Edgar Filing: TORCHMARK CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended September 30, 2011

Commission File Number 1-8052

TORCHMARK CORPORATION

(Exact name of registrant as specified in its charter)


DELAWARE		63-0780404
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3700 South Stonebridge Drive, McKinney, Texas		75070
Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (972) 569-4000

NONE

Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the last practicable date.


CLASS		OUTSTANDING AT October 25, 2011
Common Stock, $1.00 Par Value		101,940,207

Index of Exhibits (Page 55).

Total number of pages included are 56.

TORCHMARK CORPORATION

INDEX


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets		1
	Consolidated Statements of Operations		2
	Consolidated Statements of Comprehensive Income		3
	Consolidated Statements of Cash Flows		4
	Notes to Consolidated Financial Statements		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		53

Item 4.	Controls and Procedures		53

PART II.OTHER INFORMATION

Item 1.	Legal Proceedings		54

Item 1A.	Risk Factors		55

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		55

Item 6.	Exhibits		55

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TORCHMARK CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands except per share data)


	September 30, 2011			December 31, 2010*
	(Unaudited)
Assets
Investments:
Fixed maturities, available for sale, at fair value (amortized cost: 2011 - $10,715,972 ; 2010 - $10,435,497)	$	11,657,513		$	10,543,034
Equity securities, at fair value (cost: 2011 - $14,875 ; 2010 - $14,875)		17,308			17,154
Policy loans		395,391			378,124
Other long-term investments		25,115			42,985
Short-term investments		48,535			216,680

Total investments		12,143,862			11,197,977
Cash		175,960			365,679
Accrued investment income		193,790			183,861
Other receivables		232,354			230,319
Deferred acquisition costs and value of insurance purchased		3,447,875			3,406,335
Goodwill		396,891			396,891
Other assets		380,648			378,700

Total assets	$	16,971,380		$	16,159,762

Liabilities and Shareholders’ Equity
Liabilities:
Future policy benefits	$	9,470,005		$	9,150,031
Unearned and advance premiums		73,202			74,165
Policy claims and other benefits payable		227,165			221,598
Other policyholders’ funds		92,424			91,293

Total policy liabilities		9,862,796			9,537,087
Current and deferred income taxes payable		1,501,233			1,209,433
Other liabilities		283,870			284,062
Short-term debt		225,672			198,875
Long-term debt (fair value: 2011 - $961,899 ; 2010 - $933,336)		790,335			789,643
Due to affiliates		124,421			124,421

Total liabilities		12,788,327			12,143,521
Shareholders’ equity:
Preferred stock, par value $1 per share - Authorized 5,000,000 shares; outstanding: -0- in 2011 and in 2010		0			0
Common stock, par value $1 per share - Authorized 320,000,000 shares; outstanding: (2011 - 119,812,123 issued, less 17,626,916 held in treasury and 2010 - 119,812,123 issued, less 947,498 held in treasury)		119,812			119,812
Additional paid-in capital		445,238			432,608
Accumulated other comprehensive income (loss)		545,602			22,958
Retained earnings		3,813,959			3,473,482
Treasury stock, at cost		(741,558	)		(32,619	)

Total shareholders’ equity		4,183,053			4,016,241

Total liabilities and shareholders’ equity	$	16,971,380		$	16,159,762

*	Derived from audited financial statements

See accompanying Notes to Consolidated Financial Statements.

TORCHMARK CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Revenue:
Life premium	$	429,927		$	417,044		$	1,294,157		$	1,248,315
Health premium		220,458			240,631			708,181			749,583
Other premium		140			152			438			442

Total premium		650,525			657,827			2,002,776			1,998,340
Net investment income		173,491			172,337			518,242			510,060
Realized investment gains (losses)		12,600			8,045			21,169			12,016
Other-than-temporary impairments		0			0			(20	)		(1,712	)
Other income		625			679			1,680			1,757

Total revenue		837,241			838,888			2,543,847			2,520,461
Benefits and expenses:
Life policyholder benefits		280,172			269,069			836,358			809,109
Health policyholder benefits		147,910			154,011			489,603			516,873
Other policyholder benefits		10,692			10,434			31,634			30,643

Total policyholder benefits		438,774			433,514			1,357,595			1,356,625
Amortization of deferred acquisition costs		104,804			104,045			319,344			318,498
Commissions and premium taxes		30,063			31,072			93,396			94,592
Other operating expense		45,268			43,154			141,969			131,120
Interest expense		19,510			18,790			58,381			56,539

Total benefits and expenses		638,419			630,575			1,970,685			1,957,374

Income from continuing operations before income taxes		198,822			208,313			573,162			563,087
Income taxes		(61,911	)		(70,216	)		(181,179	)		(189,749	)

Income from continuing operations		136,911			138,097			391,983			373,338
Discontinued operations:
Income from discontinued operations, net of tax		0			7,519			0			20,003
Loss on disposal, net of tax		144			(31,085	)		(455	)		(31,085	)

Income (loss) from discontinued operations		144			(23,566	)		(455	)		(11,082	)

Net income	$	137,055		$	114,531		$	391,528		$	362,256

Basic net income per share:
Continuing operations	$	1.31		$	1.14		$	3.54		$	3.04
Discontinued operations		0.00			(0.19	)		0.00			(0.09	)

Total basic net income per share	$	1.31		$	0.95		$	3.54		$	2.95

Diluted net income per share:
Continuing operations	$	1.30		$	1.13		$	3.49		$	3.02
Discontinued operations		0.00			(0.19	)		0.00			(0.09	)

Total diluted net income per share	$	1.30		$	0.94		$	3.49		$	2.93

Dividends declared per common share	$	0.12		$	0.11		$	0.34		$	0.31

See accompanying Notes to Consolidated Financial Statements.

