Company Quick10K Filing
Quick10K
Torchmark
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$87.10 110 $9,610
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-17 Earnings, Exhibits
8-K 2019-02-05 Earnings, Exhibits
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-09-27 Enter Agreement, Other Events, Exhibits
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-04-26 Officers, Shareholder Vote, Exhibits
8-K 2018-04-18 Earnings, Exhibits
8-K 2018-03-01 Officers, Exhibits
8-K 2018-02-07 Earnings, Exhibits
HES Hess 20,090
HQY Healthequity 4,430
CVBF CVB Financial 3,060
GVA Granite Construction 2,160
RMR RMR Group 1,860
CMCM Cheetah Mobile 890
EBTC Enterprise Bancorp 346
ELGX Endologix 110
NODC Nodechain 0
INLL Intellisense Solutions 0
TMK 2018-12-31
Item 14. Principal Accountant Fees and Services 119 Part IV. Item 15. Exhibits and Financial Statement Schedules 119
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1-Significant Accounting Policies
Note 2-Statutory Accounting
Note 3-Supplemental Information About Changes To Accumulated Other Comprehensive Income
Note 4-Investments
Note 5-Deferred Acquisition Costs
Note 6-Commitments and Contingencies
Note 7-Liability for Unpaid Claims
Note 8-Income Taxes
Note 9-Postretirement Benefits
Note 10-Supplemental Disclosures of Cash Flow Information
Note 11-Debt
Note 12-Shareholders' Equity
Note 13-Stock-Based Compensation
Note 14-Business Segments
Note 15-Selected Quarterly Data (Unaudited)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
EX-10.11 tmk201810-kexhibit1011.htm
EX-10.17 tmk201810-kexhibit1017.htm
EX-10.23 tmk201810-kexhibit23xdeloi.htm
EX-10.24 tmk201810-kexhibit24.htm
EX-10.46 tmk201810kexhibit1046.htm
EX-31.1 tmk201810-kexhibit311.htm
EX-31.2 tmk201810-kexhibit312.htm
EX-31.3 tmk201810-kexhibit313.htm
EX-32.1 tmk201810-kexhibit321.htm

Torchmark Earnings 2018-12-31

TMK 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 tmk201810-kdocumentxq42018.htm FY 2018 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
[ ] 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: 001-08052
torchmarklogocolora01rgba40.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, TX
 
75070
(Address of principal executive offices)
 
(Zip Code)
972-569-4000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
CUSIP
 
Name of each exchange on
which registered
Common Stock, $1.00 par value per share
 
891027104
 
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:     None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     
Yes  x     No   ¨    
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨       No x   
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  x       No ¨   
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes  x       No ¨   



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the 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  x
As of June 30, 2018, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $9.0 billion based on the closing sale price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
  
Outstanding at February 19, 2019
Common Stock, $1.00 par value per share
  
110,236,297 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
  
Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Stockholders to be held April 25, 2019 (Proxy Statement)
  
Part III



TORCHMARK CORPORATION
Table of Contents
  
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 9.
 
Item 9A.
 
Item 9B.
 
 
 
 
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.






PART I

ITEM 1. BUSINESS
 
Torchmark Corporation ("Torchmark", "we", "our", and "us") is an insurance holding company incorporated in Delaware in 1979. Its primary subsidiaries are Globe Life And Accident Insurance Company (Globe Life), American Income Life Insurance Company (American Income), Liberty National Life Insurance Company (Liberty National), Family Heritage Life Insurance Company of America (Family Heritage), and United American Insurance Company (United American).

Torchmark’s website is: www.torchmarkcorp.com. Torchmark makes available free of charge through its website, its annual report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after they have been electronically filed with or furnished to the Securities and Exchange Commission. Other information included in Torchmark's website is not incorporated into this filing.
 
The following table presents Torchmark’s business by primary marketing distribution method.
 
 
Primary
Distribution Method
 
Company
 
Products and Target Markets
 
Distribution
globelifestandardlogorgbcolo.jpg
Globe Life Direct Response
 
Globe Life And Accident Insurance Company

McKinney, Texas
 
Individual life and supplemental health insurance including juvenile and senior life coverage and Medicare Supplement to lower middle to middle-income Americans.
 
Nationwide distribution through direct-to-consumer channels; including direct mail, electronic media and insert media.

ailcolora20.jpg
American Income Exclusive Agency
 
American Income Life Insurance Company

Waco, Texas
 
Individual life and supplemental health insurance marketed to working families.
 
6,894 producing agents in the U.S., Canada, and New Zealand.
lnlsince1900bluea20.jpg
Liberty National Exclusive Agency
 
Liberty National Life Insurance Company

McKinney, Texas
 
Individual life and supplemental health insurance marketed to lower middle to middle-income families.
 
2,159 producing agents in the U.S.
familyheritagecolora20.jpg
Family Heritage Exclusive Agency
 
Family Heritage Life Insurance Company of America
Cleveland, Ohio
 
Supplemental limited-benefit health insurance to lower middle to middle-income families.
 
1,097 producing agents in the U.S.
ua_colora20.jpg
United American Independent Agency
 
United American
Insurance Company

McKinney, Texas
 
Medicare Supplement coverage to Medicare beneficiaries and, to a lesser extent, supplemental limited-benefit health coverage to people under age 65.
 
4,415 independent producing agents in the U.S.
 
Additional information concerning industry segments may be found in Management’s Discussion and Analysis and in Note 14—Business Segments in the Notes to the Consolidated Financial Statements.

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TMK 2018 FORM 10-K



Insurance
 
Life Insurance
 
Torchmark’s insurance subsidiaries write a variety of nonparticipating ordinary life insurance products. These include traditional and interest sensitive whole-life insurance, term life insurance, and other life insurance. The following tables present selected information about Torchmark’s life products.
 
Annualized Premium in Force
(Dollar amounts in thousands)
 
2018
 
2017
 
2016
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount  
 
% of
Total
Whole life:
 
 
 
 
 
 
 
 
 
 
 
Traditional
$
1,643,122

 
67
 
$
1,567,077

 
66
 
$
1,471,054

 
65
Interest-sensitive
41,414

 
2
 
44,286

 
2
 
47,358

 
2
Term
671,840

 
27
 
664,558

 
28
 
657,797

 
29
Other
108,352

 
4
 
97,178

 
4
 
86,527

 
4
 
$
2,464,728

 
100
 
$
2,373,099

 
100
 
$
2,262,736

 
100
 
 
Policy Count and Average Face Amount Per Policy
(Dollar amounts in thousands)
 
2018
 
2017
 
2016
 
Policy Count
 
Average Face Amount per Policy
 
Policy Count
 
Average Face Amount per Policy
 
Policy Count
 
Average Face Amount per Policy
Whole life:
 
 
 
 
 
 
 
 
 
 
 
Traditional
8,112,745

 
$
13.9

 
8,045,522

 
$
13.6

 
7,953,837

 
$
13.2

Interest-sensitive
209,948

 
20.6

 
219,487

 
20.5

 
229,459

 
20.5

Term
4,459,850

 
14.9

 
4,351,901

 
15.0

 
4,232,417

 
15.2

Other
376,632

 
12.9

 
355,053

 
12.3

 
329,797

 
11.9

 
13,159,175

 
$
14.3

 
12,971,963

 
$
14.1

 
12,745,510

 
$
13.9


The distribution methods for life insurance products include direct response, exclusive agents, and independent agents. These methods are described in more depth in the primary marketing distribution method chart earlier in this report. The following table presents life annualized premium in force by distribution method.
 
Annualized Premium in Force
(Dollar amounts in thousands)
 
2018
 
2017
 
2016
Globe Life Direct Response
$
812,780

 
$
796,628

 
$
782,222

Exclusive agents:
 
 
 
 
 
American Income
1,129,384

 
1,059,216

 
966,990

Liberty National
300,846

 
295,235

 
288,005

Independent agents:
 
 
 
 
 
United American
11,094

 
12,121

 
13,292

Other
210,624

 
209,899

 
212,227

 
$
2,464,728

 
$
2,373,099

 
$
2,262,736

 

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TMK 2018 FORM 10-K


Health Insurance
 
Torchmark offers Medicare Supplement and limited-benefit supplemental health insurance products that include primarily critical illness and accident plans. These policies are designed to supplement health coverage that applicants already own. Medicare Supplements are offered to enrollees in the traditional fee-for-service Medicare program. Medicare Supplement plans are standardized by federal regulation and are designed to pay deductibles and co-payments not paid by Medicare.

