152,454

1
133,582

1
Below B
136,377

1
148,831

1
Below investment grade
702,256

5
679,476

4
$
14,995,101

100
$
16,969,325

100

Of the $15.5 billion of fixed maturities at amortized cost as of September 30, 2018 , $14.8 billion or 96% were investment grade with an average rating of A- . Below-investment-grade bonds were $682 million with an average rating of B+ . Below-investment-grade bonds at amortized cost were 14% of our shareholders’ equity, excluding the effect of unrealized gains and losses on fixed maturities as of September 30, 2018 . Overall, the total portfolio was rated BBB+ based on amortized cost, the same as at the end of 2017 .
An analysis of the changes in our portfolio of below-investment-grade bonds at amortized cost during the first nine months of 2018 is as follows:

Below-Investment-Grade Bonds
(Dollar amounts in thousands)
Balance as of December 31, 2017
$
702,256

Downgrades by rating agencies
—

Upgrades by rating agencies
—

Disposals
(23,154
)
Amortization and other
2,847

Balance as of September 30, 2018
$
681,949


As noted earlier, our investment policy calls for investing primarily in fixed maturities that are investment grade and meet our quality and yield objectives. Thus, any increases in below-investment-grade issues are typically a result of ratings downgrades of existing holdings. Our investment portfolio does not contain counterparty risks as we are not a party to any derivatives contracts. We also do not participate in securities lending and we have no off-balance sheet investments.

51
TMK 2018 FORM 10-Q QTR 3


Additional information concerning the fixed-maturity portfolio is as follows:
Fixed Maturity Portfolio Selected Information
At
September 30,
2018
December 31, 2017
September 30,
2017
Average annual effective yield (1)
5.56%
5.60%
5.63%
Average life, in years, to:
Next call (2)
17.0
17.5
17.4
Maturity (2)
18.8
19.1
19.2
Effective duration to:
Next call (2,3)
10.2
10.8
10.7
Maturity (2,3)
10.9
11.5
11.4

(1)
Tax-equivalent basis. 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.
Financial Condition
Liquidity . Liquidity provides Torchmark with the ability to meet on demand the cash commitments required to support our business operations and meet our financial obligations. Our liquidity is evidenced by consistent positive cash flow, a portfolio of marketable investments, and our 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 as they better match the long-term nature of these 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. While the leading source of the excess cash is investment income, a significant portion of the excess cash also comes from underwriting income due to our high underwriting margins and effective expense control.
Parent Company liquidity . An important source of Parent Company liquidity is the dividends from its insurance subsidiaries. These dividends are received throughout the year and 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 nine months of 2018 , the Parent Company received $372 million of cash dividends from subsidiaries, compared with $309 million in 2017 . The increase in cash dividends received from subsidiaries was primarily due to the timing of dividend payments. For the full year 2018 , cash dividends from subsidiaries are expected to total approximately $420 million . Including transfers from other subsidiaries, and after paying shareholder dividends, interest on debt obligations and other expenses, we expect the Parent Company to have approximately $340 million in excess cash flow in 2018.
Additional sources of liquidity for the Parent Company are cash, intercompany receivables, intercompany borrowings, public debt markets, and a credit facility. At September 30, 2018 , the Parent Company had $612 million of invested cash and net intercompany receivables, including $543 million in net proceeds received at the end of the quarter from the issuance of the new senior debt. The credit facility is discussed below.

Credit Facility. We have a credit facility with a group of lenders allowing for unsecured revolving borrowings and stand-by letters of credit up to $750 million, which could be extended up to $1 billion. We may request the extension, however, it is not guaranteed. Up to $250 million in letters of credit can be issued against the facility. The facility serves as a back-up credit line for a commercial paper program under which we may issue commercial paper at any time, with total commercial paper outstanding not to exceed the facility maximum, less any letters of credit issued. Interest on the commercial paper program is charged at variable rates. This facility was amended in May 2016 to extend the maturity date of the facility to May 2021. The amendment also allowed for an additional $100 million term loan to be

52
TMK 2018 FORM 10-Q QTR 3


issued under the facility rate structure. The term loan was issued during 2016 and will be repaid in quarterly escalating installments with a balloon payment of $75 million due in May 2021. Interest on the term loan is computed and paid monthly at 125 basis points plus 1 month LIBOR. In accordance with the agreement, we are subject to certain covenants regarding capitalization. As of September 30, 2018 , we were in full compliance with those covenants.