TORCHMARK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited and in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Net income	$	137,055		$	114,531		$	391,528		$	362,256
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period		642,719			469,908			852,930			1,108,635
Less: reclassification adjustment for (gains) losses on securities included in net income		(12,981	)		(11,978	)		(21,552	)		(15,484	)
Less: reclassification adjustment for amortization of (discount) and premium		(106	)		(796	)		(1,780	)		(2,241	)
Less: foreign exchange adjustment on securities marked to market		6,177			(2,542	)		4,560			(3,426	)

Unrealized gains (losses) on securities		635,809			454,592			834,158			1,087,484
Unrealized gains (losses) on deferred acquisition costs		(31,347	)		(21,888	)		(37,490	)		(56,960	)
Unrealized gains (losses) on other assets		(511	)		0			(731	)		0

Total unrealized investment gains (losses)		603,951			432,704			795,937			1,030,524
Less applicable taxes		(211,382	)		(151,444	)		(278,577	)		(360,682	)

Unrealized gains (losses), net of tax		392,569			281,260			517,360			669,842

Foreign exchange translation adjustments		(3,397	)		1,910			(999	)		1,993
Less applicable taxes		1,189			(668	)		351			(697	)

Foreign exchange translation adjustments, net of tax		(2,208	)		1,242			(648	)		1,296

Amortization of pension costs		3,041			2,502			9,125			7,509
Less applicable taxes		(1,064	)		(876	)		(3,193	)		(2,628	)

Amortization of pension costs, net of tax		1,977			1,626			5,932			4,881


Other comprehensive income		392,338			284,128			522,644			676,019

Comprehensive income	$	529,393		$	398,659		$	914,172		$	1,038,275

See accompanying Notes to Consolidated Financial Statements

TORCHMARK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)


	Nine Months Ended September 30,
	2011			2010
Cash provided from operations	$	684,482		$	744,954

Cash provided from (used for) investment activities:
Investments sold or matured:
Fixed maturities available for sale - sold		200,256			180,438
Fixed maturities available for sale - matured, called, and repaid		373,897			454,289
Other long-term investments		15,231			5,636

Total investments sold or matured		589,384			640,363
Investments acquired:
Fixed maturities		(830,901	)		(1,539,775	)
Other long-term investments		0			(269	)

Total investments acquired		(830,901	)		(1,540,044	)
Net increase in policy loans		(17,267	)		(20,232	)
Net change in short-term investments		168,144			227,522
Net change in payable or receivable for securities		2,832			40,763
Disposition of properties		2,812			0
Additions to properties		(2,927	)		(2,837	)
Investment in low-income housing interests		(32,677	)		(41,520	)

Cash used for investment activities		(120,600	)		(695,985	)

Cash provided from (used for) financing activities:
Proceeds from exercise of stock options		60,568			5,604
Repurchase of 9 1/4% Senior Notes		0			(8,913	)
Net borrowings (repayments) of commercial paper		26,797			(44,442	)
Tax benefit from stock option exercises		9,097			320
Acquisition of treasury stock		(790,287	)		(147,801	)
Cash dividends paid to shareholders		(36,888	)		(37,061	)
Net receipts (withdrawals) from deposit product operations		(21,942	)		(11,875	)

Cash provided by (used for) financing activities		(752,655	)		(244,168	)

Effect of foreign exchange rate changes on cash		(946	)		(4,253	)


Net increase (decrease) in cash		(189,719	)		(199,452	)
Cash at beginning of year (includes $847 of cash at December 31, 2009 included in assets of subsidiary held for sale)		365,679			231,918

Cash at end of period (includes $2,202 of cash at September 30, 2010 included in assets of subsidiary held for sale)	$	175,960		$	32,466

See accompanying Notes to Consolidated Financial Statements.

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note A—Accounting Policies

The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all of the annual disclosures required by accounting principles generally accepted in the United States of America (GAAP). However, in the opinion of management, these statements include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the consolidated financial position at September 30, 2011, and the consolidated results of operations, comprehensive income, and cash flows for the periods ended September 30, 2011 and 2010. The interim period consolidated financial statements should be read in conjunction with our Consolidated Financial Statements that are included in the Annual Report on Form 10K filed on February 28, 2011.

Torchmark reports the results of operations of a business as discontinued operations when the component is sold or expected to be sold, the operations and cash flows of the business have been or will be eliminated from the ongoing operations as a result of the disposal transaction, and Torchmark will not have any significant continuing involvement in the operations of the business after the disposal transaction. The results of discontinued operations are reported in discontinued operations in the Consolidated Statements of Operations for current and prior periods commencing in the period in which the business is either disposed of or is accounted for as a disposal group, including any gain or loss recognized on the sale or adjustment of the carrying amount to fair value less cost to sell.

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note B—Earnings Per Share

Torchmark declared a three-for-two stock split paid in the form of a 50% stock dividend on all of the Company’s outstanding common stock. On July 1, 2011, the payment date, holders of Torchmark common stock as of June 1, 2011 received one additional share of stock for every two shares held. All share and per share amounts have been adjusted to reflect this stock split for all periods presented in these consolidated financial statements. “Common stock” and “Retained earnings” presented for December 31, 2010 in the accompanying Consolidated Balance Sheet have also been retroactively adjusted to reflect this stock split.