The following table presents supplemental health annualized premium in force information for the three years ended December 31, 2018 by product category.
 
Annualized Premium in Force
(Dollar amounts in thousands)
 
2018
 
2017
 
2016
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount  
 
% of
Total
Medicare Supplement
$
524,415

 
49
 
$
495,982

 
49
 
$
502,691

 
51
Limited-benefit plans
549,283

 
51
 
522,038

 
51
 
495,943

 
49

$
1,073,698

 
100
 
$
1,018,020

 
100
 
$
998,634

 
100
 
The following table presents supplemental health annualized premium in force for the three years ended December 31, 2018 by distribution method.
 
Annualized Premium in Force
(Dollar amounts in thousands)
 
2018
 
2017
 
2016
Direct Response
$
79,325

 
$
76,672

 
$
74,261

Exclusive agents:
 
 
 
 
 
Liberty National
201,294

 
205,136

 
210,260

American Income
88,237

 
84,775

 
78,947

Family Heritage
290,186

 
268,584

 
249,857

Independent agents:
 
 
 
 
 
United American
414,656

 
382,853

 
385,309

 
$
1,073,698

 
$
1,018,020

 
$
998,634

 
Annuities
 
Annuity products include single-premium and flexible-premium deferred annuities. Annuities in each of the three years ended December 31, 2018 comprised less than 1% of premium.
 
Pricing
 
Premium rates for life and health insurance products are established using assumptions as to future mortality, morbidity, persistency, investment income, expenses, and target profit margins. These assumptions are based on Company experience and projected investment earnings. Revenues for individual life and health insurance products are primarily derived from premium income, and, to a lesser extent, through policy charges to the policyholder account values on annuity products and certain individual life products. Profitability is affected by actual experience deviations from the pricing assumptions and to the extent investment income varies from that required for policy reserves.
 
Collections for annuity products and certain life products are not recognized as revenues, but are added to policyholder account values. Revenues from these products are derived from charges to the account balances for insurance risk and administrative costs. Profits are earned to the extent these revenues exceed actual costs. Profits are also earned from investment income in excess of the amounts required for policy reserves.

3
TMK 2018 FORM 10-K


Underwriting
 
The underwriting standards of each Torchmark insurance subsidiary are established by management. Each subsidiary uses information obtained from the application and, in some cases, telephone interviews with applicants, including, but not limited to inspection reports, pharmacy data, doctors’ statements and/or medical examinations to determine whether a policy should be issued in accordance with the application, with a different rating, with a rider, with reduced coverage, or rejected.

Reserves
 
The life insurance policy reserves reflected in Torchmark’s consolidated financial statements as future policy benefits are calculated based on accounting principles generally accepted in the United States of America (GAAP). These reserves, with premiums to be received in the future and the interest thereon compounded annually at assumed rates, must be sufficient to cover policy and contract obligations as they mature. Generally, the mortality and persistency assumptions used in the calculations of reserves are based on Company experience. Similar reserves are held on most of the health policies written by Torchmark’s insurance subsidiaries, since these policies generally are issued on a guaranteed-renewable basis. The assumptions used in the calculation of Torchmark’s reserves are reported in Note 1—Significant Accounting Policies. Reserves for annuity products and certain life products consist of the policyholders’ account values and are increased by policyholder deposits and interest credited and are decreased by policy charges and benefit payments.
 
Investments
 
The nature, quality, and percentage mix of insurance company investments are regulated by state laws. The investments of Torchmark insurance subsidiaries consist predominantly of high-quality, investment-grade securities. Approximately 95% of our invested assets at fair value are fixed maturities at December 31, 2018. (See Note 4—Investments and Management’s Discussion and Analysis.)
 
Competition
 
Torchmark competes with other insurance carriers through policyholder service, price, product design, and sales efforts. While there are insurance companies competing with Torchmark, no individual company dominates any of Torchmark’s life or health markets.
 
Torchmark’s health insurance products compete with, in addition to the products of other health insurance carriers, health maintenance organizations, preferred provider organizations, and other health care-related institutions which provide medical benefits based on contractual agreements.
 
Management believes Torchmark companies operate at lower policy acquisition and administrative expense levels than peer companies. This allows Torchmark to have competitive rates while maintaining higher underwriting margins.
 
Regulation
 
Insurance. Insurance companies are subject to regulation and supervision in the states in which they do business. The laws of the various states establish agencies with broad administrative and supervisory powers which include, among other things, granting and revoking licenses to transact business, regulating trade practices, licensing agents, approving policy forms, approving certain premium rates, setting minimum reserve and loss ratio requirements, determining the form and content of required financial statements, and prescribing the type and amount of investments permitted. They are also required to file detailed annual reports with supervisory agencies, and records of their business are subject to examination at any time. Under the rules of the National Association of Insurance Commissioners (NAIC), insurance companies are examined periodically by one or more of the supervisory agencies.

Risk-Based Capital (RBC). The NAIC requires that a risk-based capital formula be applied to all life and health insurers. The risk-based capital formula is a threshold formula rather than a target capital formula. It is designed only to identify companies that require regulatory attention and is not to be used to rate or rank companies that are adequately capitalized. All Torchmark insurance subsidiaries are more than adequately capitalized under the risk-based capital formula.

4
TMK 2018 FORM 10-K


 
Guaranty Assessments. State guaranty laws provide for assessments from insurance companies to be placed into a fund which is used, in the event of failure or insolvency of an insurance company, to fulfill the obligations of that company to its policyholders. The amount which a company is assessed is based on its proportional share of the premium in each state. A significant portion of assessments are recoverable as offsets against state premium taxes. (See Note 6—Commitments and Contingencies for current assessment.)
 
Holding Company. States have enacted legislation requiring registration and periodic reporting by insurance companies domiciled within their respective jurisdictions that control or are controlled by other corporations so as to constitute a holding company system. Torchmark and its subsidiaries have registered as a holding company system pursuant to such legislation in Indiana, Nebraska, Ohio, and New York.

Insurance holding company system statutes and regulations impose various limitations on investments in subsidiaries, and may require prior regulatory approval for material transactions between insurers and affiliates and for the payment of certain dividends and other distributions.
 
Personnel
 
At the end of 2018, Torchmark had 3,102 employees, consistent with the prior year.

5
TMK 2018 FORM 10-K


ITEM 1A. RISK FACTORS
 
Risks Related to Our Business
 
The insurance industry is a regulated industry, populated by many public and private companies. We operate in the industry's life and health insurance sectors, each of which has its own set of risks.
 
Operational Risks:

The development and maintenance of our various distribution systems are critical to growth in product sales and profits. Development and retention of producing agents are critical to support sales growth in this market because our insurance sales are primarily made to individuals, and the face amounts of the life insurance policies sold are typically lower than those of policies sold in higher-income markets. Compensation that is competitive with other career opportunities and motivates producing agents to increase sales is also critical. Globe Life Direct Response is continuously developing new methods of reaching consumers and realizing cost efficiencies. Less than optimum execution of these strategies may result in reduced sales and profits.
 
Economic conditions may materially adversely affect our business and results of operations. We primarily serve the lower-middle to middle-income market for individual life and health insurance and, as a result, we compete directly with alternative uses of a customer’s disposable income. If disposable income within this demographic group declines or the use of disposable income becomes more limited as a result of a significant, sustained economic downturn or otherwise, then new sales of our insurance products could become more challenging, and our policyholders may choose to defer or stop payment of insurance premiums altogether. Economic conditions could also impact our investment portfolio as discussed under Investment Risks below.
 
Variations in expected-to-actual rates of mortality, morbidity and persistency could materially negatively affect our results of operations and financial condition. We establish policy reserves to pay future policyholder benefits. These reserves do not represent an exact calculation of liability, but rather are actuarial estimates based on models that include many assumptions and projections which are inherently uncertain. The reserve computations involve the exercise of significant judgment with respect to levels of mortality, morbidity and persistency, as well as the timing of premium and benefit payments. Even though our actuaries continually test expected-to-actual results, actual levels that occur may differ significantly from the levels assumed when premium rates were first set. Accordingly, we cannot determine with precision the ultimate amounts of policyholder benefits that we will pay or the timing of such payments. Significant adverse variations from the levels assumed when policy reserves are first set could result in increased policy obligations and negatively affect our profit margins and income.
 