Commercial paper outstanding and any amortization payments of the term loan due within one year are included in short-term debt. The remaining balance of the term loan is included in long-term debt. Also included in short-term debt at September 30, 2018 are the $293 million par value of 9.25% Senior Notes due June 15, 2019 which were redeemed on October 29, 2018 as discussed in Note 10—Debt and later under Long-Term Debt section.
The following table presents certain information about our commercial paper borrowings.
Credit Facility - Commercial Paper
(Dollar amounts in thousands)
At
September 30,
2018
December 31, 2017
September 30,
2017
Balance of commercial paper at end of period (par value)
$
317,318

$
324,250

$
305,800

Annualized interest rate
2.57
%
1.78
%
1.44
%
Letters of credit outstanding
$
155,000

$
177,000

$
177,000

Remaining amount available under credit line
277,682

248,750

267,200

Nine Months Ended
September 30,
2018
2017
Average balance of commercial paper outstanding during period (par value)
$
386,663

$
336,664

Daily-weighted average interest rate (annualized)
2.32
%
1.24
%
Maximum daily amount outstanding during period (par value)
$
525,990

$
455,912

The increase in commercial paper during the nine months ended September 30, 2018 reflects timing of cash needs at the Parent Company and funds used to call the Company's $20 million Junior Subordinated Debentures. We had no difficulties in accessing the commercial paper market under this facility during the nine month periods ended September 30, 2018 and 2017 .
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 Parent 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 $937 million in the first nine months of 2018 , compared with $1.1 billion in the same period of 2017 . The decrease is primarily attributable to a reduction in cash flows from discontinued operations and fluctuations in the settlement of certain amounts included in other liabilities. In addition to cash inflows from operations, our insurance companies received proceeds from maturities, calls, and repayments of fixed maturities available for sale in the amount of $267 million during the 2018 period. As previously noted under the caption Credit Facility, we have in place a line of credit facility. The insurance companies have no additional outstanding credit facilities.
Cash and short-term investments were $711 million at September 30, 2018 , compared with $246 million at December 31, 2017 . The increase is attributed to the issuance of the new senior debt at quarter end. In addition to these liquid assets, the entire $16.2 billion (fair value at September 30, 2018 ) portfolio of fixed income securities is available for sale in the event of an unexpected need. Approximately 96% of our fixed income securities are publicly traded, freely tradable under SEC Rule 144, or qualified for resale under SEC Rule 144A. 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, on-going investment maturities, and credit line availability make any need to sell securities for liquidity highly unlikely.

53
TMK 2018 FORM 10-Q QTR 3


Capital Resources . Our goal is to maintain capital at levels necessary to support our current ratings. For the past several years, that level has been around a National Association of Insurance Commissioners (NAIC) Company Action Level Risk Based Capital (RBC) ratio of 325% on a consolidated basis. In June, the NAIC issued adjustments to certain RBC factors to reflect the reduction of the corporate income tax rate from 35% to 21%, which are effective for 2018. The effect of the adjustments is to increase the amount of required capital which comprises the denominator of the RBC ratio. In light of these adjustments and following discussions with our rating agencies, Torchmark is reducing the targeted consolidated RBC ratio to be in the range of 300% to 320%. While the consolidated target ratio has declined, the actual amount of capital at the insurance subsidiaries will be higher at December 31, 2018 than recent years.
Torchmark used approximately $150 million of the net proceeds from the recent issuance of new senior debt to provide additional capital to its insurance subsidiaries. To the extent that additional capital is needed in the future, the Company is confident that it can fund any capital with additional debt offerings or the use of Parent Company liquidity sources.
On a consolidated basis, Torchmark’s capital structure consists of short-term debt (comprised of the commercial paper outstanding discussed above, current maturities of the term loan, and current maturities of funded debt), long-term debt (comprised of long-term maturities of funded debt and long term maturities of the term loan), and shareholders’ equity.