A reconciliation of basic and diluted weighted-average shares outstanding is as follows:


	For the three months ended September 30,				For the nine months ended September 30,
	2011		2010		2011		2010
Basic weighted average shares outstanding		104,779,422		121,163,567		110,603,070		122,808,242
Weighted average dilutive options outstanding		532,720		869,613		1,669,249		942,414

Diluted weighted average shares outstanding		105,312,142		122,033,180		112,272,319		123,750,656

Antidilutive shares*		3,984,927		10,647,740		3,326,037		10,647,740

*	Antidilutive shares are excluded from the calculation of diluted earnings per share.

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note C—Postretirement Benefit Plans

The following tables present a summary of post-retirement benefit costs by component:

Components of Post-Retirement Benefit Costs


	Three Months ended September 30,
	Pension Benefits						Other Benefits
	2011			2010			2011			2010
Service cost	$	2,187		$	2,025		$	184		$	171
Interest cost		4,022			3,716			250			253
Expected return on assets		(4,124	)		(3,795	)		0			0
Prior service cost		519			523			0			0
Net actuarial (gain)/loss		2,371			2,017			(203	)		(139	)

Net periodic benefit cost	$	4,975		$	4,486		$	231		$	285


	Nine Months ended September 30,
	Pension Benefits						Other Benefits
	2011			2010			2011			2010
Service cost	$	6,865		$	6,076		$	650		$	543
Interest cost		12,073			11,155			752			773
Expected return on assets		(12,050	)		(11,132	)		0			0
Prior service cost		1,556			1,568			0			0
Net actuarial (gain)/loss		7,161			6,042			(607	)		(428	)

Net periodic benefit cost	$	15,605		$	13,709		$	795		$	888

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note C—Postretirement Benefit Plans (continued)

The following chart presents assets at fair value for our defined-benefit pension plans at September 30, 2011 and the prior-year end.

Pension Assets by Component

(Dollar amounts in thousands)


	September 30, 2011				December 31, 2010
	Amount		%		Amount		%
Corporate debt	$	150,861		61.4	$	135,767		57.4
Other fixed maturities		358		0.1		772		0.3
Equity securities		66,689		27.1		67,909		28.7
Short-term investments		13,951		5.7		19,484		8.2
Guaranteed annuity contract		10,864		4.4		10,959		4.6
Other		3,135		1.3		2,002		0.8

Total	$	245,858		100.0	$	236,893		100.0

The liability for the funded defined-benefit pension plans was $244 million at December 31, 2010. Contributions of $6 million were made to the qualified pension plans during the nine months ended September 30, 2011. Torchmark plans to contribute $400 thousand during the remainder of 2011. With respect to the Company’s non-qualified supplemental retirement plan, life insurance policies on the lives of plan participants have been established with an unaffiliated carrier to fund a portion of the Company’s obligations under the plan. These policies, as well as $21 million of cash placed with an unaffiliated trustee to be invested, were placed in a Rabbi Trust established in 2010 to provide for payment of the plan obligations. Premiums of $1.7 million on the insurance policies were paid in each of the 2011 and 2010 periods in addition to a cash deposit of $5 million that was added to the trust in the first quarter of 2011. The combined value of the insurance policies and investments was $41 million as of September 30, 2011, compared with $33 million at year end 2010. This plan is unqualified and therefore the value of the insurance policies and investments are not included in the chart of plan assets above. The liability for the unqualified pension plan was $40 million at September 30, 2011 and $38 million at December 31, 2010.

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note D—Investments

Portfolio Composition:

A summary of fixed maturities and equity securities available for sale by cost or amortized cost and estimated fair value at September 30, 2011 is as follows:

PORTFOLIO COMPOSITION AS OF SEPTEMBER 30, 2011


	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		% of Total Fixed Maturities*
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	53,507	$	1,912	$	(1	)	$	55,418		1	%
States, municipalities, and political subdivisions		1,212,712		124,692		(1,619	)		1,335,785		11
Foreign governments		21,660		1,264		0			22,924		0
Corporates		8,138,344		1,018,671		(133,563	)		9,023,452		77
Collateralized debt obligations		59,435		0		(34,850	)		24,585		0
Other asset-backed securities		43,094		3,343		(707	)		45,730		1
Redeemable preferred stocks		1,187,220		27,142		(64,743	)		1,149,619		10

Total fixed maturities		10,715,972		1,177,024		(235,483	)		11,657,513		100	%
Equity securities		14,875		2,504		(71	)		17,308

Total fixed maturities and equity securities	$	10,730,847	$	1,179,528	$	(235,554	)	$	11,674,821

*	At fair value

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note D—Investments (continued)

A schedule of fixed maturities by contractual maturity date at September 30, 2011 is shown below on an amortized cost basis and on a fair value basis. Actual maturity dates could differ from contractual maturities due to call or prepayment provisions.


	Amortized Cost		Fair Value
Fixed maturities available for sale:
Due in one year or less	$	58,823	$	60,039
Due from one to five years		511,494		547,638
Due from five to ten years		650,146		709,305
Due from ten to twenty years		2,414,241		2,634,113
Due after twenty years		6,973,244		7,629,789
Mortgage-backed and asset-backed securities		108,024		76,629

	$	10,715,972	$	11,657,513

Selected information about sales of fixed maturities is as follows:


For the nine months ended September 30,
	2011			2010
Proceeds from sales	$	200,256		$	177,011	*
Gross realized gains		22,073			11,731
Gross realized losses		(24,323	)		(13,033	)

*	Proceeds from sales including discontined assets were $180 million during the 2010 nine months.

