Liberty National, though headquartered in McKinney, Texas, operates its main activities out of a 24,000 square foot facility leased in Hoover, Alabama (a Birmingham suburb). An 8,000 square foot facility is leased for storage in Pelham, Alabama, close to the Hoover facility.
(4) There is an accounting rule (ASC 320-10-35-1, Investments- Debt and Equity Securities) requiring available-for-sale fixed maturities to be revalued at fair value each period. The effect of this rule on diluted equity per share reflects the amount added or (deducted) under this rule to produce GAAP Shareholders’ equity per share. 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.
Summary of Operations: Net income was $527 million in 2015, compared with $543 million in 2014. Net income increased in 2014 from $528 million in 2013. On a diluted per share basis, 2015 net income rose 2% to $4.16 after an 8% increase in 2014. Net income per diluted share in 2014 rose to $4.09 from $3.79 in 2013. The per-share results have exceeded the growth in dollar amounts due to our share repurchase program. Also, each year’s per share net income was affected by realized investment gains, which were $(0.05), $0.12, and $0.03, in 2015, 2014 and 2013, respectively. More information concerning realized investment gains and losses can be found under the caption Realized Gains and Losses in this report where there is a more complete discussion. Also, as explained in Note 14-Business Segments in the Notes to the Consolidated Financial Statements, we do not consider realized gains and losses to be a component of our core insurance operations or operating segments. Additionally, we do not consider non-operating items which are not related to the current ongoing reporting performance of our segments to be part of our segment operating income.
Management has committed to a plan to sell the Medicare Part D business in 2016. Torchmark no longer emphasizes its Medicare Part D business due to declining margins, increased risks, higher drug costs, and increased administrative and compliance costs. Management believes this sale will allow the Company to better focus on its core protection life and health insurance businesses as well as provide additional capital to invest. The Medicare Part D business met the criteria for discontinued operations in accordance with applicable accounting guidance, and as such, the business is reflected as discontinued operations in the financial statements. As this business has been classified as held for sale and its operations are discontinued, the financial results of this business are excluded from Torchmark's continuing operations. For more information, refer to Note 6-Discontinued Operations in the Notes to the Consolidated Financial Statements.
As shown in the above chart, after-tax segment results of continuing operations rose each year over the prior year from $509 million in 2013 to $520 million in 2014 to $523 million in 2015. The primary contributor to the growth in both 2015 and 2014 was the underwriting margin in our life insurance segment, in which margins rose $13 million in 2015 and $11 million in 2014. The life insurance segment is our strongest segment and is the largest contributor to earnings
in each year presented. Also contributing to growth in income in both years was our health insurance segment, which provided $5 million of additional margin in 2015 and $3 million in 2014.
Excess investment income, the measure of profitability of our investment segment, decreased to $220 million or 2% from the prior year amount of $224 million. In 2014, excess investment income increased 3%. Although interest rates increased slightly in 2015, the low interest rate environment continued to pressure investment yields and spreads related to required interest on net policy liabilities throughout the three-year period. Excess investment income has also been hampered by a lag in government reimbursements of Medicare Part D costs. The impact of the lost investment income from delayed receipt of reimbursements is reflected in income from continuing operations rather than discontinued operations in accordance with applicable accounting rules. As noted previously, the Medicare Part D business has been classified as discontinued operations. In 2015 and 2014, the timing of cash flows in the Medicare Part D business had a negative impact on excess investment income, pre-tax of approximately $8 million and $5 million, respectively.
Total revenues rose 4% in 2015 to $3.8 billion, or $146 million over the prior year total of $3.6 billion. Life premium rose 5% or $107 million in 2015 to $2.1 billion. Life premium increased $81 million in 2014 to $2.0 billion. Net investment income rose $24 million or 3% in 2014, and rose 2% or $16 million in 2015. Health premium increased 6% to $926 million in 2015 and contributed $56 million to 2015 revenue growth, after having gained 1% to $869 million in 2014. Health premium contributed $6 million to 2014 revenue growth.
Life insurance premium and underwriting margins have grown steadily in each of the three years ended December 31, 2015. The increase in life premium was driven by sales growth and improvements in persistency. While premium and underwriting margins grew, margin as a percent of premium fell slightly in 2015 to 27%, after decreasing from 29% to 28% from 2013 to 2014. These fluctuations were due primarily to higher than expected claims. Net life sales increased 9% in 2015 to $412 million after increasing 12% in 2014. The life insurance segment is discussed further in this report under the caption Life Insurance.
With regard to health insurance, we primarily market Medicare Supplement insurance and limited-benefit products including critical illness and accident products. In 2013 and 2014, the limited-benefit health premiums have exceeded the Medicare supplement premiums due to the inclusion of Family Heritage at the end of 2012. In late 2014, we experienced an unusually large volume of group sales of our Medicare Supplement product. As a result of increased growth in group sales, the Medicare Supplement premiums increased $43 million, which exceeded the limit-benefit premiums. Health insurance premium income increased 6% to $926 million in 2015. Health net sales fell 13% to $156 million during 2015, as a result of a 29% decrease in Medicare Supplement sales. First-year collected health premium rose 32% to $157 million from the prior year total of $119 million. The decrease in 2015 Health net sales and increase in 2015 first-year collected premium was reflective of the previously mentioned large volume of group sales in 2014. Health margins declined to 22%, with underwriting income increasing to $204 million for 2015. Margins were $199 million for the same period in 2014. The 2015 change was due to lower pricing margins on the group business sold in 2014.
The investment segment’s pretax profitability, or 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 2015, net investment income rose 2%, compared with 3% in 2014. At the same time, our investment portfolio grew 3% in both 2015 and 2014. In recent years, net investment income has not grown as fast as the portfolio due to new investments being made at yield rates lower than the yield rates earned on securities that matured or were otherwise disposed of. Also, there is sometimes a lag between the time when proceeds from maturities and dispositions are received and when the proceeds are reinvested, during which the funds are held in cash. Growth in total investment income is also somewhat negatively affected by Torchmark’s share repurchase program (described later under this caption), which has diverted cash that could have otherwise been used to acquire investments. In 2015 and 2014, net investment income was negatively impacted by our Medicare Part D business. Under the program, we are required to cover certain claim costs in the current period that are the federal government’s responsibility, but are not reimbursed until late in the next calendar year. This delay in reimbursement reduced our funds available for investment in 2015 and 2014, resulting in reduced investment income in both periods.
low-interest-rate environment noted above have compressed excess investment income as required interest has continued to grow at approximately the same rate that net policy liabilities have grown. Financing costs, which consist of the interest required for debt service on our long and short-term debt, are also deducted from net investment income. Financing costs in 2015 were up slightly to $77 million from $76 million in 2014. This increase was primarily the result of increased short term borrowings coupled with slightly higher short term interest rates. The 2014 decline resulted from the maturity and repayment in 2013 of our $94.5 million principal amount 7.375% Notes.