The outstanding long-term debt at book value was $1.4 billion at September 30, 2018 and $1.1 billion at December 31, 2017 . An analysis of debt issues outstanding is as follows at September 30, 2018 .

Selected Information about Debt Issues
As of September 30, 2018
(Dollar amounts in thousands)
Instrument
Year
Due
Interest
Rate
Par
Value
Book
Value
Fair
Value
Notes
2023
7.875%
$
165,612

$
164,437

$
191,786

Senior Notes (1)
2019
9.250%

292,647

292,265

304,779

Senior Notes (2)
2022
3.800%
150,000

148,701

149,307

Senior Notes
2028
4.550%
550,000

543,203

552,338

Junior Subordinated Debentures
2056
6.125%
300,000

290,505

307,336

Junior Subordinated Debentures
2057
5.275%
125,000

123,351

97,712

Term loan
2021
3.326%
(3)
95,000

95,000

95,000

1,678,259

1,657,462

1,698,258

Less current maturity of term loan (4)
6,250

6,250

6,250

Less current maturity of funded debt
292,647

292,265

304,779

Total long-term debt
1,379,362

1,358,947

1,387,229

Current maturity of term loan (4)
6,250

6,250

6,250

Current maturity of funded debt
292,647

292,265

304,779

Commercial paper
317,318

316,496

316,496

Total short-term debt
616,215

615,011

627,525

Total debt
$
1,995,577

$
1,973,958

$
2,014,754


(1)
Amount was redeemed on October 29, 2018.
(2)
An additional $150 million par value and book value is held by insurance subsidiaries that eliminates in consolidation.
(3)
Interest paid at 1 month LIBOR plus 125 basis points, resets each month.
(4)
The current amount of the term loan due of $6.3 million is classified as short term debt.


54
TMK 2018 FORM 10-Q QTR 3


Issuance of long-term debt: On September 27, 2018 , Torchmark completed the issuance and sale of $550 million in aggregate principal of Torchmark’s 4.55% Senior Notes due September 15, 2028 . The notes were sold pursuant to Torchmark’s shelf registration statement on Form S-3, filed September 26, 2018. The net proceeds from the sale of the notes were $543 million , after giving effect to the underwriting discounts and commissions and estimated offering expenses payable by Torchmark. Torchmark used a portion of the net proceeds from the sale of the notes to redeem the $293 million outstanding principal amount on Torchmark’s 9.25% Senior Notes due June 15, 2019, including the payment of an approximately $11 million “make-whole” premium plus accrued and unpaid interest to, but excluding, the date of redemption. Torchmark has used approximately $150 million of the net proceeds to provide additional capital to its insurance subsidiaries and intends to use any remaining net proceeds for general corporate purposes, which may include additional holding company liquidity and the repayment of a portion of Torchmark’s outstanding commercial paper. The rating agencies assigned ratings for the new debt consistent with prior ratings.
Due to increasing variable interest rates, on June 15, 2018 , the Company called its $20 million Junior Subordinated Debentures. As previously noted under the caption Results of Operations in this report, we acquired 2.9 million of our outstanding common shares under our share repurchase program during the first nine months of 2018 . These shares were acquired at a cost of $250 million (average of $85.54 per share), compared with purchases of 3.2 million shares at a cost of $243 million (average of $76.46 per share) in the first nine months of 2017 .
On August 9, 2018 , the Company announced that it had declared a quarterly dividend of $0.16 per share. This dividend was paid on November 1, 2018 .
Shareholders’ equity was $5.5 billion at September 30, 2018 . This compares with $6.2 billion at December 31, 2017 and $5.2 billion at September 30, 2017 . During the nine months since December 31, 2017 , shareholders’ equity decreased due to $949 million of after-tax unrealized losses in the fixed-maturity portfolio as interest rates have increased over the period. In addition, shareholders' equity was increased by net income of $537 million . Share purchases of $250 million noted above during the period reduced shareholders’ equity.
We are required under 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.