A ratings downgrade or other negative action by a rating agency could materially affect our business, financial condition and results of operations. Various rating agencies review the financial performance and condition of insurers, including our insurance subsidiaries, and publish their financial strength ratings as indicators of an insurer’s ability to fulfill its contractual obligations. These ratings are important to maintaining public confidence in our insurance products. A downgrade or other negative action by a rating agency with respect to the financial strength ratings of our insurance subsidiaries could negatively affect us in many ways, including: limiting or restricting the ability of our insurance subsidiaries to pay dividends to us and adversely affecting our ability to sell insurance products through independent insurance agencies.
 
Rating agencies also publish credit ratings for us. Credit ratings are indicators of a debt issuer’s ability to meet the terms of debt obligations in a timely manner. These ratings are important to our overall ability to access certain types of capital. Actual or anticipated downgrades in our credit ratings, or an announcement that our ratings are under further review for a downgrade, could potentially have a negative effect on our financial condition and results of operations. Such an event could limit our access to capital markets, increase the cost of debt, or impair our ability to raise capital to refinance maturing debt obligations, thereby potentially limiting our capacity to support growth at our insurance subsidiaries or making it more difficult to maintain or improve the current financial strength ratings of our insurance subsidiaries.

Ratings reflect only a rating agency’s views and are not recommendations to buy, sell or hold our securities. Rating agencies assign ratings based upon several factors. While most of the factors relate to the rated company, some of the factors relate to the views of the rating agency, general economic conditions and circumstances outside the rated

6
TMK 2018 FORM 10-K


company’s control. In addition, rating agencies use various models and formulas to assess the strength of a rated company, and from time to time rating agencies have, in their discretion, altered the models. Changes to the models could impact a rating agency's judgment of the rating to be assigned to the rated company. There can be no assurance that our current credit ratings will remain in effect for any given period of time or that such ratings will not be lowered, suspended or withdrawn entirely by the rating agencies. We cannot predict what actions the rating agencies may take, or what actions we may take in response to the actions of the rating agencies which could negatively affect our business, financial condition and results of operations.
 
Life Insurance Marketplace Risk:

Our life insurance products are sold in selected niche markets. We are at risk should any of these markets diminish. We have several life distribution channels that focus on distinct market niches, two of which are labor unions and sales via Globe Life Direct Response solicitation. Deterioration of our relationships with organized labor or adverse changes in the public’s receptivity to direct response marketing initiatives could negatively affect our life insurance business.
 
Health Insurance Marketplace Risks:

The health insurance market is subject to substantial regulatory scrutiny. Regulatory changes could impact our Medicare Supplement and other supplemental health business. The nature and timing of any such changes cannot be predicted and could have a material adverse effect on our health insurance business.
 
Competition in the health insurance market can be significant. Sales of our health insurance products are subject to competition from other health insurance companies and alternative healthcare providers, such as those that provide alternatives to traditional Medicare to seniors. In addition, some insurers may be willing to significantly reduce their profit margins or underprice new sales in order to gain market share. We choose not to compete for market share based on these terms. Accordingly, changes in the competitive landscape, including the pricing strategies employed by our competitors, could negatively impact the future sales of our health insurance products.
 
Obtaining timely and appropriate premium rate increases for certain health insurance policies is critical. A significant percentage of the health insurance premiums that our insurance subsidiaries earn is from Medicare Supplement insurance. Medicare Supplement insurance, including conditions under which the premiums for such policies may be increased, is highly regulated at both the state and federal level. As a result, our Medicare Supplement business is characterized by lower profit margins than life insurance and requires strict administrative discipline and economies of scale for success. Since Medicare Supplement policies are coordinated with the federal Medicare program, which experiences health care inflation every year, annual premium rate increases for the Medicare Supplement policies are typically necessary. Obtaining timely rate increases is of critical importance to our success in this market. Accordingly, the inability of our insurance subsidiaries to obtain approval of premium rate increases in a timely manner from state insurance regulatory authorities could adversely impact their profitability and thus our business, financial condition and results of operations.

Information Security and Technology Risks:
 
The failure to maintain effective and efficient information systems at the Company could compromise data security, thereby adversely affecting our financial condition and results of operations. Our business is highly dependent upon information systems to operate in an efficient and resilient manner. We gather and maintain data on our information systems, including the identity, health and financial information of our current, former and prospective policyholders, for the purpose of conducting marketing, sales and policy administration functions. This information is highly targeted by malicious threat actors.

Malicious threat actors, employee or agent errors or disasters affecting our information systems could impair our business operations, regulatory compliance and financial condition. An attacker could circumvent security measures in order to access, alter or delete data from our systems or to render our systems unavailable for business use. Additionally, we may not become aware of sophisticated cyber-attacks for some time after they occur, thereby increasing the Company's exposure. We may have to incur significant costs to address existing and future regulatory requirements related thereto. These risks are heightened as the frequency and sophistication of cyber-attacks increase.


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TMK 2018 FORM 10-K


Employee or agent errors in the handling of our information systems may inadvertently result in unauthorized access to customer or proprietary information, or an inability to use our information systems to efficiently support business operations.

We may utilize the services of third parties in order to conduct our business. Cyber events affecting these third parties could materially impact our sales and operational efficiency.

We anticipate more frequent and sophisticated cyber-attacks along with more impactful regulatory oversight models. An increasing number of states also require that customers be notified of unauthorized access, use or disclosure of their confidential information. Any such breach of confidential information could damage our reputation in the marketplace, deter potential customers from purchasing our products, result in the loss of existing customers, subject us to significant civil and criminal liability, or require us to incur significant technical, legal or other expenses.

In the event of a disaster, such as a natural catastrophe, an industrial accident, a blackout, or a terrorist attack or war, our computer systems may be inaccessible to our employees, agents or customers for a period of time. A disaster or natural catastrophe, an industrial accident, terrorist attack or war may make our information systems unavailable to support business operations for a period of time, which could adversely affect our financial condition and results of operations. Even if our employees are able to report to work, they may be unable to perform their duties for an extended period of time if our data or systems are disabled or destroyed and existing contingency plans cannot function as designed.

Reputational Risk:
 
Damage to the reputation of Torchmark or its subsidiaries could affect our ability to conduct business. Negative publicity through traditional media, internet, social media and other public forums could damage our reputation and adversely impact our agent recruiting efforts, the ability to market our products and the persistency of our block of inforce policies. As discussed above in Information Security and Technology Risks, the Company could be subjected to adverse publicity as a result of a significant security breach.

Investment Risks:
 
Our investments are subject to market and credit risks. Significant downgrades, delinquencies and defaults in our investment portfolio could potentially result in lower net investment income and increased realized and unrealized investment losses. Our invested assets are subject to the customary risks of defaults, downgrades and changes in market values. Our investment portfolio consists predominately of fixed maturity and short-term investments, where we are exposed to the risk that individual issuers will not have the ability to make required interest or principal payments. The concentration of these investments in any particular issuer, industry, group of related industries or geographic areas increases this risk. Factors that may affect both market and credit risks include interest rate levels (consisting of both treasury rate and credit spread), financial market performance, disruptions in credit markets, general economic conditions, legislative changes, particular circumstances affecting the businesses or industries of each issuer and other factors beyond our control.

Additionally, as the majority of our investments are longer-term fixed maturities that we typically hold until maturity, significant increases in interest rates or inactive markets associated with market downturns could cause a material temporary decline in the fair value of our fixed investment portfolio, even with regard to performing assets. These declines could cause a material increase in unrealized losses in our investment portfolio. Significant unrealized losses could substantially reduce our capital position and shareholders’ equity. It is possible that our investment in certain of these securities with unrealized losses could experience a default event and that a portion or all of that unrealized loss could be unrecoverable. In that case, the unrealized loss would be realized, at which point we would take an impairment charge, reducing our net income.
 
We cannot be assured that any particular issuer, regardless of industry, will be able to make required interest and principal payments on a timely basis or at all. Significant downgrades or defaults of issuers could negatively impact our risk-based capital ratios, leading to potential downgrades of the Company by rating agencies, potential reduction in future dividend capacity from our insurance subsidiaries, and/or higher financing costs at the holding company should additional statutory capital be required.
 