Torchmark’s current investment policy regarding fixed maturities limits new fixed maturity acquisitions to investment-grade securities generally with longer maturities (often exceeding twenty years) that meet our quality and yield objectives. Approximately 96% of our invested assets at fair value consist of fixed maturities of which 96% were investment grade at December 31, 2015. The average quality rating of the portfolio was A-. The portfolio contains no securities backed by sub prime or Alt-A mortgages, no direct investment in residential mortgages, no credit default swaps, or other derivative contracts. See the analysis of excess investment income and investment activities under the caption Investments in this report and Note 4-Investments in the Notes to the Consolidated Financial Statements for a more detailed discussion of this segment.
In each of the years 2013 through 2015, net income was affected by certain significant, unusual, and nonrecurring nonoperating items. 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. Accordingly, as described in Note 14-Business Segments in the Notes to the Consolidated Financial Statements, 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 matters from our segment analysis for current periods.
Torchmark has in place an ongoing share repurchase program which began in 1986. With no specified authorization amount, we determine the amount of repurchases based on the amount of the Company’s excess cash flow, general market conditions, and other alternative uses. The majority of these purchases are made from excess operating cash flow. Additionally, when stock options are exercised, proceeds from these exercises and the 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.
The table below discloses first-year collected life premium by distribution channel.
The Globe Life Direct Response unit offers adult and juvenile life insurance through a variety of direct-to-consumer marketing approaches, which include direct mailings, insert media, and electronic media. These different approaches support and complement one another in the unit’s efforts to reach the consumer. The Globe Life Direct Response channel’s growth has been fueled 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
Globe Life Direct Response’s life premium income rose 6% to $747 million, representing 36% of Torchmark’s total life premium during 2015. Life premium in this channel increased 6% in 2014 to $702 million over the 2013 total of $664 million. Net sales of $164 million for this group increased 4% from $158 million in 2014, after a 10% in 2014. First-year collected premium increased 6% to $106 million in 2015 after having risen 8% in 2014.
The Liberty average agent count increased 2% to 1,535 for the year ended December 31, 2015 compared with 1,505 for the same period in 2014. 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, our prospecting training program has helped to improve the ability of agents to develop new work site marketing business.
Life insurance underwriting income before insurance administrative expense was $569 million in 2015 compared with $556 million in 2014 and $545 million in 2013. As a percentage of premium, underwriting margins declined to 27% in 2015 from 28% in 2014. The decrease in underwriting margin as a percentage of premium in 2015 and 2014 was due primarily to higher than expected Globe Life Direct Response policy obligations and to increases in non-deferred acquisition costs in the Globe Life Direct Response and American Income units. Non-deferred acquisition expense
Health premium accounted for 31% of our total premium in 2015, 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.
Health premium increased 6% to $926 million in 2015 compared with $869 million in 2014 after an increase of 1% in 2014 over the 2013 total of $864 million. Medicare Supplement premium increased 10% to $466 million, while other limited-benefit health premium increased 3% to $459 million.
Health net sales declined 13% to $156 million in 2015 from $181 million in 2014. Net sales in 2013 totaled $111 million. Medicare Supplement net sales decreased 29% to $76 million in 2015. A decrease in 2015 Medicare Supplement net sales was expected due to the unusually high level of group sales and individual sales in late 2014. Group sales can vary significantly from period to period due to the impact of large groups that can occur from time to time. Limited-benefit net sales increased 8% to $81 million. Health first-year collected premium rose 32% to $157 million due to the aforementioned high level of group sales in 2014. Health first-year collected premium was up 18% during 2014. First year Medicare Supplement premium was up 53% as a result of an increase in the UA independent agency individual sales and the 2014 group sales noted above. As a result of the Medicare Supplement sales activity occurring in the fourth quarter, the full impact of this activity on collected premium is seen in the following year.
We do not expect recent health care reform activity to have a significant impact on our operations. The Affordable Care Act (ACA) imposes an annual fee to health insurance issuers offering commercial health insurance as well as another fee for premium stabilization. These taxes totaled $1.2 million and $1.8 million in 2015 and 2014, respectively.
The Family Heritage Exclusive Agency primarily markets limited-benefit supplemental health insurance in non-urban areas. Most of their policies include a cash-back feature, such as a return of premium whereby any excess of premiums over claims paid is returned to the policyholder at the end of a specified period stated within the insurance policy. Management expects to grow this agency through geographic expansion and continuing incorporation of Torchmark’s recruiting programs. The Family Heritage Agency contributed $50 million in net sales in 2015, compared with $47 million in 2014 and $44 million in 2013. Health premium income was $221 million in 2015, representing 24% of Torchmark’s health premium. This compared with $205 million or 24% of health premium in 2014 and $191 million or 22% in 2013. The average agent count was 882 for the year ended December 31, 2015, compared with 740 for the same period in 2014, an increase of 19%.
Other distribution. Certain of our other distribution channels market health products, although their main emphasis is on life insurance. On a combined basis, they accounted for 16% of health premium in 2015. The American Income Exclusive Agency primarily markets accident plans. The Direct Response group markets primarily Medicare Supplements to employer or union-sponsored groups. Direct Response added $5 million of Medicare Supplement net sales in 2015 compared with $23 million in 2014. The higher net sales in 2014 were due to the addition of a large new group in the third quarter of 2014.
Annuities. Our fixed annuity balances at the end of 2015, 2014, and 2013 were $1.32 billion, $1.36 billion, and $1.38 billion, respectively. Underwriting income was $4.6 million, $4.3 million, and $3.9 million in each of the respective years.
We do not currently market annuity products, favoring instead protection-oriented life and health insurance products. Therefore, we do not expect that annuities will be a significant portion of our business or marketing strategy going forward.