55
TMK 2018 FORM 10-Q QTR 3


The following table presents selected data related to capital resources. Additionally, the table presents the effect of the GAAP requirement to revalue our fixed maturity assets on relevant items so that investors and other financial statement users may determine its impact on our capital structure.

Selected Financial Data
(Dollar amounts in thousands, except per share data)
At
September 30, 2018
December 31, 2017
September 30, 2017
GAAP
Effect of
Accounting
Rule
Requiring
Revaluation (1)
GAAP
Effect of
Accounting
Rule
Requiring
Revaluation (1)
GAAP
Effect of
Accounting
Rule
Requiring
Revaluation (1)
Fixed maturities
$
16,231,471

$
769,107

$
16,969,325

$
1,974,224

$
16,652,913

$
1,738,333

Deferred acquisition costs (2)
4,091,601

(7,150
)
3,958,063

(10,819
)
3,911,800

(11,273
)
Total assets
23,469,488

761,957

23,474,985

1,963,405

22,993,607

1,727,060

Short-term debt
615,011

—

328,067

—

309,002

—

Long-term debt
1,358,947

—

1,132,201

—

1,130,806

—

Shareholders' equity
5,538,905

601,946

6,231,421

1,551,090

5,167,685

1,122,589

Book value per diluted share
48.35

5.25

52.95

13.18

43.78

9.51

Debt to capitalization (3)
26.3
%
(2.3
)%
19.0
%
(4.8
)%
21.8
%
(4.5
)%
Diluted shares outstanding
114,559

117,696

118,028

Actual shares outstanding
112,168

114,593

115,359

(1)
Amount added to (deducted from) comprehensive income to produce the stated GAAP item, per accounting rule ASC 320-10-35-1.
(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 first nine months of 2018 , compared with 10.8 times in the 2017 period. Interest coverage is computed by dividing interest expense into the sum of pretax income and interest expense.

56
TMK 2018 FORM 10-Q QTR 3


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.
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)
Economic and other 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);
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)
The ability to obtain timely and appropriate premium rate increases for health insurance policies from our regulators;
10)
The customer response to new products and marketing initiatives;
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; and
12)
Compromise by a malicious actor or other event that causes a loss of secure data from, or inaccessibility to, our computer and other information technology systems.


57
TMK 2018 FORM 10-Q QTR 3


Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no quantitative or qualitative changes with respect to market risk exposure during the nine months ended September 30, 2018 .
Item 4. Controls and Procedures
Torchmark, under the direction of the Co-Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer, has established disclosure controls and procedures that are designed to ensure that information required to be disclosed by Torchmark in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to Torchmark’s management, including the Co-Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
As of the end of the fiscal quarter completed September 30, 2018 , an evaluation was performed under the supervision and with the participation of Torchmark management, including the Co-Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer, of Torchmark’s disclosure controls and procedures (as those terms are defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon their evaluation, the Co-Chairmen and Chief Executive Officers and the Executive Vice President and Chief Financial Officer have concluded that Torchmark’s disclosure controls and procedures are effective as of the date of this Form 10-Q. In compliance with Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350), each of these officers executed a Certification included as an exhibit to this Form 10-Q.
For the quarter ended September 30, 2018 , there have not been any changes in Torchmark’s internal control over financial reporting or in other factors that could significantly affect this control over financial reporting subsequent to the date of their evaluation which have materially affected, or are reasonably likely to materially affect, Torchmark’s internal control over financial reporting. No material weaknesses in such internal controls were identified in the evaluation and as a consequence, no corrective action was required to be taken.