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Changes in interest rates could negatively affect income. Declines in interest rates expose insurance companies to the risk that they will fail to earn the level of interest on investments assumed in pricing products and in setting discount rates used to calculate net policy liabilities. We attempt to manage our investments to earn the level of interest on investments assumed in pricing products and in setting the discount rates used to calculate net policy liabilities. There is a risk that a significant and persistent decline in interest rates will prevent us from doing so, thereby having a negative impact on income. Significant decreases in interest rates could result in calls by issuers of investments, where such features are available to issuers. Any such calls could result in a decline in our investment income, as reinvestment of the proceeds would likely be at lower rates.

Increases in interest rates could cause the fair value of securities within our fixed maturity portfolio to decline. A rise in interest rates could also result in certain policyholders surrendering their annuity policies for cash, thereby potentially requiring our insurance subsidiaries to liquidate invested assets if other sources of liquidity are not available to meet their obligations. In such a case, realized losses could result from such sales and could adversely affect our statutory income, consolidated RBC ratio and results of operations.

Liquidity Risks:
 
Our ability to fund operations is substantially dependent on funds available, primarily dividends, from our insurance subsidiaries. As a holding company with no direct operations, our principal asset is the capital stock of our insurance subsidiaries, which periodically declare and distribute dividends on their capital stock. Moreover, our liquidity, including our ability to pay our operating expenses and to make principal and interest payments on debt securities or other indebtedness owed by us, as well as our ability to pay dividends on our common stock or any preferred stock, depends significantly upon the surplus and earnings of our insurance subsidiaries and the ability of these subsidiaries to pay dividends or to advance or repay funds to us. Other sources of liquidity include a variety of short-term and long-term instruments, including our credit facility, commercial paper, long-term debt, intercompany financing and reinsurance.

The principal sources of our insurance subsidiaries’ liquidity are insurance premiums, as well as investment income, maturities, repayments and other cash flow from our investment portfolio. Our insurance subsidiaries are subject to various state statutory and regulatory restrictions applicable to insurance companies that limit the amount of cash dividends, loans and advances that those subsidiaries may pay to us, including laws establishing minimum solvency and liquidity thresholds. For example, in the states where our companies are domiciled, an insurance company generally may pay dividends only out of its unassigned surplus as reflected in its statutory financial statements filed in that state. Additionally, dividends paid by insurance subsidiaries are restricted based on regulations by their states of domicile. Accordingly, impairments in assets or disruptions in our insurance subsidiaries’ operations that reduce their capital or cash flow could limit or disallow the payment of dividends to us, a principal source of our cash flow.
 
Changes in laws or regulations in the states in which our companies are domiciled could constrain the ability of our insurance subsidiaries to pay dividends or to advance or repay funds to us in sufficient amounts and at times necessary to meet our debt obligations and corporate expenses. Additionally, if our insurance subsidiaries were unable to obtain approval of our health insurance premium rate increases in a timely manner from state insurance regulatory authorities, their profitability, and their ability to declare and distribute dividends to us could be negatively impacted. Limitations on the flow of dividends from our subsidiaries could limit our ability to service and repay debt or to pay dividends on our capital stock.

Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs or access capital, as well as affect our cost of capital. Should interest rates rise in the future, the interest rate on any new debt obligation we may issue could increase and our net income could be reduced. In addition, if the credit and capital markets were to experience significant disruption, uncertainty and instability, these conditions could adversely affect our access to capital. Such market conditions may limit our ability to replace maturing liabilities in a timely manner or at all and/or access the capital necessary to grow our business.
 
In the unlikely event that current sources of liquidity do not satisfy our needs, we may have to seek additional financing or raise capital. The availability and cost of additional financing or capital depend on a variety of factors such as market conditions, the general availability of credit or capital, the volume of trading activities, the overall availability of credit to the insurance industry and our credit ratings and credit capacity. Additionally, customers, lenders or investors could develop a negative perception of our financial prospects if we were to incur large investment losses or if the level of

9
TMK 2018 FORM 10-K


our business activity were to decrease due to a market downturn. Our access to funds may also be impaired if regulatory authorities or rating agencies take negative actions against us. If our internal sources of liquidity prove to be insufficient, we may not be able to successfully obtain additional financing on favorable terms or at all. As such, we may be forced to delay raising capital, issue shorter term securities than we would prefer or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility. If so, our results of operations, financial condition and cash flows could be materially negatively affected.

Regulatory Risks:
 
Our businesses are heavily regulated and changes in regulation may reduce our profitability and growth. Insurance companies, including our insurance subsidiaries, are subject to extensive supervision and regulation in the states in which they do business. The primary purpose of this supervision and regulation is the protection of policyholders, not investors. State agencies have broad administrative power over numerous aspects of our business, including premium rates and other terms and conditions that we can include in the insurance policies offered by our insurance subsidiaries, marketing practices, advertising, agent licensing, policy forms, capital adequacy, solvency, reserves and permitted investments. Also, regulatory authorities have relatively broad discretion to grant, renew or revoke licenses or approvals. The insurance laws, regulations and policies currently affecting the Company may change at any time, possibly having an adverse effect on our business. Should regulatory changes occur, we may be unable to maintain all required licenses and approvals, or fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of such laws and regulations, which may change from time to time. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend some or all of our business activities and/or impose substantial fines.
 
We cannot predict the timing or substance of any future regulatory initiatives. In recent years, there has been increased scrutiny of insurance companies, including our insurance subsidiaries, by insurance regulatory authorities, which has included more extensive examinations and more detailed review of disclosure documents. These regulatory authorities may bring regulatory or other legal actions against us if, in their view, our practices, or those of our agents, are improper. Such actions could result in substantial fines, penalties and/or prohibitions or restrictions on our business activities, and could have a material adverse effect on our business, results of operations or financial condition. Additionally, changes in the overall legal or regulatory environment may cause us to change our views regarding the actions that we need to take from a legal or regulatory risk management perspective, thus necessitating changes to our practices that may, in some cases, limit our ability to grow, impact regulatory capital requirements, or otherwise negatively impact our profitability.
 
Currently, the U.S. federal government does not directly regulate the business of insurance. However, the Dodd-Frank Wall Street Record and Consumer Protection Act of 2010 established a Federal Insurance Office (FIO), charged with monitoring systemic risk exposure in all lines of insurance other than health insurance and long-term care insurance, and a Financial Stability Oversight Council (FSOC), which serves to identify and respond to risks and emerging threats to U.S. financial systems. A Center for Consumer Information and Insurance Oversight (CCIIO), established under the Department of Health and Human Services, is charged with overseeing implementation of the Affordable Care Act (ACA). The creation of these insurance regulatory offices may indicate that the federal government intends to play a larger role in the direct oversight or regulation of the insurance industry. We cannot predict what impact, if any, the ongoing operations of the FIO, FSOC and CCIIO, as well as any other proposals or executive action for federal oversight or regulation of insurance could have on our business, results of operations or financial condition.

Changes in U.S. federal income tax law could increase our tax costs or negatively impact our insurance subsidiaries' capital. Changes to the Internal Revenue Code, administrative rulings, or court decisions affecting the insurance industry, including the products insurers offer, could increase our effective tax rate and lower our net income, adversely impact our insurance subsidiaries' capital, or limit the ability of our insurance subsidiaries to sell certain of their products.
 
Changes in accounting standards issued by accounting standard-setting bodies may affect our financial statements, reduce our reported profitability and change the timing of profit recognition. Our financial statements are subject to the application of GAAP and accounting practices as promulgated by the National Association of Insurance Commissioners’ statutory accounting practices (NAIC SAP), which principles are periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised accounting standards or guidance issued by

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recognized authoritative bodies. Future accounting standards that we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and such changes could have a material adverse effect on our financial condition and results of operations. Further, standard setters have a full agenda of unissued topics under review at any given time, many of which have the potential to negatively impact our profitability.

Non-compliance with laws or regulations related to customer and consumer privacy and information security, including a failure to ensure that our business associates with access to sensitive customer and consumer information maintain its confidentiality, could materially adversely affect our reputation and business operations. The collection, maintenance, use, disclosure and disposal of personally identifiable information by our insurance subsidiaries are regulated at the international, federal and state levels. These laws and rules are subject to change by legislation or administrative or judicial interpretation. Various state laws address the use and disclosure of personally identifiable information to the extent they are more restrictive than those contained in the privacy and security provisions in the federal Gramm-Leach-Bliley Act of 1999 (GLBA), the Health Information Technology for Economic and Clinical Health Act (HITECH), and in the Health Insurance Portability and Accountability Act of 1996 (HIPAA). HIPAA also requires that we impose privacy and security requirements on our business associates (as that term is defined in the HIPAA regulations). Noncompliance with any privacy laws, whether by us or by one of our business associates, could have a material adverse effect on our business, reputation and results of operations and could include material fines and penalties, various forms of damages, consent orders regarding our privacy and security practices, adverse actions against our licenses to do business and injunctive relief.
 