Net investment income has also been negatively affected in 2014 and 2015 by the CMS requirement for us to pay certain Medicare Part D claims costs during the current period that are ultimately the responsibility of the government, but are not reimbursed until the following year. Because of the overall design of the program and higher Part D claims due to the approval of new Hepatitis C drugs and higher overall drug costs, we have incurred extensive upfront costs that are not reimbursed by CMS until late in the following respective year. These delays in reimbursements have caused a delay in cash flows available for new investments that resulted in a loss of approximately $5 million and $8 million of pre-tax net investment income in 2014 and 2015, respectively, and will cause us to lose approximately $9 million of additional investment income in 2016.
Presented in the following chart is the growth in net investment income and the growth in mean invested assets.
Information about interest on policy liabilities is shown in the following table.
As previously noted, growth rates in our excess investment income decline when growth in income from the portfolio is less than that of the interest required by policy liabilities and financing costs as has been the case in recent years. In an extended low-interest-rate environment, the portfolio yield will tend to decline as we invest new money at lower long-term rates. We believe, however, the decline would be relatively slow as on average less than 2% of fixed maturities are expected to run off each year over the next five years.
(1) Tax-equivalent basis, where the yield on tax-exempt securities, is adjusted to produce a yield equivalent to the pretax yield on taxable securities.
During the three years 2013 through 2015, acquisitions consisted of securities spanning a diversified range of issuers, industry sectors, and geographical regions. All of the acquired securities were investment grade. In addition to the fixed maturity acquisitions, Torchmark invested $30 million in a limited partnership in 2015. The limited partnership is a diversified investment fund that currently invests opportunistically in global credit assets with the potential for attractive returns relative to risk. It is classified within long-term investments.
New cash flow available for investment has been primarily provided through our insurance operations and coupons received on existing investments. In some years, a significant amount of new investments can be derived from proceeds from dispositions including issuer calls. Issuer calls, as a result of the low-interest environment experienced during the past three years were an important factor, especially in 2013. Calls increase funds available for investment, but as noted earlier in this discussion, they can have a negative impact on investment income if the proceeds from the calls are reinvested in bonds that have lower yields than those of the bonds that were called. Issuer calls were $178 million in 2015, $160 million in 2014, and $344 million in 2013. The higher level of acquisitions in 2013 was primarily due to the additional funds available from the higher level of 2013 calls. The lower level of acquisitions in 2014 was primarily due to the delay in receiving CMS reimbursements as discussed earlier.
Approximately 96% of our investments at book value are in a diversified fixed maturity portfolio. Policy loans, which are secured by policy cash values, make up approximately 4% of our investments. We also have insignificant investments in equity securities and other long-term investments. Because fixed maturities represent such a significant portion of our investment portfolio, the remainder of the discussion of portfolio composition will focus on fixed maturities.
based on the maturity date of all bonds, whether callable or not.
Financial and Utilities. At December 31, 2015, the fixed maturity securities in the financial and utility sectors had net unrealized gains of $288 million and $196 million, respectively. Less than 6% of the book value of the holdings in each of these sectors was rated below-investment grade. While the fair market value of the securities in these two sectors declined during the year, Torchmark does not believe that its fixed maturity securities in the financial and utility sectors pose a significant credit risk in the foreseeable future or that any of these securities are other-than-temporarily impaired.
Energy and Basic Materials. The current low price of oil and other commodities is putting some downward price pressure on some of our holdings in the energy and basic materials sectors, resulting in lower fair values of these sectors as noted above. Our energy sector investments accounted for 12% of fixed maturities at amortized cost and 10% of fixed maturities at fair value as of December 31, 2015. At amortized cost, over 93% of the energy holdings are investment grade. Within our energy portfolio, 53% of the holdings at amortized cost are in pipelines, 34% are in exploration and production, 6% are in oil field services, and the remainder are in refineries and drilling. We believe securities in drilling and oil field services with an amortized cost of $44 million rated below investment grade have the greatest risk of exposure to the current market conditions. Our investments in basic materials accounted for 8% of fixed maturities at amortized cost and 7% of fixed maturities at fair value as of December 31, 2015. At amortized cost, over 95% of these holdings are investment grade. Within this sector, 49% of the holdings at amortized cost are in chemicals, 40% are in mining, and the remainder are in forestry products.
While a sustained period of low oil and natural gas prices and depressed demand for commodities may lead to some downgrades in these sectors, we believe that our investments will be able to withstand lower energy and commodity prices for an extended duration. Due to the strong and stable cash flows generated by our insurance products, Torchmark has the ability to hold securities with temporary unrealized losses until recovery. Even though these fixed maturity investments are classified as available for sale, Torchmark generally intends to hold to maturity any securities which are temporarily impaired. As of December 31, 2015, Torchmark does not believe that any of its holdings in the energy and basic materials sectors are other-than-temporarily impaired.
An analysis of the fixed maturity portfolio by a composite rating at December 31, 2015 is shown in the following table. The composite rating for each security, other than private-placement securities managed by third parties, is the average of the security’s ratings as assigned by Moody’s Investor Service, Standard & Poor’s, Fitch Ratings, and Dominion Bond Rating Service, LTD. The ratings assigned by these four nationally recognized statistical rating organizations are evenly weighted when calculating the average. Included in the chart below are private placement fixed maturity holdings of $542 million at amortized cost ($546 million at fair value) for which the ratings were assigned by the third party managers.
Of the $13.3 billion of fixed maturities at amortized cost as of December 31, 2015, $12.6 billion or 95% were investment grade with an average rating of A-. Below-investment-grade bonds were $640 million with an average rating of B+. Below-investment-grade bonds at amortized cost were 17% of our shareholders’ equity, excluding the effect of unrealized gains and losses on fixed maturities as of December 31, 2015. Overall, the total portfolio had a weighted average quality rating of A- based on amortized cost, the same as at the end of 2014.
Market Risk Sensitivity. Torchmark’s investment securities are exposed to interest rate risk, meaning the effect of changes in financial market interest rates on the current fair value of the company’s investment portfolio. Since 96% of the book value of our investments is attributable to fixed maturity investments (and virtually all of these investments are fixed-rate investments), the portfolio is highly subject to market risk. Declines in market interest rates generally result in the fair value of the investment portfolio exceeding the book value of the portfolio and increases in interest rates cause the fair value to decline below the book value. Under normal market conditions, we do not expect to realize these unrealized gains and losses because we have the ability and the intent to hold these investments to maturity. The long-term nature of our insurance policy liabilities and strong cash-flow operating position substantially mitigate any future need to liquidate portions of the portfolio. The increase or decrease in the fair value of insurance liabilities and debt due to increases or decreases in market interest rates largely offsets the impact of rates on the investment portfolio. However, as is permitted by GAAP, these liabilities are not recorded at fair value.
