The tables in Note 14-Business Segments reconcile Torchmark’s revenues and expenses by segment to its major income statement line items for each of the years in the three-year period ending December 31, 2013. Additionally, this Note provides a summary of the profitability measures that demonstrates year-to-year comparability and which reconciles to net income. That summary is reproduced below from the Consolidated Financial Statements to present our overall operations in the manner that we use to manage the business.
The Liberty National Agency’s net sales declined 4% to $31 million in 2013, after having declined 11% a year earlier. As is the case with all of our agencies, sales are driven by the size of the agent force. The Liberty agency had 1,430 producing agents at December 31, 2013, compared with 1,419 a year earlier, an increase of 1%. The producing agent count increased 6% during 2012.
Health insurance, excluding Medicare Part D. Health premium, excluding Part D premium, rose 18% to $864 million in 2013, after having declined 1% in 2012 to $730 million and a decline of 6% in 2011. However, if the premium of Family Heritage were removed for comparability in 2013 and 2012, health premium excluding Part D would have declined 4% in 2013 and 5% in 2012. The declines in premium resulted primarily from the previously-mentioned run-off of a block of discontinued hospital-surgical plans. Net sales increased 42% in 2013 to $111 million, after having increased 22% in 2012. These increases were primarily a result of the acquisition of Family Heritage, which contributed $44 million to the growth in 2013 and $7 million of the $14 million increase in 2012. Net sales declined 1% in 2011. First-year collected premium increased 47% in 2013 and 17% in 2012 after a 22% decline in 2011. Family Heritage accounted for the majority of the increases in both 2013 and 2012.
The Liberty National Exclusive Agency represented 28% of all Torchmark non-Part D health premium income at $241 million in 2013. The Liberty Agency markets limited-benefit health supplemental products consisting primarily of cancer insurance. Much of the Liberty’s health business is now generated through worksite marketing targeting small businesses of 10 to 25 employees. In 2013, health premium income in the Agency declined 8% from prior year premium of $264 million, after declining 9% in 2012. As noted earlier, these premium declines were due primarily to the runoff of a block of discontinued hospital-surgical business as well as the previously-discussed restructuring of this Agency to a commission-driven model.
The following table illustrates the market risk sensitivity of our interest-rate sensitive fixed-maturity portfolio at December 31, 2013 and 2012. This table measures the effect of a change in interest rates (as represented by the U.S. Treasury curve) on the fair value of the fixed-maturity portfolio. The data measures the change in fair value arising from an immediate and sustained change in interest rates in increments of 100 basis points.
The carrying value of the long-term funded debt was $991 million at December 31, 2013, compared with $990 million a year earlier. As fully explained in Note 11-Debt, we issued $300 million principal amount of 3.8% Senior Notes due in 2022 in September, 2012 for proceeds of $297 million in a public offering. However, $150 million of the offering was acquired by Torchmark insurance subsidiaries and was eliminated in consolidation, resulting in net proceeds after issue expenses to the consolidated group of $147 million. The majority of the $297 million proceeds received by the Parent were used to acquire Family Heritage as described in Note 6-Acquisition. The balance was invested and later used for the redemption of our 7 3/8% Senior Notes that matured in August, 2013, as noted below, and for other corporate purposes.
Property and Equipment: Property and equipment, included in “Other assets,” is reported at cost less allowances for depreciation. Depreciation is recorded primarily on the straight line method over the estimated useful lives of these assets which range from three to ten years for equipment and five to forty years for buildings and improvements. Ordinary maintenance and repairs are charged to income as incurred. Impairments, if any, are recorded when, based on events and circumstances, it becomes evident that the fair value of the asset is less than its carrying amount. Original cost of property and equipment was $136 million at December 31, 2013 and $125 million at December 31, 2012. Accumulated depreciation was $85 million at year end 2013 and $79 million at the end of 2012. Depreciation expense was $6.4 million in 2013, $7.1 million in 2012, and $6.8 million in 2011. During 2013, Liberty National Life Insurance Company (Liberty National), a Torchmark subsidiary, sold real estate for a loss of $265 thousand after a previous write-down for other-than-temporary impairment of $2.7 million earlier in the year. The sale of this property eliminated substantially all asbestos-related liability for Torchmark.
The Torchmark Corporation 2011 Incentive Plan replaced all previous plans and allows for option grants with a ten-year contractual term which vest over five years in addition to seven-year grants which vest
Effective during 2013, Torchmark adopted prospectively Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This statement requires an analysis of the changes in the components of accumulated other comprehensive income as well as supplemental information about the amounts reclassified out of other comprehensive income.
The fair value for mortgages was approximately $0.5 million at December 31, 2012. Accumulated depreciation on investment real estate was $1.7 million at December 31, 2013 and $2.1 million at December 31, 2012.
Allowed investments are limited to equities, fixed maturities, and short-term investments (invested cash). There is also a guaranteed annuity contract issued by American Income Life Insurance Company to fund the obligations of the American Income Pension Plan. The assets are to be invested in a mix of equity and fixed income investments that best serve the objectives of the pension plan. Factors to be considered in determining the asset mix include funded status, annual pension expense, annual pension contributions, and balance sheet liability. Equities include common and preferred stocks, securities convertible into equities, mutual funds that invest in equities, and other equity-related investments. Equities must be listed on major exchanges and adequate market liquidity is required. Fixed maturities consist of marketable debt securities rated investment grade at purchase by a major rating agency. Short-term investments include fixed maturities with maturities less than one year and invested cash. Short-term investments in commercial paper must be rated at least A-2 by Standard & Poor’s with the issuer rated investment grade. Invested cash is limited to banks rated A or higher. Investments outside of the aforementioned list are not permitted, except by prior approval of the Plan’s Trustees. At December 31, 2013, there were no restricted investments contained in the portfolio. Plan contributions have been invested primarily in fixed maturities during the three years ending December 31, 2013.
Commercial Paper: In December, 2010, Torchmark entered into a credit facility with a group of lenders allowing unsecured borrowings and stand-by letters of credit up to $600 million. The facility includes a provision which allows Torchmark to increase the facility limit by $200 million if certain conditions are met. The Company also has the ability to request up to $250 million in letters of credit to be issued against the facility. The agreement is set to terminate on January 7, 2015. The credit facility is further designated as a back-up credit line for a commercial paper program, where Torchmark may
borrow from either the credit line or issue commercial paper at any time, with total commercial paper outstanding not to exceed the facility limit less any letters of credit issued. Interest is charged at variable rates. The facility does not have a ratings-based acceleration trigger which would require early payment. A facility fee is charged for the entire facility. There is also an issuance fee for letters of credit issued. Torchmark is subject to certain covenants for the agreements regarding capitalization and earnings, with which it was in compliance at December 31, 2013 and throughout the three-year period ended December 31, 2013. Borrowings on the credit facilities are reported as short-term debt on the Consolidated Balance Sheets. A table presenting selected information concerning Torchmark’s short-term borrowings is presented below.
As of December 31, 2013, securities of state and municipal governments represented 10% of invested assets at fair value. Such investments are made throughout the U.S. At year-end 2013, 5% or more of the state and municipal bond portfolio at fair value was invested in securities issued within the following states: Texas (31%), Ohio (7%), Washington (7%), Illinois (6%), and Alabama (5%). Otherwise, there was no significant concentration within any given state.