Litigation Risk:
 
Litigation could result in substantial judgments against us or our subsidiaries. We are, and in the future may be, subject to litigation in the ordinary course of business. Some of these proceedings have been brought on behalf of various alleged classes of complainants, and, in certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. Members of our management and legal teams review litigation on a quarterly and annual basis. However, the outcome of any such litigation cannot be predicted with certainty. A number of civil jury verdicts involving the insurers’ sales practices, alleged agent misconduct, failure to properly supervise agents and other matters have been returned against insurers in the jurisdictions in which our insurance subsidiaries do business. These lawsuits have resulted in the award of substantial judgments against insurers that are disproportionate to the actual damages, including material amounts of punitive damages. In some states in which we operate, juries have substantial discretion in awarding punitive damages. This discretion creates the potential for unpredictable material adverse judgments in any given punitive damages suit.
 
Our pending and future litigation could adversely affect us because of the costs of defending these cases, the costs of settlement or judgments against us, or changes in our operations that could result from litigation. Substantial legal liability in these or future legal actions could also have a material adverse financial effect or cause significant harm to our reputation, which, in turn, could materially harm our business and our business prospects.

Actual or alleged misclassification of independent contractors at our insurance subsidiaries could result in adverse legal, tax or financial consequences. A significant portion of our sales agents are independent contractors. Although we believe we have properly classified such individuals, a risk nevertheless exists that a court, the IRS or other authority will take the position that those sales agents are employees. The laws and regulations that govern the status and classification of workers are subject to change and differing interpretations, which we cannot predict.
If there is an adverse determination regarding the classification of some or all of the independent contractors at our insurance subsidiaries by a court or governmental agency, we could incur significant costs with respect to payroll tax liabilities, employee benefits, wage payments, fines, judgments and/or legal settlements, any of which could have a material adverse effect on our business, financial condition and results of operations. In addition, any resulting reclassification could necessitate significant changes in our affected insurance subsidiaries’ business models.
Catastrophic Event Risk:
 
Our business is subject to the risk of the occurrence of catastrophic events. Our insurance policies are issued to and held by a large number of policyholders throughout the United States in relatively low-face amounts. Accordingly, it is unlikely that a large portion of our policyholder base would be affected by a single natural disaster. However, our insurance operations could be exposed to the risk of catastrophic mortality or morbidity caused by events such as a

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TMK 2018 FORM 10-K


pandemic, hurricane, earthquake, or man-made catastrophes, including acts of terrorism or war, which may produce significant claims in larger areas, especially those that are heavily populated. Claims resulting from natural or man-made catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or harm our financial condition.
 

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TMK 2018 FORM 10-K


ITEM 1B. UNRESOLVED STAFF COMMENTS
 
As of December 31, 2018, Torchmark had no unresolved SEC staff comments.
 
ITEM 2. PROPERTIES
 
Torchmark, through its subsidiaries, owns or leases buildings that are used in the normal course of business. Torchmark owns and occupies a 300,000 square foot facility in McKinney, Texas. This facility is Torchmark’s corporate headquarters and also houses the operations of subsidiaries, United American and Liberty National, as well as many operations of other subsidiaries. In addition, United American leases 5,000 square feet of space in Omaha, Nebraska and, through a subsidiary, leases 3,230 square feet of office space in Syracuse, New York.

Globe Life leases 34,000 square feet of an office building located in Oklahoma City, Oklahoma. Globe Marketing Services, a subsidiary of Globe Life, owns a 133,000 square foot facility in Oklahoma City that houses the Globe Life Direct Response operation. Globe Life also leases a 10,000 square foot storage facility in Allen, Texas.
 
American Income owns and occupies two buildings located in Waco, Texas: a 70,000 square foot building for corporate operations and a 43,000 square foot printing facility. American Income also leases 19,597 square feet in additional corporate office space in Waco, and leases office space throughout the United States to support its marketing operations.
 
Family Heritage owns 50% of a partnership that owns a 66,000 square foot building in Broadview Heights, Ohio (a suburb of Cleveland). Family Heritage leases 24,157 square feet of the building for various corporate operations. The partnership also leases a portion of the building to unrelated tenants.

ITEM 3. LEGAL PROCEEDINGS

Torchmark and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including putative class action litigation, 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 unclaimed property audits in Note 6—Commitments and Contingencies.

ITEM 4. MINE SAFETY DISCLOSURES
 
Not Applicable.

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TMK 2018 FORM 10-K


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

The principal market in which Torchmark’s common stock is traded is the New York Stock Exchange (NYSE: TMK). There were 2,521 shareholders of record on December 31, 2018, excluding shareholder accounts held in nominee form.

The line graph shown below compares Torchmark’s cumulative total return on its common stock with the cumulative total returns of the Standard and Poor’s 500 Stock Index (S&P 500) and the Standard and Poor’s Life & Health Insurance Index (S&P Life & Health Insurance). Torchmark is one of the companies whose stock is included within both the S&P 500 and the S&P Life & Health Insurance Index.
chart-8731a0de5f585ffcbea.jpg
*$100 invested on 12/31/13 in stock or index, including reinvestment of dividends. Fiscal year ended December 31.
(Copyright © 2019 Standard & Poor's, a division of S&P Global. All rights reserved.) 


Purchases of Certain Equity Securities by the Issuer and Others for the Fourth Quarter 2018
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
October 1-31, 2018
658,923

 
$
84.59

 
658,923

 
November 1-30, 2018
199,443

 
86.20

 
199,443

 
December 1-31, 2018
644,199

 
78.40

 
644,199

 
 
On August 7, 2018, Torchmark’s Board reaffirmed its continued authorization of the Company’s stock repurchase program in amounts and with timing that management, in consultation with the Board, determined to be in the best interest of the Company. The program has no defined expiration date or maximum number of shares to be purchased.


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TMK 2018 FORM 10-K


ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with Torchmark’s Consolidated Financial Statements and related notes reported elsewhere in this Form 10-K:
(Dollar amounts in thousands except per share and percentage data)
Year ended December 31,
2018
 
2017
 
2016
 
2015
 
2014
Premium revenue:
 
 
 
 
 
 
 
 
 
Life
$
2,406,555

 
$
2,306,547

 
$
2,189,333

 
$
2,073,065

 
$
1,966,300

Health
1,015,339

 
976,373

 
947,663

 
925,520

 
869,440

Other
12

 
15

 
38

 
135

 
400

Total premium
3,421,906

 
3,282,935

 
3,137,034

 
2,998,720

 
2,836,140

Net investment income
882,512

 
847,885

 
806,903

 
773,951

 
758,286

Realized gains (losses)
(1,804
)
 
23,611

 
(10,683
)
 
(8,791
)
 
23,548

Total revenue
4,303,751

 
4,155,573

 
3,934,629

 
3,766,065

 
3,620,095

Income from continuing operations, net of tax
701,510

 
1,458,263

 
539,590

 
516,293

 
528,074

Income from discontinued operations, net of tax
(44
)
 
(3,769
)
 
10,189

 
10,807

 
14,865

Net income(1)
701,466

 
1,454,494

 
549,779

 
527,100

 
542,939

Per common share:
 
 
 
 
 
 
 
 
 
Basic earnings:
 
 
 
 
 
 
 
 
 
Income from continuing operations
6.22

 
12.53

 
4.50

 
4.13

 
4.04

Income from discontinued operations

 
(0.03
)
 
0.08

 
0.08

 
0.11

Net income(1)
6.22

 
12.50

 
4.58

 
4.21

 
4.15

Diluted earnings:
 
 
 
 
 
 
 
 
 
Income from continuing operations
6.09

 
12.26

 
4.41

 
4.07

 
3.98

Income from discontinued operations

 
(0.04
)
 
0.08

 
0.09

 
0.11

Net income(1)
6.09

 
12.22

 
4.49

 
4.16

 
4.09

Cash dividends declared
0.64

 
0.60

 
0.56

 
0.54

 
0.51

Cash dividends paid
0.63

 
0.59

 
0.56

 
0.53

 
0.49

Basic weighted average shares outstanding
112,873

 
116,343

 
120,001

 
125,095

 
130,722

Diluted weighted average shares outstanding
115,249

 
118,983

 
122,368

 
126,757

 
132,640

 
 