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note D—Investments (continued)

Fair Value Measurements:

The following table represents assets measured at fair value on a recurring basis:

FAIR VALUE MEASUREMENTS AT SEPTEMBER 30, 2011 USING:


Description	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	0		$	55,418		$	0		$	55,418
States, municipalities, and political subdivisions		0			1,335,785			0			1,335,785
Foreign governments		0			22,924			0			22,924
Corporates		27,447			8,985,693			10,312			9,023,452
Collateralized debt obligations		0			0			24,585			24,585
Other asset-backed securities		0			45,730			0			45,730
Redeemable preferred stocks		242,024			907,595			0			1,149,619

Total fixed maturities		269,471			11,353,145			34,897			11,657,513
Equity securities		16,519			79			710			17,308

Total fixed maturities and equity securities	$	285,990		$	11,353,224		$	35,607		$	11,674,821

Percent of total		2.5	%		97.2	%		0.3	%		100.0	%

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note D—Investments (continued)

The great majority of fixed maturities are not actively traded and direct quotes are not generally available. Management therefore determines the fair values of these securities after consideration of data provided by third-party pricing services and independent broker/dealers. Over 99% of the fair value reported at September 30, 2011 was determined using data provided by third-party pricing services. Prices provided by third-party pricing services are not binding offers but are estimated exit values. They are based on observable market data inputs which can vary by security type. Such inputs include benchmark yields, available trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market data. Where possible, these prices were corroborated against other independent sources. When corroborated prices produce small variations, the close correlation indicates observable inputs, and the median value is used. When corroborated prices present greater variations, additional analysis is required to determine which value is the most appropriate. When only one price is available, it is used if based on observable inputs and analysis confirms that it is appropriate. All fair value measurements based on prices determined with observable market data are reported as Level 1 or Level 2 measurements.

When third-party vendor prices are not available, the Company attempts to obtain at least three quotes from broker/dealers for each security. When at least three quotes are obtained, and the standard deviation of such quotes is less than 3%, (suggesting that the independent quotes were likely derived using similar observable inputs), the Company uses the median quote and classifies the measurement as Level 2. At September 30, 2011, there were no assets valued as Level 2 in this manner with broker quotes.

When the standard deviation is 3% or greater, or the Company cannot obtain three quotes, then additional information and management judgment are required to establish the fair value. The measurement is then classified as Level 3. The Company uses information and valuation techniques deemed appropriate for determining the point within the range of reasonable fair value estimates that is most representative of fair value under current market conditions.

As of September 30, 2011, fair value measurements classified as Level 3 represented 3 tenths of one percent of total fixed maturities and equity securities, compared with slightly less than 1% at December 31, 2010.

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note D—Investments (continued)

Other-Than-Temporary Impairments:

During the nine month periods of 2011 and 2010, the Company determined that certain of its holdings in fixed maturities were other-than-temporarily impaired, resulting in writedowns on those securities. Writedowns for other-than-temporary impairment are included in realized investment losses. On a pretax basis, the 2011 writedown was on bonds with a carrying amount of $20 thousand ($13 thousand after tax). The 2010 writedown included the complete write off of a collateralized debt obligation (CDO) with a carrying amount of $1.7 million ($1.1 million after tax).

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note D—Investments (continued)

Unrealized Loss Analysis:

The following table discloses unrealized investment losses by class of investment at September 30, 2011. Torchmark considers these investments not to be other-than-temporarily impaired.

ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES

At September 30, 2011


	Less than Twelve Months					Twelve Months or Longer					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	14	$	0		$	36	$	(1	)	$	50	$	(1	)
States, municipalities, and political subdivisions		0		0			17,665		(1,619	)		17,665		(1,619	)
Foreign governments		0		0			0		0			0		0
Corporates		448,009		(33,899	)		594,919		(99,664	)		1,042,928		(133,563	)
Collateralized debt obligations		0		0			24,460		(34,850	)		24,460		(34,850	)
Other asset-backed securities		0		0			7,859		(707	)		7,859		(707	)
Redeemable preferred stocks		178,646		(15,467	)		384,533		(49,276	)		563,179		(64,743	)

Total fixed maturities		626,669		(49,366	)		1,029,472		(186,117	)		1,656,141		(235,483	)
Equity securities		378		(71	)		0		0			378		(71	)

Total fixed maturities and equity securities	$	627,047	$	(49,437	)	$	1,029,472	$	(186,117	)	$	1,656,519	$	(235,554	)

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note D—Investments (continued)

Additional information about investments in an unrealized loss position is as follows:


	Less than Twelve Months		Twelve Months or Longer		Total
Number of issues (Cusip numbers) held:
As of September 30, 2011		63		94		157
As of December 31, 2010		234		133		367

Torchmark’s entire fixed-maturity and equity portfolio consisted of 1,378 issues at September 30, 2011 and 1,430 issues at December 31, 2010. The weighted average quality rating of all unrealized loss positions as of September 30, 2011 was BBB-. Even though Torchmark’s fixed-maturity investments are available for sale, Torchmark’s management generally does not intend to sell and does not believe it will be required to sell any securities which are temporarily impaired until they mature due to the strong and stable cash flows generated by its insurance products.