58
TMK 2018 FORM 10-Q QTR 3


Part II – Other Information
Item 1. Legal Proceedings

Torchmark and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including claims involving tax matters, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of Torchmark’s subsidiaries, employment discrimination, and miscellaneous other causes of action. Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, management does not believe that such litigation will have a material adverse effect on Torchmark’s financial condition, future operating results or liquidity; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future. This bespeaks caution, particularly in states with reputations for high punitive damage verdicts. Torchmark’s management recognizes that large punitive damage awards bearing little or no relation to actual damages continue to be awarded by juries in jurisdictions in which Torchmark and its subsidiaries have substantial business, creating the potential for unpredictable material adverse judgments in any given punitive damage suit.

See further discussion of litigation and other legal proceedings in Note 6—Commitments and Contingencies .

Item 1A. Risk Factors
Torchmark had no material changes to its risk factors.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
(c)    Purchases of Certain Equity Securities by the Issuer and Others
Period
(a) Total Number
of Shares
Purchased
(b) Average
Price Paid
Per Share
(c) Total Number of
Shares Purchased as Part
of Publicly Announced
Plans or Programs
(d) Maximum Number
of Shares (or
Approximate Dollar
Amount) that May
Yet Be Purchased
Under the Plans or
Programs
July 1-31, 2018
257,785

$
83.20

257,785

August 1-31, 2018
289,533

87.84

289,533

September 1-30, 2018
517,746

86.61

517,746

At its August 7, 2018 m eeting, the Board of Directors reaffirmed the Company’s share repurchase program in amounts and with timing that management, in consultation with the Board, determines to be in the best interest of the Company. The program has no defined expiration date or maximum shares to be repurchased.
Item 6. Exhibits
(a)
Exhibits


59
TMK 2018 FORM 10-Q QTR 3


SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
TORCHMARK CORPORATION
Date: November 6, 2018
/s/ Gary L. Coleman
Gary L. Coleman
Co-Chairman and Chief Executive Officer
Date: November 6, 2018
/s/ Larry M. Hutchison
Larry M. Hutchison
Co-Chairman and Chief Executive Officer
Date: November 6, 2018
/s/ Frank M. Svoboda
Frank M. Svoboda
Executive Vice President and Chief Financial Officer

60
TMK 2018 FORM 10-Q QTR 3

TABLE OF CONTENTS
Part I Financial InformationItem 1. Condensed Consolidated Financial StatementsNote 1 Significant Accounting PoliciesNote 2 New Accounting StandardsNote 2 New Accounting Standards (continued)Note 15 Commitments and ContingenciesNote 3 Supplemental Information About Changes To Accumulated Other Comprehensive IncomeNote 3 Supplemental Information About Changes To Accumulated Other Comprehensive Income (continued)Note 4 InvestmentsNote 4 Investments (continued)Note 5 Income TaxesNote 6 Commitments and ContingenciesNote 6 Commitments and Contingencies (continued)Note 7 Liability For Unpaid ClaimsNote 8 Postretirement BenefitsNote 8 Postretirement Benefit Plans (continued)Note 9 Earnings Per ShareNote 10 DebtNote 11 Business SegmentsNote 11 Business Segments (continued)Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsPart D Adjustment - Discontinued Operations (55) (3,739) 3,684Part D Adjustment - Discontinued OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Changes in Securities, Use Of Proceeds and Issuer Purchases Of Equity SecuritiesItem 6. Exhibits

Exhibits

(31.1) Rule 13a-14(a)/15d-14(a) Certification by Larry M. Hutchison (31.2) Rule 13a-14(a)/15d-14(a) Certification by Gary L. Coleman (31.3) Rule 13a-14(a)/15d-14(a) Certification by Frank M. Svoboda (32.1) Section 1350 Certification by Larry M. Hutchison, Gary L. Coleman, and Frank M. Svoboda