 
 
 
 
 
 
 
 
As of December 31,
2018
 
2017
 
2016
 
2015
 
2014
Cash and invested assets
$
17,239,570

 
$
17,853,047

 
$
15,955,891

 
$
14,405,073

 
$
15,058,996

Total assets
23,095,722

 
23,474,985

 
21,436,087

 
19,853,213

 
20,272,259

Short-term debt
307,848

 
328,067

 
264,475

 
490,129

 
238,398

Long-term debt
1,357,185

 
1,132,201

 
1,133,165

 
743,733

 
992,130

Shareholders' equity(1)
5,415,177

 
6,231,421

 
4,566,861

 
4,055,552

 
4,697,466

Per diluted common share(1)
48.11

 
52.95

 
37.76

 
32.71

 
36.19

Effect of fixed maturity revaluation on diluted
equity per common share(2)
3.79

 
13.18

 
5.63

 
2.62

 
8.28

Annualized premium in force:
 
 
 
 
 
 
 
 
 
Life
2,464,728

 
2,373,099

 
2,262,736

 
2,150,498

 
2,044,545

Health
1,073,698

 
1,018,020

 
998,634

 
973,042

 
947,323

Total
3,538,426

 
3,391,119

 
3,261,370

 
3,123,540

 
2,991,868

Basic shares outstanding
110,693

 
114,593

 
118,031

 
122,370

 
127,930

Diluted shares outstanding
112,561

 
117,696

 
120,958

 
123,996

 
129,812

Note: Certain figures have been revised to reflect the adoption of new accounting guidance and discontinued operations.
(1)
See discussion of tax legislation impact in 2017 in the Results of Operations.
(2)
See discussion under the caption Capital Resources in Management’s Discussion and Analysis in this report concerning the effect this rule has on Torchmark’s equity.

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TMK 2018 FORM 10-K


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with the Selected Financial Data and Torchmark’s Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.
 
RESULTS OF OPERATIONS
icons2002.jpg
 
How Torchmark Views Its Operations. Torchmark is the holding company for a group of insurance companies that market primarily individual life and supplemental health insurance to lower middle 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.

icons003a01.jpg
 
Insurance Product Line Segments. The insurance product line segments involve the marketing, underwriting, and 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

icons3002.jpg
 
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




 

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TMK 2018 FORM 10-K


CURRENT YEAR HIGHLIGHTS:

Net income as a return on equity (ROE) was 12.3%(1) and net operating income as an ROE, excluding net unrealized gains on the fixed maturity portfolio was 14.6%(1,2).
Total premium increased by 4% over the prior year. Life premium increased by 4% for the year from $2.3 billion to $2.4 billion. Life underwriting margin increased 8% from $604 million in 2017 to $652 million in 2018.
Net investment income increased 4% over the prior year. In addition, excess investment income, a measure used by management as explained below, increased by 2% over the prior year.
During 2018, the Company repurchased 4.4 million shares at a total cost of $372 million for an average share price of $84.38.

The following represents net income and net operating income from continuing operations for the 3 years ended December 31, 2018.
opsummarycharts2018.jpg

(1)
In 2017, 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.
In addition, the Company recorded an adjustment of $874 million to net income during 2017. In 2018, the Company completed its analysis of the tax legislation and recorded an additional $798 thousand adjustment related to the remeasurement of the deferred tax assets and liabilities based on the 21% rate. As the impact of the tax legislation was treated as a non-operating event, it was excluded from net operating income.
(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. It differs from net income primarily because it excludes certain non-operating items such as realized 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 was $701 million in 2018, compared with $1.5 billion in 2017. This decrease was primarily due to an $874 million increase to net income in 2017, relating to new tax legislation as described above. Net income increased in 2017 from $550 million in 2016. On a diluted per common share basis, 2018 net income fell 50% to $6.09 after a 172% increase in 2017. Net income per diluted common share in 2017 rose to $12.22 from $4.49 in 2016. As previously noted, 2017 net income per diluted common share includes the effect of the adjustment to net income relating to new tax legislation. The percentage growth in net income per share results continues to exceed the growth in dollar amounts due to our share repurchase program. Each year’s net income per share was affected by realized gains (losses), which were $(0.01), $0.15, and $(0.06), in 2018, 2017 and 2016, respectively. More information concerning realized gains and losses can be found under the caption Realized Gains and Losses in this report.

Net operating income from continuing operations rose each year over the prior year from $549 million in 2016 to $574 million in 2017 to $707 million in 2018. Net operating income is the consolidated total of segment profits after tax and

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TMK 2018 FORM 10-K


as such is considered a non-GAAP measure. Net income is the most directly comparable GAAP measure. We do not consider realized gains and losses to be a component of our core insurance operations or operating segments. Additionally, net income was affected by certain significant and unusual non-operating items in each of the years 2016 through 2018. We do not view these items as components of core operating results because they are not indicative of past performance or future prospects of the insurance operations. We remove items such as these that relate to prior periods or are non-operating items when evaluating the results of current operations, and therefore exclude such items from our segment analysis for current periods.

Torchmark’s operations on a segment-by-segment basis are discussed in depth under the appropriate captions following in this report.

Analysis of Profitability by Segment
(Dollar amounts in thousands)
 
2018
 
2017
 
2016
 
2018
Change
 
%
 
2017
Change
 
%
Life insurance underwriting margin
$
652,301

 
$
604,337

 
$
573,762

 
$
47,964

 
8

 
$
30,575

 
5

Health insurance underwriting margin
236,053

 
219,508

 
210,056

 
16,545

 
8

 
9,452

 
4

Annuity underwriting margin
10,376

 
10,562

 
9,394

 
(186
)
 
(2
)
 
1,168

 
12

Excess investment income
245,094

 
239,363

 
224,031

 
5,731

 
2

 
15,332

 
7

Other insurance:
 
 
 
 
 
 

 
 
 
 
 
 
Other income
1,236

 
1,270

 
1,534

 
(34
)
 
(3
)
 
(264
)
 
(17
)
Administrative expense
(223,941
)
 
(210,590
)
 
(196,598
)
 
(13,351
)
 
6

 
(13,992
)
 
7

Corporate and other
(50,476
)
 
(43,285
)
 
(34,913
)
 
(7,191
)
 
17

 
(8,372
)
 
24

Pre-tax total
870,643

 
821,165

 
787,266

 
49,478

 
6

 
33,899

 
4

Applicable taxes
(163,669
)
 
(247,484
)
 
(237,906
)
 
83,815

 
(34
)
 
(9,578
)
 
4

Net operating income from continuing operations
706,974

 
573,681

 
549,360

 
133,293

 
23

 
24,321

 
4

Discontinued operations—Part D, net of tax

 

 
9,033

 

 

 
(9,033
)
 
(100
)
Net operating income
706,974

 
573,681

 
558,393

 
133,293

 
23

 
15,288

 
3

Reconciling items, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized gains (losses)—investments
7,327

 
20,217

 
(6,944
)
 
(12,890
)
 
 
 
27,161

 
 
Realized loss—redemption of debt
(8,752
)
 
(2,627
)
 

 
(6,125
)
 
 
 
(2,627
)
 
 
Part D adjustments—discontinued operations
(44
)
 
(3,769
)
 
1,156

 
3,725

 
 
 
(4,925
)
 
 
Guaranty fund assessments

 
(1,171
)
 

 
1,171

 
 
 
(1,171
)
 
 
Administrative settlements
(3,590
)
 
(5,628
)
 
(2,467
)
 
2,038

 
 
 
(3,161
)
 
 
Non-operating fees
(1,247
)
 
(187
)
 
(359
)
 
(1,060
)
 
 
 
172

 
 
Tax reform adjustment
798

 
873,978

 

 
(873,180
)
 
 
 
873,978

 
 
Net income
$
701,466

 
$
1,454,494

 
$
549,779

 
$
(753,028
)
 
(52
)
 
$
904,715

 
165


The life insurance segment is our strongest segment and is the largest contributor to earnings in each year presented. This segment contributed $48 million in 2018 and $31 million in 2017 to the growth in our underwriting margin. Also contributing to growth in income in both years was our health insurance segment, which provided $17 million of additional margin in 2018 and $9 million in 2017.
 