Torchmark’s balances related to bifurcated credit loss positions included in other comprehensive income were $22 million at September 30, 2011 and December 31, 2010, with no change to this balance during any period presented.

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note E—Income Taxes

The effective income tax rate differed from the expected 35% rate as shown below:


	Three Months Ended September 30,												Nine Months Ended September 30,
	2011						2010						2011						2010
	Amount			%			Amount			%			Amount			%			Amount			%
Expected income taxes	$	69,588			35.0		$	72,909			35.0		$	200,607			35.0		$	197,080			35.0
Increase (reduction) in income taxes resulting from:
Tax-exempt investment income		(906	)		(0.5	)		(807	)		(0.4	)		(2,599	)		(0.5	)		(2,526	)		(0.5	)
Low-income housing investments		(7,066	)		(3.6	)		(1,745	)		(0.8	)		(17,184	)		(3.0	)		(5,148	)		(0.9	)
Other		295			0.2			(141	)		(0.1	)		355			0.1			343			0.1

Income tax expense	$	61,911			31.1		$	70,216			33.7		$	181,179			31.6		$	189,749			33.7

The effective income tax rate for the three and nine month periods ended September 30, 2011 differed from the effective income tax rate for the same periods ended September 30, 2010 primarily as a result of the Company’s low-income housing tax credit investments.

Note F—Discontinued Operations

On December 31, 2010, Torchmark’s subsidiary, Liberty National Life Insurance Company (Liberty), sold its wholly-owned subsidiary, United Investors Life Insurance Company (United Investors), to an unaffiliated insurance carrier. United Investors markets primarily term and interest-sensitive life insurance, fixed annuities, and, prior to 2009, variable annuities. Consideration for the sale consisted of $343 million in cash at the closing, as well as final adjustment proceeds collected from the buyer of approximately $20 million during the first quarter of 2011. As a result of the sale, Torchmark’s consolidated financial statements are presented to reflect the operations of United Investors as discontinued operations for periods prior to the sale.

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note G—Business Segments

Torchmark is comprised of life insurance companies which primarily market individual life and supplemental health insurance products through niche distribution systems to middle income Americans. To a limited extent, the Company also markets fixed annuities. Torchmark’s core operations are insurance marketing and underwriting, and management of its investments. Insurance marketing and underwriting is segmented by the types of insurance products offered: life, health, and annuity. Management’s measure of profitability for each insurance segment is insurance underwriting margin, which is underwriting income before other income and insurance administrative expenses. It represents the profit margin on insurance products before administrative expenses, and is calculated by deducting net policy obligations (claims incurred and change in reserves), commissions and other acquisition expenses from premium revenue. Torchmark further views the profitability of each insurance product segment by the marketing groups that distribute the products of that segment: direct response, independent, or captive/career agencies.

The investment segment includes the management of the investment portfolio, debt, and cash flow. Management’s measure of profitability for this segment is excess investment income, which is the income earned on the investment portfolio less the interest credited on net policy liabilities and financing costs. Financing costs include the interest on Torchmark’s debt. Other income and insurance administrative expense are classified in a separate “Other” segment.

As noted, Torchmark’s “core operations” are insurance and investment management. The insurance segments issue policies for which premiums are collected for the eventual payment of policy benefits. In addition to policy benefits, operating expenses are incurred including acquisition costs, administrative expenses, and taxes. Because life and health contracts can be long term, premium receipts in excess of current expenses are invested. Investment activities, conducted by the investment segment, focus on seeking quality investments with a yield and term appropriate to support the insurance product obligations. These investments generally consist of fixed maturities, and, over the long term, the expected yields are taken into account when setting insurance premium rates and product profitability expectations. As a result, fixed maturities are generally held for long periods to support the liabilities, and Torchmark generally expects to hold investments until maturity. Dispositions of investments occur from time to time, generally as a result of credit concerns, calls by issuers, or other factors usually beyond the control of management.

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note G—Business Segments (continued)

Dispositions are sometimes required in order to maintain the Company’s investment policies and objectives. Investments are also occasionally written down as a result of other-than-temporary impairment. Torchmark does not actively trade investments. As a result, realized gains and losses from the disposition and write down of investments are generally incidental to operations and are not considered a material factor in insurance pricing or product profitability. While from time to time these realized gains and losses could be significant to net income in the period in which they occur, they have a limited effect on the yield of the total investment portfolio. Further, because the proceeds of the disposals are reinvested in the portfolio, the disposals have little effect on the size of the portfolio and the income from the reinvestments is included in net investment income. Therefore, management removes realized investment gains and losses from results of core operations when evaluating the performance of the Company. For this reason, these gains and losses are excluded from Torchmark’s operating segments.

Torchmark accounts for its stock options and restricted stock under current accounting guidance requiring stock options and stock grants to be expensed based on fair value at the time of grant. Management considers stock compensation expense to be an expense of the Parent Company. Therefore, stock compensation expense is treated as a corporate expense in Torchmark’s segment analysis.