The following table illustrates the market risk sensitivity of our interest-rate sensitive fixed-maturity portfolio at December 31, 2015 and 2014. 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 following table summarizes our tax-effected realized gains (losses) by component for each of the years in the three-year period ended December 31, 2015.
Parent Company Liquidity. Cash flows from the insurance subsidiaries are used to pay interest and principal repayments on Parent Company debt, operating expenses of the Parent, and Parent Company dividends to Torchmark shareholders. In 2015, the Parent received $466 million of cash dividends from its subsidiaries, compared with $479 million in 2014 and $488 million in 2013. Including transfers from other subsidiaries and after paying debt obligations, shareholder dividends, and other expenses (but before share repurchases), Torchmark Parent had excess operating cash flow in 2015 of approximately $358 million, compared with $377 million in 2014 and $364 million in 2013. Parent Company cash flow in excess of its operating requirements is available for other corporate purposes, such as insurance subsidiary capital or financing needs, strategic acquisitions or share repurchases. In 2016, it is expected that the Parent Company will receive approximately $450 million in dividends and transfers from subsidiaries and that approximately $320 to $330 million will be available as excess cash flow. Certain restrictions exist on the payment of these dividends. For more information on the restrictions on the payment of dividends by subsidiaries, see the restrictions section of Note 12-Shareholders’ Equity in the Notes to Consolidated Financial Statements. Although these restrictions exist, dividend availability from subsidiaries historically has been more than sufficient for the cash flow needs of the Parent Company.
Short-Term Borrowings. An additional source of parent company liquidity is a line of credit facility with a group of lenders which allows unsecured borrowings and stand-by letters of credit up to $750 million. In July 2014, Torchmark replaced a $600 million facility with this agreement, as discussed in Note 11-Debt in the Notes to Consolidated Financial Statements, under the caption Commercial Paper. The facility, like the previous, is further designated as a back-up line of credit for a commercial paper program. As of December 31, 2015, we had available $332 million of additional borrowing capacity under this new facility, compared with $314 million a year earlier. There have been no difficulties in accessing the commercial paper market during the three years ended December 31, 2015.
Off-Balance Sheet Arrangements. As a part of its aforementioned credit facility, Torchmark had outstanding $177 million in stand-by letters of credit at December 31, 2015, compared with $198 million a year earlier. These letters are issued among our subsidiaries, one of which is an offshore captive reinsurer, and have no impact on company obligations as a whole. Any future regulatory changes that restrict the use of off-shore captive reinsurers might require Torchmark to obtain third-party financing, which could cause an immaterial increase in financing costs.
Funded debt is itemized in Note 11-Debt and includes short-term commercial paper.
Future insurance obligations consist primarily of estimated future contingent benefit payments on policies in force at December 31, 2015. These estimated payments were computed using assumptions for future mortality, morbidity and persistency. The actual amount and timing of such payments may differ significantly from the estimated amounts shown. Management believes that the assets supporting the liability of $12.2 billion at December 31, 2015, along with future premiums and investment income, will be sufficient to fund all future insurance obligations.
Capital Resources. Torchmark’s capital structure consists of short-term debt (the commercial paper facility described in Note 11-Debt in the Notes to Consolidated Financial Statements and the current maturity of funded debt), long-term funded debt, and shareholders’ equity. A complete analysis and description of long-term debt issues outstanding is presented in Note 11.
The carrying value of the funded debt was $993 million at December 31, 2015, compared with $992 million a year earlier. Torchmark has a 6.375% Senior Note that matures on June 15, 2016 with a par value and book value of $250 million. As this issue matures within one year, it has been reclassified to short term debt. Torchmark intends to refinance the debt during calendar 2016 with a hybrid debt instrument.
As noted under the caption Summary of Operations in this report, we have an ongoing share repurchase program. Under this program, we acquired 6 million shares at a cost of $359 million in 2015, 7 million shares at a cost of $375 million in 2014, and 8 million shares for $360 million in 2013. The majority of purchased shares are retired each
The AA financial strength rating category is assigned by Standard & Poor’s Corporation (S&P) to those insurers which have very strong capacity to meet its financial commitments which differs from the highest-rated insurers only to a small degree. An insurer rated A has strong capacity to meet its financial commitments but it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than insurers in higher-rated categories. The plus sign (+) or minus sign (-) shows the relative standing within the major rating category.
Litigation. Torchmark and its subsidiaries are subject to being named as parties to pending or threatened litigation, much of which involves punitive damage claims based upon allegations of agent misconduct at the insurance subsidiaries. Such punitive damage claims may have the potential for significant adverse results since Torchmark and its subsidiaries operate in jurisdictions where large punitive damage awards bearing little or no relation to actual damages continue to be awarded. This bespeaks caution since it is impossible to predict the likelihood or extent of punitive damages that may be awarded if liability is found in any given case. Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not presently considered by us to be material. For more information concerning litigation, please refer to Note 15-Commitments and Contingencies in the Notes to Consolidated Financial Statements.
Approximately 85% of our liabilities for future policy benefits at December 31, 2015 were traditional insurance liabilities where the liability is determined as the present value of future benefits less the present value of the portion of the gross premium required to pay for such benefits. The assumptions used in estimating the future benefits for this portion of business are set at the time of contract issue. These assumptions are “locked in” and are not revised for the lifetime of the contracts, except where there is a premium deficiency, as defined in Note 1-Significant Accounting Policies in the Notes to Consolidated Financial Statements under the caption Future Policy Benefits. Otherwise, variability in the accrual of policy reserve liabilities after policy issuance is caused only by variability of the inventory of in force policies. Torchmark did not have a premium deficiency event for its traditional business during the three years ended December 31, 2015.
The remaining portion of liabilities for future policy benefits pertains to business accounted for as deposit business, where the recorded liability is the fund balance attributable to the benefit of policyholders as determined by the policy contract at the financial statement date. Accordingly, there are no assumptions used to determine the future policy benefit liability for deposit business.