Total revenues rose 4% or $148 million in 2018 to $4.3 billion from the prior year. Life premium rose 4% or $100 million in 2018 to $2.4 billion. Life premium increased $117 million in 2017 to $2.3 billion. Health premium increased 4% to $1.0 billion in 2018 and contributed $39 million to 2018 revenue growth, after having gained 3% to $976 million in 2017. Health premium contributed $29 million to 2017 revenue growth. Net investment income rose 4% or $35 million in 2018, and rose 5% or $41 million in 2017.
 
Life insurance premium and underwriting margins have grown in each of the last three years ended December 31, 2018. The increase in life premium was driven by sales growth and improvements in persistency. Life underwriting

18
TMK 2018 FORM 10-K


margin as a percent of premium increased in 2018 to 27%, after remaining flat at 26% in 2016 and 2017. Net life sales decreased $4 million in 2018 to $413 million. The decline is primarily attributable to flat sales in the American Income Exclusive Agency due to lack of growth in agent count and productivity, and a decline in sales in our Globe Life Direct Response unit as a result of operational changes intended to improve profitability on new business. Net life sales increased between 2016 and 2017. The life insurance segment is discussed further in this report under the caption Life Insurance.
 
Health insurance premium income increased 4% to $1.0 billion in 2018. Health net sales also rose 9% to $172 million during 2018 attributable to both individual and group sales. Group sales vary significantly from period to period due to the impact of large groups that are sold from time-to-time. First-year collected health premium rose 9% to $148 million from the prior year total of $136 million as a result of higher net sales in 2017. Health margins as a percentage of premium increased to 23% as a result of favorable policy obligations as a percentage of premium, while underwriting income increasing to $236 million for 2018 primarily as a result of favorable policy obligations and growth in premium income. Underwriting income was $220 million in 2017 compared with $210 million in 2016. The health insurance segment is discussed further in this report under the caption Health Insurance.

We do not currently market stand-alone fixed or deferred annuities. See the caption Annuities for discussion of the Annuity segment.
 
Excess investment income, the measure of profitability of our investment segment, increased 2% to $245 million from the prior year amount of $239 million. In 2017, excess investment income increased 7%. Excess investment income, is based on three major components: net investment income, required interest on net policy liabilities (interest applicable to insurance products), and financing costs. In 2018, net investment income rose 4%, compared with 5% in 2017. At the same time, our investment portfolio grew 5% in 2018 and 6% in 2017, on an amortized cost basis. 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 6% in 2018 to $2.13 from $2.01 in 2017. See further discussion under the caption Investments.
 
Insurance administrative expenses were up 6.3% in 2018 when compared with the prior year period, and increased to 6.5% as a percentage of premium from 6.4% in 2017 and 6.3% in 2016. The increase in administrative expenses is primarily due to an increase in other employee costs and investments in information technology. See further discussion under the caption Administrative expenses.


19
TMK 2018 FORM 10-K


SHARE PURCHASES

Torchmark has an ongoing share repurchase program that began in 1986, and is reviewed quarterly by management and annually reaffirmed by the Board of Directors. The program was reaffirmed on August 7, 2018. With no specified authorization amount, we determine the amount of repurchases based on the amount of the excess cash flow at the Parent Company, general market conditions, and other alternative uses. The majority of these purchases are made from excess cash flow. Excess cash flow at the Parent Company is primarily comprised of dividends received from the insurance subsidiaries less interest expense paid on its debt, dividends paid to Torchmark shareholders, and other limited operating activities. Additionally, when stock options are exercised, proceeds from these exercises and the resulting tax benefit are used to repurchase additional shares on the open market to minimize dilution as a result of the option exercises. The Board of Directors has authorized 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 and its shareholders. The following chart summarizes share purchase activity for each of the last three years.
 
Analysis of Share Purchases
(Amounts in thousands)
 
2018
 
2017
 
2016
Purchases with:
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
Share repurchase program
4,406

 
$
371,794

 
4,126

 
$
324,622

 
5,208

 
$
311,332

Option proceeds
571

 
49,955

 
1,103

 
88,367

 
1,487

 
93,452

Total
4,977

 
$
421,749

 
5,229

 
$
412,989

 
6,695

 
$
404,784


With the significant pullback of the overall stock market in December, the Company accelerated approximately $25 million of repurchases from 2019 to 2018 at an average price of approximately $76.00. The repurchases were paid from cash at the Parent Company and issuance of commercial paper.

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

20
TMK 2018 FORM 10-K


A discussion of each of Torchmark’s segments follows. The following discussions are presented in the manner we view our operations, as described in Note 14—Business Segments.

LIFE INSURANCE

Life insurance is our largest insurance segment, with 2018 life premium representing 70% of total premium. Life underwriting income before other income and administrative expense represented 73% of the total in 2018. Additionally, investments supporting the reserves for life products produce the majority of excess 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 with 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.

The following table presents the summary of results of life insurance. Further discussion of the results by distribution channel is included below.

Life Insurance
Summary of Results
(Dollar amounts in thousands)
 
2018
 
2017
 
2016
 
Amount
 
% of
Premium
 
Amount
 
% of
Premium
 
Amount
 
% of
Premium
Premium and policy charges
$
2,406,555

 
100

 
$
2,306,547

 
100

 
$
2,189,333

 
100

 
 
 
 
 
 
 
 
 
 
 
 
Policy obligations
1,591,790

 
66

 
1,549,602

 
67

 
1,475,477

 
67

Required interest on reserves
(636,040
)
 
(26
)
 
(607,007
)
 
(26
)
 
(577,827
)
 
(26
)
Net policy obligations
955,750

 
40

 
942,595

 
41

 
897,650

 
41

Commissions, premium taxes, and non-deferred acquisition expenses
190,007

 
8

 
177,111

 
8

 
164,476

 
8

Amortization of acquisition costs
608,497

 
25

 
582,504

 
25

 
553,445

 
25

Total expense
1,754,254

 
73

 
1,702,210

 
74

 
1,615,571

 
74

Insurance underwriting margin before other income and administrative expenses
$
652,301

 
27

 
$
604,337

 
26

 
$
573,762

 
26








21
TMK 2018 FORM 10-K


Life insurance premium rose 4% to $2.4 billion in 2018 after having increased 5% in 2017 to $2.3 billion. Life insurance products are marketed through several distribution channels. Premium income by distribution channel for each of the last three years is as follows:
 
Life Insurance
Premium by Distribution Channel
(Dollar amounts in thousands)
 
2018
 
2017
 
2016
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
American Income Exclusive Agency
$
1,081,333

 
45
 
$
999,279

 
43
 
$
913,355

 
42
Globe Life Direct Response
828,935

 
34
 
812,907

 
35
 
782,765

 
36
Liberty National Exclusive Agency
278,878

 
12
 
274,635

 
12
 
270,476

 
12
Other Agencies
217,409

 
9
 
219,726

 
10
 
222,737

 
10
 
$
2,406,555

 
100
 
$
2,306,547

 
100
 
$
2,189,333

 
100
 
Annualized life premium in force was $2.5 billion at December 31, 2018, an increase of 4% over $2.4 billion a year earlier. Annualized life premium in force was $2.3 billion at December 31, 2016.

The following table shows net sales information for each of the last three years by distribution channel.
 
Life Insurance
Net Sales by Distribution Channel
(Dollar amounts in thousands)
 
2018
 
2017
 
2016
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
American Income Exclusive Agency
$
223,924

 
54
 
$
223,259

 
54
 
$
209,856

 
51
Globe Life Direct Response
126,133

 
31
 
135,704

 
33
 
150,267

 
36
Liberty National Exclusive Agency
49,173

 
12
 
46,886

 
11
 
40,159

 
10
Other Agencies
13,293

 
3
 
10,233

 
2
 
11,673

 
3
 
$
412,523

 
100
 
$
416,082

 
100
 
$
411,955

 
100

The table below discloses first-year collected life premium by distribution channel.
 