Torchmark provides coverage under the Medicare Part D prescription drug plan for Medicare beneficiaries. In accordance with GAAP, Part D premiums are recognized evenly throughout the year when they become due but benefit costs are recognized when the costs are incurred. Due to the design of the Part D product, premiums are evenly distributed throughout the year, but benefit costs are higher earlier in the year. As a result, under GAAP, benefit costs can exceed premiums in the first part of the year, but be less than premiums during the remainder of the year. In order to more closely match the benefit cost with the associated revenue for interim periods, Torchmark defers these excess benefits for segment reporting purposes. In addition, GAAP recognizes in each quarter a government risk-sharing premium adjustment consistent with the contract as if the quarter represented an entire contract period. These contract payments are based upon the experience of the full contract year, not the experience of interim periods. Therefore, these risk-sharing adjustments are removed in the segment analysis. For the entire year, Torchmark expects its benefit ratio to be in line with pricing and does not expect to receive any government risk-sharing premium. For the full year of 2010, the total premiums and benefits were the same under this alternative method as they were under GAAP and are expected to be so in 2011. The Company’s presentation results in the

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note G—Business Segments (continued)

underwriting margin percentage of each interim period reflecting the expected margin percentage for the full year.

An analysis of the adjustments for the difference in the interim results as presented for segment purposes and GAAP for Medicare Part D is as follows:


	Nine months ended September 30,
	2011			2010
Benefit costs deferred	$	11,211		$	8,231
Government risk-sharing premium adjustment		(5,374	)		(1,226	)

Pre-tax addition to segment interim period income	$	5,837		$	7,005

After tax amount	$	3,794		$	4,553

Torchmark has invested in various limited partnerships that provide investment returns through the provision of low-income housing tax credits and other related Federal income tax benefits to the Company. The investment returns from a portion of the interests are guaranteed by unrelated third-parties. Under GAAP, expenses associated with the amortization of the guaranteed interests are required to be reflected in income tax expense. In contrast, GAAP requires the expenses associated with the amortization of non-guaranteed interests to be reflected as a component of “Net investment income.” All of the investment returns from investing in these guaranteed and non-guaranteed limited partnerships interests are in the form of income tax benefits reflected in income tax expense. Management believes including the amortization expense associated with the non-guaranteed as well as the guaranteed interest in income tax expense provides a more appropriate matching of the expense with the related income. For this reason, amortization expense of the non-guaranteed interests is included in “Income taxes” and not “Net investment income” for segment reporting purposes.

During the first quarter of 2011, Torchmark sold aviation equipment for a pretax loss of $979 thousand ($636 thousand after tax). Also in the first quarter of 2011, Torchmark accrued an estimated liability for a state administrative settlement involving issues arising over many years in the pretax amount of $6 million ($3.9 million after tax). Management removes items such as these that are related to prior periods or are one-time non-operating sales transactions when analyzing its ongoing core results.

The following tables total the components of Torchmark’s operating segments and reconcile these operating results to its pretax income and each significant line item in its Consolidated Statements of Operations.

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note G—Business Segments (continued)

Reconciliation of Segment Operating Information to the Consolidated Statement of Operations


	For the nine months ended September 30, 2011
	Life			Health			Annuity			Investment			Other & Corporate			Adjustments			Consolidated
Revenue:
Premium	$	1,294,157		$	702,807		$	438								$	5,374	⁽¹⁾	$	2,002,776
Net investment income										$	528,902						(10,660	)^(2,5)		518,242
Other income													$	1,953			(273	)⁽⁴⁾		1,680

Total revenue		1,294,157			702,807			438			528,902			1,953			(5,559	)		2,522,698
Expenses:
Policy benefits		836,358			478,392			31,634									11,211	⁽¹⁾		1,357,595
Required interest on net reserves		(341,452	)		(27,521	)		(42,139	)		411,112									0
Amortization of acquisition costs		377,898			93,189			9,025			(160,768	)								319,344
Commissions and premium tax		56,495			37,121			53									(273	)⁽⁴⁾		93,396
Insurance administrative expense ⁽³⁾														117,796			6,979	^(6,7)		124,775
Parent expense														6,162						6,162
Stock compensation expense														11,032						11,032
Interest expense											58,183						198	⁽²⁾		58,381

Total expenses		929,299			581,181			(1,427	)		308,527			134,990			18,115			1,970,685

Subtotal		364,858			121,626			1,865			220,375			(133,037	)		(23,674	)		552,013
Nonoperating items																	12,816	^(1,6,7)		12,816
Amortization of low-income housing																	10,858	⁽⁵⁾		10,858

Measure of segment profitability (pretax)	$	364,858		$	121,626		$	1,865		$	220,375		$	(133,037	)	$	0			575,687

Deduct applicable income taxes																				(189,121	)

Segment profits after tax																				386,566


Add back income taxes applicable to segment profitability		189,121
Add (deduct) realized investment gains (losses)		21,149
Deduct Part D adjustment ⁽¹⁾		(5,837	)
Deduct amortization of low-income housing ⁽⁵⁾		(10,858	)
Deduct estimated state administrative settlement expense ⁽⁶⁾		(6,000	)
Deduct loss on sale of equipment ⁽⁷⁾		(979	)

Pretax income from continuing operations per Consolidated Statement of Operations	$	573,162

(1)	Medicare Part D items adjusted to GAAP from the segment analysis, which match expected benefits with policy premium.

(2)	Reclassification of interest amount due to accounting rule requiring deconsolidation of Trust Preferred Securities. Management views the Trust Preferreds as consolidated debt.

(3)	Administrative expense is not allocated to insurance segments.

(4)	Elimination of intersegment commission.

(5)	Amortization of low-income housing expense, considered a component of income tax expense in the segment analysis.

(6)	Estimated state administrative settlement expense.

(7)	Loss on sale of equipment.