The remaining 1% of deferred acquisition costs pertain to deposit business for which deferred acquisition costs are amortized over the estimated lives of the contracts in proportion to actual and estimated future gross profits. These contracts are not subject to lock-in. The assumptions must be updated when actual experience or other evidence suggests that earlier estimates should be revised. Revisions related to our deposit business assets have not had a material impact on the amortization of deferred acquisition costs during the three years ended December 31, 2015.
be held to maturity, they are classified as available for sale and are sold from time to time, primarily to manage risk. We report this portfolio at fair value. Fair value is the price that we would expect to receive upon sale of the asset in an orderly transaction. The fair value of the fixed maturity portfolio is primarily affected by changes in interest rates in financial markets, having a greater impact on longer-term maturities. Because of the size of our fixed maturity portfolio, small changes in rates can have a significant effect on the portfolio and the reported financial position of the Company. This impact is disclosed in 100 basis point increments under the caption Market Risk Sensitivity in this report. However, as discussed under the caption Financial Condition in this report, we believe these unrealized fluctuations in value have no meaningful impact on our actual financial condition and, as such, we remove them from consideration when viewing our financial position and financial ratios.
At times, the values of our fixed maturities can also be affected by illiquidity in the financial markets. Illiquidity would contribute to a spread widening, and accordingly unrealized losses, on many securities that we would expect to be fully recoverable. Even though our fixed maturity portfolio is available for sale, we have the ability and intent to hold the securities until maturity as a result of our strong and stable cash flows generated from our insurance products. Considerable information concerning the policies, procedures, classification levels, and other relevant data concerning the valuation of our fixed-maturity investments is presented in Note 1-Significant Accounting Policies and in Note 4-Investments in the Notes to Consolidated Financial Statements under the captions Fair Value Measurements in both notes.
The Company determines mortality assumptions through the use of published mortality tables that reflect broad-based studies of mortality and published longevity improvement scales. During 2014, the Company revised the mortality assumptions based on an evaluation of a new mortality table and longevity scale released by the Society of Actuaries. The change in these assumptions added approximately $26 million to the projected benefit obligation as of December 31, 2014.
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2015
We have audited the accompanying consolidated balance sheets of Torchmark Corporation and subsidiaries (Torchmark) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of Torchmark’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Torchmark Corporation and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Basis of Presentation: The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP), under guidance issued by the Financial Accounting Standards Board (FASB). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Investments: Torchmark classifies all of its fixed maturity investments, which include bonds and redeemable preferred stocks, as available for sale. Investments classified as available for sale are carried at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated other comprehensive income. Investments in equity securities, which include common and nonredeemable preferred stocks, are reported at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated other comprehensive income. Policy loans are
Fair Value Measurements, Investments in Securities: Torchmark measures the fair value of its fixed maturities and equity securities based on a hierarchy consisting of three levels which indicate the quality of the fair value measurements as described below:
Over 95% of the fair value reported at December 31, 2015 was determined using data provided by third-party pricing services. Prices provided by these services are not binding offers but are estimated exit values. Third-party pricing services use proprietary pricing models to determine security values by discounting cash flows using a market-adjusted spread to a benchmark yield. For all asset classes within Torchmark’s significant security types, third-party pricing services use a common valuation technique to model the price of the investments using observable market data. The foundation for these models consists of developing yield spreads based on multiple observable market inputs, including but not limited to: benchmark yield curves, actual trading activity, new issue yields, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, sector-specific data, economic data, and other inputs that are corroborated in the market. Pricing vendors monitor and review their pricing data continuously with current market and economic data feeds, augmented by ongoing communication within the dealer community.
Using the observable market inputs described above, spreads to an appropriate benchmark yield are further developed by the vendors for each security based on security-specific and/or sector-specific risk factors, such as a security’s terms and conditions (coupon, maturity, and call features), credit rating, sector, liquidity, collateral or other cash flow options, and other factors that could impact the risk of the security. Embedded repayment options, such as call and redemption features, are also taken into account in the pricing models. When the spread is determined, it is added to
impairments is a process that is undertaken at least quarterly and is overseen by a team of Company investment and accounting professionals. Each security which is impaired because the fair value is less than the cost or amortized cost is identified and evaluated. The determination that an impairment is other-than-temporary is highly subjective and involves the careful consideration of many factors. Among the factors considered are:
News and information included in press releases issued by the issuer
News and information published by or otherwise provided by credit analysts
Current accounting guidance is such that if an entity intends to sell or if it is more likely than not that it will be required to sell an impaired security prior to recovery of its cost basis, the security is to be considered other-than-temporarily impaired and the full amount of impairment must be charged to earnings. Otherwise, losses on fixed maturities which are other-than-temporarily impaired are separated into two categories, the portion of loss which is considered credit loss and the portion of loss which is due to other factors. The credit loss portion is charged to earnings while the loss due to other factors is charged to other comprehensive income. The credit loss portion of an impairment is determined as the difference between the security’s amortized cost and the present value of expected future cash flows discounted at the security’s original effective yield rate. The temporary portion is the difference between this present value of expected future cash flows and fair value (as discounted by a market yield). The expected cash flows are determined using judgment and the best information available to the Company. Inputs used to derive expected cash flows include expected default rates, current levels of subordination, and loan-to-collateral value ratios. Management believes that the present value of future cash flows at the original effective yield is a better measure of valuation because fair value determined by a discounted market yield is often based on limited observable market data, and the market for these securities is generally neither active nor orderly.
to determine the amount of impairment, if any. If there is an impairment in the goodwill of any reporting unit, it is written down and charged to earnings in the period of test.
Torchmark tested its goodwill annually in each of the years 2013 through 2015. These tests, performed in the second quarter each year, involved assigning carrying value by allocating the Company’s net assets to each of the reporting units of Torchmark’s segments, including the portion of goodwill assigned to the unit. In 2015, the qualitative assessment was employed as permitted by accounting guidance. Based on the analyses as outlined in the guidance, it was determined that an impairment of goodwill was not likely. In both 2014 and 2013, the fair values of the various reporting units were developed. The fair value of each reporting unit was determined using discounted expected cash flows associated with that unit. Judgment and assumptions are used in developing the projected cash flows for the reporting units, and such estimates are subject to change. The Company also exercises judgment in the determination of the discount rate, which management believes to be appropriate for the risk associated with the cash flow expectations. The fair value of each reporting unit is then measured against that reporting unit’s corresponding carrying value. Because the estimated fair value substantially exceeded the carrying value, including goodwill, of each reporting unit in each period, Torchmark’s goodwill was not impaired in any of those periods.