Life Insurance
First-Year Collected Premium by Distribution Channel
(Dollar amounts in thousands)
 
2018
 
2017
 
2016
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
American Income Exclusive Agency
$
190,680

 
60
 
$
182,538

 
58
 
$
173,573

 
56
Globe Life Direct Response
82,432

 
26
 
92,057

 
29
 
98,496

 
31
Liberty National Exclusive Agency
36,463

 
11
 
33,191

 
10
 
29,103

 
9
Other Agencies
10,342

 
3
 
9,633

 
3
 
11,458

 
4
 
$
319,917

 
100
 
$
317,419

 
100
 
$
312,630

 
100
 

22
TMK 2018 FORM 10-K


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 to help ensure sustainable growth. This agency is Torchmark’s largest contributor to life premium of any distribution channel at 45% of Torchmark’s 2018 total. This agency produced premium income of $1.1 billion, an increase of 8% over the prior year total of $999 million, after having risen 9% in 2017. First-year collected premium was $191 million compared with $183 million in 2017, an increase of 4%. First-year collected premium rose 5% in 2017. Net sales increased to $224 million in 2018 over the 2017 total of $223 million. Net sales increased 6% in 2017 over the 2016 total of $210 million. Sales growth in our captive agencies is generally dependent on growth in the size of the agency force. The American Income Exclusive Agency's average producing agent count rose slightly to 6,971 in 2018, compared with 6,962 in 2017. The average producing 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 the agency force. In addition to offering financial incentives and training opportunities, the agency has made considerable investments in information technology, including launching a lead mapping and customer relationship management tool for the agency force. We anticipate this tool will help enhance agent productivity and agent retention.

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 long-term growth has been fueled by constant innovation. In recent years, electronic media production has grown rapidly as management has aggressively increased marketing activities related to internet and mobile technology, and has focused on driving traffic to the inbound call center. We 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 $829 million, representing 34% of Torchmark’s total life premium during 2018. Life premium in this channel increased 4% in 2017 to $813 million over the 2016 total of $783 million. Net sales of $126 million for this group decreased 7% from $136 million in 2017, after a 10% decrease in 2017 due to operational changes designed to maximize underwriting margin dollars. In 2019, we expect sales to be relatively flat or increase slightly. First-year collected premium decreased 10% to $82 million in 2018 after having decreased 7% in 2017.

The Liberty National Exclusive Agency markets individual and group life insurance to lower middle to middle-income customers. Life premium income for this agency was $279 million in 2018, an increase of 2% from $275 million in 2017. Life premium income in 2016 totaled $270 million. Net sales increased 5% during 2018 to $49 million over the 2017 total of $47 million. Net sales in 2017 increased 17%. The continued increases in net sales reflect changes in structure of the agency that were put in place several years ago. Recent growth in middle management within the agency should help continue this growth. First-year collected premium increased 10% to $36 million during 2018 and increased 14% in 2017 to $33 million.

The Liberty average producing agent count increased from 2,017 in 2017 to 2,156 in 2018. 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. 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 has helped to improve the ability of agents to develop new work site marketing business.

The Other Agencies distribution channels offering life insurance include the Military Agency, the UA Independent Agency (which predominantly writes health insurance), and various smaller distribution channels. The Other Agencies contributed $217 million of life premium income, or 9% of Torchmark’s total in 2018, but contributed only 3% of net sales for the year.

23
TMK 2018 FORM 10-K


HEALTH INSURANCE
Health insurance sold by Torchmark includes primarily Medicare Supplement insurance, critical illness coverage, accident coverage, and other limited-benefit supplemental health products. In this analysis, all health coverage plans other than Medicare Supplement are classified as limited-benefit plans.
Health premium accounted for 30% of our total premium in 2018, while the health underwriting margin accounted for 26% of total underwriting margin, reflective of the lower underwriting margin as a percent of premium for health compared with life insurance. As noted under the caption Life Insurance, we have emphasized life insurance sales relative to health, due to life’s superior profitability and its greater contribution to excess investment income.
The following table presents the summary of results for health insurance.

Health Insurance
Summary of Results
(Dollar amounts in thousands)
 
2018
 
2017
 
2016
 
Amount
 
% of
Premium
 
Amount
 
% of
Premium
 
Amount
 
% of
Premium
Premium
$
1,015,339

 
100

 
$
976,373

 
100

 
$
947,663

 
100

 
 
 
 
 
 
 
 
 
 
 
 
Policy obligations
649,188

 
64

 
628,640

 
65

 
612,725

 
65

Required interest on reserves
(83,243
)
 
(8
)
 
(77,792
)
 
(8
)
 
(73,382
)
 
(8
)
Net policy obligations
565,945

 
56

 
550,848

 
57

 
539,343

 
57

Commissions, premium taxes, and non-deferred acquisition expenses
88,553

 
9

 
86,044

 
9

 
84,819

 
9

Amortization of acquisition costs
124,788

 
12

 
119,973

 
12

 
113,445

 
12

Total expense
779,286

 
77

 
756,865

 
78

 
737,607

 
78

Insurance underwriting margin before other income and administrative expense
$
236,053

 
23

 
$
219,508

 
22

 
$
210,056

 
22


Health premium increased 4% from $976 million in 2017 to $1.0 billion in 2018. Health underwriting margin increased 8% from $220 million in 2017 to $236 million in 2018. Further discussion is included below by distribution channels.
 

24
TMK 2018 FORM 10-K


Premium income by distribution channel for each of the last three years is as follows:

Health Insurance
Premium by Distribution Channel
(Dollar amounts in thousands) 
 
2018
 
2017
 
2016
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
United American Independent Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
$
10,992

 
 
 
$
11,438

 
 
 
$
12,704

 
 
Medicare Supplement
370,084

 
 
 
352,690

 
 
 
342,311

 
 
 
381,076

 
38
 
364,128

 
37
 
355,015

 
38
Family Heritage Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
273,275

 
 
 
253,534

 
 
 
236,075

 
 
Medicare Supplement

 
 
 

 
 
 

 
 
 
273,275

 
27
 
253,534

 
26
 
236,075

 
25
Liberty National Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
147,250

 
 
 
144,128

 
 
 
142,026

 
 
Medicare Supplement
44,128

 
 
 
52,079

 
 
 
59,772

 
 
 
191,378

 
19
 
196,207

 
20
 
201,798

 
21
American Income Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
93,093

 
 
 
88,776

 
 
 
84,064

 
 
Medicare Supplement
220

 
 
 
260

 
 
 
318

 
 
 
93,313

 
9
 
89,036

 
9
 
84,382

 
9
Direct Response
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
439

 
 
 
545

 
 
 
552

 
 
Medicare Supplement
75,858

 
 
 
72,923

 
 
 
69,841

 
 
 
76,297

 
7
 
73,468

 
8
 
70,393

 
7
Total Premium
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
525,049

 
52
 
498,421

 
51
 
475,421

 
50
Medicare Supplement
490,290

 
48
 
477,952

 
49
 
472,242

 
50
 
$
1,015,339

 
100
 
$
976,373

 
100
 
$
947,663

 
100


25
TMK 2018 FORM 10-K


We market supplemental health insurance products through a number of distribution channels. The following table presents net sales by distribution channel for the last three years.
 
Health Insurance
Net Sales by Distribution Channel
(Dollar amounts in thousands) 
 
2018
 
2017
 
2016
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
United American Independent Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
$
480

 
 
 
$
500

 
 
 
$
558

 
 
Medicare Supplement
69,487

 
 
 
60,670

 
 
 
55,451

 
 
 
69,967

 
41
 
61,170

 
39
 
56,009

 
39
Family Heritage Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
60,268

 
 
 
56,534

 
 
 
51,349

 
 
Medicare Supplement

 
 
 

 
 
 

 
 
 
60,268

 
35
 
56,534

 
36
 
51,349

 
35
Liberty National Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
22,098

 
 
 
20,407

 
 
 
19,513

 
 
Medicare Supplement

 
 
 

 
 
 
9

 
 
 
22,098

 
13
 
20,407

 
13
 
19,522

 
13
American Income Exclusive Agency
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
14,432

 
 
 
13,943

 
 
 
12,666

 
 
Medicare Supplement

 
 
 

 
 
 

 
 
 
14,432

 
8
 
13,943

 
9
 
12,666

 
9
Direct Response
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans

 
 
 

 
 
 

 
 
Medicare Supplement
4,769

 
 
 
5,582

 
 
 
5,560

 
 
 
4,769

 
3
 
5,582

 
3
 
5,560

 
4
Total Net Sales
 
 
 
 
 
 
 
 
 
 
 
Limited-benefit plans
97,278

 
57
 
91,384

 
58
 
84,086

 
58
Medicare Supplement
74,256

 
43
 
66,252

 
42
 
61,020

 
42
 
$
171,534

 
100
 
$
157,636


100
 
$
145,106

 
100


26
TMK 2018 FORM 10-K