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note G—Business Segments (continued)

Reconciliation of Segment Operating Information to the Consolidated Statement of Operations


	For the nine months ended September 30, 2010
	Life			Health			Annuity			Investment			Other & Corporate			Adjustments			Consolidated
Revenue:
Premium	$	1,248,315		$	748,357		$	442								$	1,226	⁽¹⁾	$	1,998,340
Net investment income										$	509,862						198	⁽²⁾		510,060
Other income													$	2,324			(567	)⁽⁴⁾		1,757

Total revenue		1,248,315			748,357			442			509,862			2,324			857			2,510,157
Expenses:
Policy benefits		809,109			508,642			30,643									8,231	⁽¹⁾		1,356,625
Required interest on net reserves		(323,617	)		(26,466	)		(38,233	)		388,316									0
Amortization of acquisition costs		367,901			99,590			6,940			(155,933	)								318,498
Commissions and premium tax		54,537			40,513			109									(567	)⁽⁴⁾		94,592
Insurance administrative expense ⁽³⁾														114,922						114,922
Parent expense														7,128						7,128
Stock compensation expense														9,070						9,070
Interest expense											56,341						198	⁽²⁾		56,539

Total expenses		907,930			622,279			(541	)		288,724			131,120			7,862			1,957,374

Subtotal		340,385			126,078			983			221,138			(128,796	)		(7,005	)		552,783
Nonoperating items																	7,005	⁽¹⁾		7,005

Measure of segment profitability (pretax)	$	340,385		$	126,078		$	983		$	221,138		$	(128,796	)	$	0			559,788

Deduct applicable income taxes																				(188,594	)

Segment profits after tax																				371,194


Add back income taxes applicable to segment profitability		188,594
Add (deduct) realized investment gains (losses)		10,304
Deduct Part D adjustment ⁽¹⁾		(7,005	)

Pretax income from continuing operations per Consolidated Statement of Operations	$	563,087

(1)	Medicare Part D items adjusted to GAAP from the segment analysis, which match expected benefits with policy premium.

(2)	Reclassification of interest amount due to accounting rule requiring deconsolidation of Trust Preferred Securities). Management views the Trust Preferreds as consolidated debt.

(3)	Administrative expense is not allocated to insurance segments.

(4)	Elimination of intersegment commission.

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(UNAUDITED)

(Dollar amounts in thousands except per share data)

Note G—Business Segments (continued)

The following table summarizes the measures of segment profitability for comparison. It also reconciles segment profits to net income.

Analysis of Profitability by Segment

(Dollar amounts in thousands)


	Nine months ended						Increase
	September 30,						(Decrease)
	2011			2010			Amount			%
Life insurance	$	364,858		$	340,385		$	24,473			7
Health insurance		121,626			126,078			(4,452	)		(4	)
Annuity		1,865			983			882
Other:
Other income		1,953			2,324			(371	)		(16	)
Administrative expense		(117,796	)		(114,922	)		(2,874	)		3
Investment		220,375			221,138			(763	)		0
Corporate and adjustments		(17,194	)		(16,198	)		(996	)		6

Pretax total		575,687			559,788			15,899			3
Applicable taxes		(189,121	)		(188,594	)		(527	)		0

After-tax total, before discontinued operations		386,566			371,194			15,372			4
Discontinued operations (after tax)		0			18,531			(18,531	)

Total		386,566			389,725			(3,159	)		(1	)
Reconciling items, net of tax:
Realized gains (losses) - Investments		13,747			6,697			7,050
Realized gains (losses) - Discontinued operations		0			1,472			(1,472	)
Loss on disposal of discontinued operations		(455	)		(31,085	)		30,630
Part D adjustment		(3,794	)		(4,553	)		759
Estimated state administrative settlement		(3,900	)		0			(3,900	)
Loss on sale of equipment		(636	)		0			(636	)

Net income	$	391,528		$	362,256		$	29,272			8

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

Results of Operations

Discontinued Operations. As discussed in Note F – Discontinued Operations, we sold our subsidiary United Investors Life Insurance Company (United Investors) on December 31, 2010. Because of the sale, United Investors’ financial results prior to the sale are excluded from this discussion.

Summary of Operations. Torchmark’s operations are segmented into its insurance underwriting and investment operations as described in Note G—Business Segments. The measures of profitability described in Note G are useful in evaluating the performance of the segments and the marketing groups within each insurance segment, because each of our distribution units operates in a niche market. These measures enable management to view period-to-period trends, and to make informed decisions regarding future courses of action.

The tables in Note G—Business Segments demonstrate how the measures of profitability are determined. Those tables also reconcile our revenues and expenses by segment to major income statement line items for the nine-month periods ended September 30, 2011 and 2010. Additionally, a table in that note, Analysis of Profitability by Segment, provides a summary of the profitability measures that demonstrates year-to-year comparability and which reconciles those measures to our net income. That summary represents our overall operations in the manner that management views the business, and is a basis of the following highlights discussion.

A discussion of operations by each segment follows later in this report. These discussions compare the first nine months of 2011 with the same period of 2010, unless otherwise noted. The following discussions are presented in the manner we view our operations, as described in Note G—Business Segments.