On January 1, 2015, Torchmark adopted new guidance concerning Investments-Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects (ASU 2014-01). The guidance replaces the effective-yield method of amortization with respect to investments in qualified affordable housing acquired after the date of adoption and, if certain conditions are present, provides for a proportional amortization method. Under the proportional amortization method, the investor amortizes the initial cost of the investment in proportion to the tax credits received during the current period to the total expected tax credits to be received over the life of the investment. The guidance further provides that a company which previously used the effective-yield method of amortization may continue to use such method with respect to investments acquired before the date of adoption. Amortization, previously required to be recognized in the Consolidated Statements of Operations as a component of "Net investment income", is now included in "Income tax expense."
Torchmark continues to use the effective-yield method of amortization with respect to its guaranteed investments acquired prior to January 1, 2015, and has retrospectively adopted the new guidance and applied the proportional method of amortization with respect to its non-guaranteed investments. The proportional method of amortization is consistent with Torchmark’s historical method of amortization. As a result, the only impact of the adoption is the reclassification of amortization expense from “Net investment income” to “Income tax expense” with no impact on Torchmark's historical net income, cash flows, or statutory earnings of its insurance subsidiaries.
The following table reflects a summary of the impact of the retrospectively adjusted balances on the Company's Consolidated Statements of Operations for the twelve months ended December 31, 2014 and 2013.
(1) Total revenue, income before income taxes, and income taxes were adjusted for discontinued operations as discussed earlier in this note.
Future Policy Benefits: The liability for future policy benefits for universal life-type products is represented by policy account value. The liability for future policy benefits for all other life and health products, approximately 85% of total future policy benefits, is determined on the net level premium method. This method provides for the present value of expected future benefit payments less the present value of expected future net premiums, based on estimated investment yields, mortality, morbidity, persistency and other assumptions which were considered appropriate at the time the policies were issued. For limited-payment contracts, a deferred profit liability is also recorded which causes profits to emerge over the life of the contract in proportion to policies in force. Assumptions used for traditional life and health insurance products are based primarily on Company experience. Assumptions for interest rates range from 2.5% to 7.0% for Torchmark’s insurance companies with an overall weighted average assumed rate of 5.7%. Mortality tables used for individual life insurance include various statutory tables and modifications of a variety of generally accepted actuarial tables. Morbidity assumptions for individual health are based on Company experience and industry data. Withdrawal and termination assumptions are based on Torchmark’s experience. Once established, assumptions for these products are generally not changed. An additional provision is made on most products to allow for possible adverse deviation from the assumptions. These estimates are reviewed annually and compared with actual experience. If it is determined that existing contract liabilities, together with the present value of future gross premiums, will not be
sufficient to cover the present value of future benefits and to recover unamortized deferred acquisition costs, then a premium deficiency exists. Such a deficiency would be recognized immediately by a charge to earnings and either a reduction of unamortized deferred acquisition costs or an increase in the liability for future policy benefits. From that point forward, the liability for future policy benefits would be based on revised assumptions.
Earnings Per Share: Torchmark presents basic and diluted earnings per share (EPS) on the face of the Consolidated Statements of Operations for income from continuing operations and income from discontinued operations. Basic EPS is computed by dividing income available to common shareholders by the weighted average common shares outstanding for the period. Diluted EPS is calculated by adding to shares outstanding the additional net effect of potentially dilutive securities or contracts, such as stock options, which could be exercised or converted into common shares. For more information on earnings per share, see Note 12-Shareholders’ Equity.
Consolidation: The FASB issued Accounting Standards Update No. 2015-02 Consolidation: Amendments to the Consolidation Analysis (ASU 2015-02), to amend the consolidation requirements in ASC 810, Consolidation. ASU 2015-02 will be effective for Torchmark beginning in calendar year 2016. This new guidance is not expected to have a material impact on the consolidated financial statements.
Short-Duration Contracts: The FASB issued Accounting Standards Update No. 2015-09 Financial Services-Insurance: Disclosures about Short-Duration Contracts (ASU 2015-09), requiring companies to disclose additional information with regards to its short-duration insurance contracts. These new disclosures are intended to provide additional insight into an insurance entity’s ability to underwrite claims. Torchmark's disclosures under ASU 2015-09 will be effective for the 2016 annual consolidated financial statements. This guidance consists only of new disclosures and will not impact the accounting for short-duration contracts.
Defined Benefit Pension Plans: The FASB issued Accounting Standards Update No. 2015-12 Plan Accounting: Defined Pension Plans, Defined Contribution Pension Plans, Health and Welfare Benefit Plans: (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient (Consensuses of the FASB Emerging Issues Task Force) (ASU 2015-12) which is a three part standard that is expected to 1) change the measurement of fully benefit-responsive investment contracts from fair value to contract value, 2) simplify disclosures related to plan investments, and 3) provide a measurement date practical expedient. ASU 2015-12 will be effective for Torchmark beginning in calendar year 2016. This new guidance will not have a material impact on the consolidated financial statements.
The excess, if any, of shareholder’s equity of the insurance subsidiaries on a GAAP basis over that determined on a statutory basis is not available for distribution by the insurance subsidiaries to Torchmark without regulatory approval. Insurance subsidiaries’ statutory capital and surplus necessary to satisfy regulatory requirements in the aggregate was $452 million at December 31, 2015. More information on the restrictions on the payment of dividends can be found in Note 12-Shareholders’ Equity.
An analysis in the change in balance by component of Accumulated Other Comprehensive Income is as follows for each of the years 2013 through 2015.
Note 3-Supplemental Information about Changes to Accumulated Other Comprehensive Income (continued)
A summary of fixed maturities available for sale and equity securities by cost or amortized cost and estimated fair value at December 31, 2015 and 2014 is as follows:
A schedule of fixed maturities by contractual maturity at December 31, 2015 is shown below on an amortized cost basis and on a fair value basis. Actual maturities could differ from contractual maturities due to call or prepayment provisions.
Fair value measurements: The following tables represent the fair value of assets measured on a recurring basis at December 31, 2015 and 2014:
Other-than-temporary impairments (OTTI): Based on the Company's evaluation of its fixed maturities in an unrealized loss position in accordance with the OTTI policy as described in Note 1-Significant Accounting Policies, the Company concluded that there were no other-than-temporary impairments during the three years ended December 31, 2015.
As of year end 2015, previously written down securities remaining in the portfolio were carried at a fair value of $60 million, or less than 1% of the fair value of the fixed maturity portfolio. Torchmark is continuously monitoring the market conditions impacting its portfolio, especially in the energy and basic materials sectors. While adverse market conditions for an extended duration could lead to some ratings downgrades in these sectors, Torchmark has the ability and intent to hold these investments to recovery, and does not intend to sell nor expects to be required to sell any of its securities.
Unrealized gains/loss analysis: The following tables disclose gross unrealized investment losses by class and major sector of investments at December 31, 2015 and December 31, 2014 for the respective periods of time in a loss position. Torchmark considers these investments to be only temporarily impaired.
Gross unrealized losses rose from $79 million at year end 2014 to $564 million at year end 2015, an increased gross unrealized loss of $485 million. During 2015, the increase in gross unrealized losses was partially attributable to rising interest rates in the financial markets, but also resulted from deteriorating conditions in the energy and metals and mining sectors. The energy sector accounted for $197 million of the 2015 increase in gross unrealized losses from 2014, while metals and mining contributed $86 million of additional gross unrealized losses. Financial sector investments, our largest sector holdings at 25% of the portfolio at fair value at year end 2015, were also affected by the poor economic environment, adding another $43 million of gross unrealized losses during 2015.
Torchmark did not have any invested assets that were non-income producing during the twelve months ended December 31, 2015.
Concentrations of Credit Risk: Torchmark maintains a diversified investment portfolio with limited concentration in any given issuer. At December 31, 2015, the investment portfolio, at fair value, consisted of the following:
As of December 31, 2015, 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 2015, the state and municipal bond portfolio at fair value was invested in securities issued within the following states: Texas (30%), Ohio (7%), Washington (7%), Illinois (6%), and Alabama (5%). Otherwise, there was no significant concentration within any given state greater than 5%.
At year end 2015, 4% of invested assets at fair value were represented by fixed maturities rated below investment grade (BB+ or lower as determined by the weighted average of available ratings from rating services). Par value of these investments was $720 million, amortized cost was $640 million, and fair value was $533 million. While these investments could be subject to additional credit risk, such risk should generally be reflected in their fair value.
(1) Represents amounts pertaining to investments relating to universal life-type products.
The net assets held for sale at December 31, 2015 and 2014 were as follows:
(1) Previously included as a component of "Other receivables" on the Consolidated Balance Sheets.
(2) At December 31, 2015, receivables included $193 million from Centers for Medicare and Medicaid Services (CMS) and $95 million from drug manufacturer rebates. At December 31, 2014, the comparable amounts were $179 million and $58 million, respectively. In 2014, the receivable for drug manufacturer rebates was previously included as a component of "Policy claims and other benefits payable" on the Consolidated Balance Sheets.
Income from discontinued operations for the three years ended December 31, 2015 is as follows:
Income taxes paid related to discontinued operations for the three years ended December 31, 2015 were as follows:
As discussed in Note 1-Significant Accounting Policies under the caption "Low-Income Housing Tax Credit Interests" the Company adopted ASU 2014-01 as of January 1, 2015. As a result of the adoption, amortization of the cost component for certain investments in low-income affordable housing projects were reclassified from net investment income to income taxes. The reclassification adjustment has been applied retrospectively to all periods presented.
In each of the years 2013 through 2015, deferred income tax expense was incurred because of certain differences between net income before income taxes as reported on the Consolidated Statements of Operations and taxable income as reported on Torchmark’s income tax returns. As explained in Note 1-Significant Accounting Policies, these differences caused the financial statement book values of some assets and liabilities to be different from their respective tax bases.
Torchmark and its subsidiaries, excluding Family Heritage Life Insurance Company (Family Heritage), file a life-nonlife consolidated federal income tax return. Family Heritage files its federal income tax return on a separate company basis. Torchmark’s consolidated federal income tax returns are routinely audited by the Internal Revenue Service (IRS). The IRS completed its examination of Torchmark’s 2008-2011 consolidated income tax returns during 2014 resulting in no impact on the company’s effective tax rate. The statutes of limitations for the assessment of additional tax are closed for all tax years prior to 2012 with respect to Torchmark’s consolidated and Family Heritage’s federal income tax returns. Management believes that adequate provision has been made in the consolidated financial statements for any potential assessments that may result from current or future tax examinations and other tax-related matters for all open years.
Torchmark’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company recognized interest income of $11 thousand, $465 thousand, and $0 thousand, net of federal income tax benefits, in its Consolidated Statements of Operations for 2015, 2014, and 2013, respectively. The Company had no accrued interest or penalties at December 31, 2015 or 2014.
Torchmark has a Supplemental Executive Retirement Plan (SERP), which provides to a limited number of executives an additional supplemental defined pension benefit. The supplemental benefit is based on the participant’s qualified plan benefit without consideration to the regulatory limits on compensation and benefit payments applicable to qualified plans, except that eligible compensation is capped at $1 million. The SERP is unqualified and unfunded. However, a Rabbi Trust has been established to support the liability for this plan. This trust consists of life insurance policies on the lives of plan participants with an unaffiliated insurance carrier as well as an investment account. The premiums paid for the insurance coverage were $10.1 million in 2015, $2.2 million in 2014, and $2.9 million in 2013. The cash value of these policies at December 31, 2015 was $34 million and was $24 million a year earlier. Investments in the investment account consist of ETFs. Deposits of $6 million in 2013 were added to the investment account in this trust. There were no deposits in 2015 or 2014. As of December 31, 2015, the combined value of the insurance policies and the trust investments was $79 million, compared with $74 million a year earlier. Because this plan is unqualified, the investments and the policyholder value of the insurance policies in the Rabbi Trust are not included as defined benefit plan assets but as assets of the Company. They are included with “Other Assets” in the Consolidated Balance Sheets. The liability for this SERP at December 31, 2015 was $67 million and was $71 million a year earlier.
The Company has another small supplemental benefit pension plan which is limited to a very select group of employees and was closed as of December 31, 1994. It provides the full benefits that an employee would have otherwise received from a defined benefit plan in the absence of the limitation on benefits payable under a qualified plan. This plan is unfunded. Liability for this closed plan was $3 million at December 31, 2015 and December 31, 2014. Pension cost for both supplemental defined benefit plans is determined in the same manner as for the qualified defined benefit plans.
(1) This amount represents a guaranteed annuity contract issued by Torchmark's subsidiary, American Income Life Insurance Company, to fund the obligations of the American Income Pension Plan.
Torchmark has estimated its expected pension benefits to be paid over the next ten years as of December 31, 2015. These estimates use the same assumptions that measure the benefit obligation at December 31, 2014, taking estimated future employee service into account. Those estimated benefits are as follows:
Interest paid at 3 month LIBOR plus 330 basis points, resets each quarter.
Funded debt: As of January 1, 2013, Torchmark had outstanding 7.375% Notes with a principal balance of $94 million. These notes were repaid with interest on August 1, 2013.
Commercial Paper: As of July 16, 2014, Torchmark entered into a new credit facility with a group of lenders allowing for unsecured borrowings and stand-by letters of credit up to $750 million, replacing a previous facility that had a maximum limitation of $600 million. Up to $250 million in letters of credit can be issued against the new facility. The facility is further designated as a back-up credit line for a commercial paper program under which the Company may either borrow from the credit line or issue commercial paper at any time, with total commercial paper outstanding not to exceed the facility maximum, less any letters of credit issued. Interest is charged at variable rates. The facility has no ratings-based acceleration triggers which would require early repayment prior to the termination date of July 16, 2019. In accordance with the agreement, Torchmark is subject to certain covenants regarding capitalization, as was the case with the previous credit facility. As of December 31, 2015, and throughout the three-year period ended December 31, 2015, Torchmark was in full compliance with the appropriate covenants. 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.
Acquisition of Common Shares: Torchmark shares are acquired from time to time through open market purchases under the Torchmark stock repurchase program when it is believed to be the best use of Torchmark’s excess cash flows. Share repurchases under this program were 6.3 million shares at a cost of $359 million in 2015, 7.2 million shares at a cost of $375 million in 2014, and 8.3 million shares at a cost of $360 million in 2013. When stock options are exercised, proceeds from the exercises are generally used to repurchase approximately the number of shares available with those funds in order to reduce dilution. Shares repurchased for dilution purposes were 1.0 million shares at a cost of $60 million in 2015, 1.4 million shares at a cost of $74 million in 2014, and 2.8 million shares at a cost of $122 million in 2013.
Retirement of Treasury Stock: Torchmark retired 4.0 million shares of treasury stock in 2015, 17.0 million in 2014, and 7.5 million in 2013.
subsidiaries of Torchmark are limited to the greater of prior year statutory net income excluding realized capital gains on an annual noncumulative basis, or 10% of prior year surplus, in the absence of special regulatory approval. Additionally, insurance company distributions are generally not permitted in excess of statutory surplus. Subsidiaries are also subject to certain minimum capital requirements. Subsidiaries of Torchmark paid cash dividends to the Parent Company in the amount of $466 million in 2015, $479 million in 2014, and $488 million in 2013. As of December 31, 2015, dividends and transfers from insurance subsidiaries to parent available to be paid in 2016 were limited to the amount of $337 million without regulatory approval, such that $916 million was considered restricted net assets of the subsidiaries. While there are no legal restrictions on the payment of dividends to shareholders from Torchmark’s retained earnings, retained earnings as of December 31, 2015 were restricted by lenders’ covenants which require the Company to maintain and not distribute $2.9 billion from its total consolidated retained earnings of $3.6 billion.
(2) Plan allows for grant of restricted stock such that each stock grant reduces shares available for grant in a range from 3.1 shares to 3.88 shares.
A summary of stock compensation activity for each of the three years ended December 31, 2015 is presented below:
Additional information about Torchmark’s stock option activity as of December 31, 2015 and 2014 is as follows:
Additional information concerning Torchmark’s unvested options is as follows at December 31:
A summary of restricted stock grants for each of the years in the three-year period ended December 31, 2015 is presented in the table below.
Restricted stock units outstanding at each of the year ends 2015, 2014, and 2013 were 105,679, 98,039, and 85,717, respectively. All restricted stock units were fully vested at the end of each year of grant.
An analysis of the weighted-average grant-date fair values of unvested restricted stock is as follows for the year 2015:
Life insurance products include traditional and interest-sensitive whole life insurance as well as term life insurance. Health insurance products are generally guaranteed-renewable and include Medicare Supplement, critical illness, accident, long-term care, and limited-benefit supplemental hospital and surgical coverages. Annuities include fixed-benefit contracts.
(5) Retrospectively adjusted to give effect to the adoption of ASU 2014-01 as described in Note 1-Significant Accounting Policies.
Leases: Torchmark leases office space, office equipment, and aviation equipment under a variety of operating lease arrangements.
Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 2015 were as follows:
Letters of Credit: Torchmark has guaranteed letters of credit in connection with its credit facility with a group of banks as disclosed in Note 11-Debt. The letters of credit were issued by TMK Re, Ltd., a wholly-owned subsidiary, to secure TMK Re, Ltd.’s obligation for claims on certain policies reinsured by TMK Re, Ltd. that were sold by other Torchmark insurance companies. These letters of credit facilitate TMK Re, Ltd.’s ability to reinsure the business of Torchmark’s insurance carriers. The agreement expires in 2019. The maximum amount of letters of credit available is $250 million. The Torchmark parent company would be liable to the extent that TMK Re, Ltd. does not pay the reinsured party. At December 31, 2015, $177 million of letters of credit were outstanding, compared with $198 million a year earlier.
Unclaimed Property Audits: Torchmark subsidiaries are currently the subject of audits regarding the identification, reporting and escheatment of unclaimed property arising from life insurance policies and a limited number of annuity contracts. These audits are being conducted by private entities that have contracted with forty-seven various states through their respective Departments of Revenue, and have not resulted in any financial assessment from any state nor indicated any liability. The audits are wide-ranging and seek large amounts of data regarding claims handling, procedures, and payments of contract benefits arising from unreported death claims. No estimate of range can be made at this time for loss contingencies related to possible administrative penalties or amounts that could be payable to the states for the escheatment of abandoned property.
Sanction: During the third quarter of 2015, Centers for Medicare & Medicaid Services (CMS) placed United American Life Insurance Company (UA) and First United American Life Insurance Company (FUA) on Enrollment Sanction. During this time, Torchmark is not permitted to enroll new individuals or groups into our Medicare Part D program. Torchmark is permitted to re-enroll existing individual members into our 2016 plans, as well as enroll new members of groups that were policyholders at the time the sanction was initiated. Torchmark has submitted a remediation plan that has been accepted by CMS, and Torchmark is proceeding with this plan in an effort to have the sanction lifted as soon as possible. As discussed in Note 6-Discontinued Operations, the Medicare Part D business is held for sale and reflected in discontinued operations.
The following is an unaudited summary of quarterly results for the two years ended December 31, 2015. The information includes all adjustments (consisting of normal accruals) which management considers necessary for a fair presentation of the results of operations for these periods.