Highlights, comparing the first nine months of 2011 with the first nine months of 2010. Net income per diluted share increased 19% to $3.49 from $2.93. Net income from continuing operations was $392 million in 2011, compared with $373 million in the prior year period, an increase of 5%. On a per share basis, net income from continuing operations rose 16% to $3.49 from $3.02. Included in net income from continuing operations in 2011 were realized investment gains of $14 million after tax or $.12 per share, compared with 2010 after-tax realized gains of $7 million, or $.05 per share. Realized investment gains and losses are discussed more fully under the caption Realized Gains and Losses in this report. Earnings in 2011 were also negatively affected by two non-operating charges, a charge for a state administrative matter in the estimated after tax amount of $3.9 million ($.03 per share) and the loss on sale of aviation equipment of $636 thousand after tax ($.01 per share).

As explained in Note G—Business Segments, differences in our estimate of interim results for Medicare Part D as we view this product for segment purposes and GAAP financial statement purposes resulted in a $3.8 million after-tax charge to earnings in 2011 ($.03 per share) and a $4.6 million charge in 2010 ($.04 per share). We expect our 2011 full year benefit ratios to be approximately the same as those for interim periods, as was the case in 2010 and prior years. For this reason, there should be no differences in our segment versus financial statement reporting by year end 2011, as it relates to Medicare Part D.

We use three statistical measures as indicators of future premium growth: “annualized premium in force,” “net sales,” and “first-year collected premium.” Annualized premium in force is defined as the premium income that would be received over the following twelve months at any given date on all active policies if those policies remain in force throughout the twelve-month period. Annualized premium in force is an indicator of potential growth in premium revenue. Net sales is defined as annualized premium issued, net of cancellations in the first thirty days after issue, except for Direct Response, where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer has expired. Annualized premium issued is the gross premium that would be received during the policies’ first year in force, assuming that none of the policies lapsed or terminated. Although lapses and terminations will occur, we believe that net sales is a useful indicator of the rate of acceleration of premium growth. First-year collected premium is the premium collected during the reporting period for all policies in their first policy year. First-year collected premium takes lapses into account in the first policy year when lapses are more likely to occur, and thus is a useful indicator of how much new premium is expected to be added to premium income in the future.

Total premium income was stable at $2.0 billion. Total net sales declined 5% to $305 million, as a result of agent losses, the discontinuation of certain products, and other factors discussed in depth later in this report. First-year collected premium declined 12% to $245 million for the period.

Life insurance premium income grew 4% to $1.3 billion. Life net sales declined 3% to $245 million, as three of our four distribution units experienced declines. First-year collected life premium declined 2% to $183 million. However, life underwriting margins increased 7% to $365 million, primarily as a result of lower claims.

Health insurance premium income, excluding Medicare Part D premium, declined 6% to $555 million. Health net sales, excluding Part D, declined 4% to $43 million for the nine months. However, health net sales rose 26% in the third quarter 2011 compared with the prior year quarter, primarily as a result of sales of a new cancer product at Liberty and sales of Medicare Supplements. First-year collected health premium, excluding Part D, decreased 25% to $43 million for the nine months. The nine-month declines in sales and first-year premium resulted primarily from the discontinuance of sales of certain health products.

Our Medicare Part D prescription drug business is a component of the health insurance segment. In the manner we view our Medicare Part D business as described in Note G—Business Segments, policyholder premium was $148 million in 2011 compared with $158 million in 2010, a decline of 6%. Underwriting income rose 8% to $17 million.

Excess investment income per diluted share increased 9% to $1.96, while excess investment income declined slightly to $220 million. Net investment income rose $19 million, or 4%. Our average investment portfolio at amortized cost also grew 4%. The average effective yield on the fixed-maturity portfolio, which represents 96% of our investments, was 6.57% in the 2011 period, compared with 6.74% in the prior period. Excess investment income did not increase at the same rate as net investment income because of the $18 million or 8% increase in required interest on net insurance policy liabilities, exceeding the rate of increase in net investment income. Financing costs also rose 3% in the period from $56 million to $58 million. Excess investment income has been negatively affected by the low-interest-rate environment in financial markets during recent periods.

In the first nine months of 2011, we invested new money in our fixed-maturity portfolio at an effective annual yield on new investments of 5.79%, compared with 5.91% in the same period of 2010. Our average fixed maturity portfolio yield was 6.53% (as of September 30, 2011) and had an average rating of A-. Over 93% of the portfolio at amortized cost was investment grade at September 30, 2011. Cash and short-term investments were $224 million at that date, compared with $582 million at December 31, 2010, as excess cash flow was generally either invested during the 2011 period or was used to buy Torchmark stock.

The unrealized gain position in our fixed-maturity portfolio improved from a net unrealized gain of $108 million at year end 2010 to a net unrealized gain position of $942 million at September 30, 2011, as a result of a reduction in yield rates in the bond market. The fixed-maturity portfolio contains no commercial mortgage-backed securities or securities backed by subprime or Alt-A mortgages (loans for which some of the typical documentation was not provided by the borrower). We are not a party to any counterparty risk, with no credit default swaps or other derivative contracts. We do not engage in securities lending, and have no direct exposure to European sovereign debt.

We have an on-going share repurchase program which began in 1986 and was reaffirmed by the Board of Directors at their April, 2011 meeting. With no specified authorization amount, we determine the amount of repurchases based on the amount of our excess cash flow, general market conditions, and other alternative uses. These purchases are made with excess cash flow. Share purchases are also made with the proceeds from option exercises by current and former employees, in order to reduce dilution. The following chart summarizes share purchases for the nine-month periods ended September 30, 2011 and 2010.

ANALYSIS OF SHARE PURCHASES

(Amounts in thousands)


	For the nine months ended September 30,
	2011								2010
	Shares*			Amount			Average Price*		Shares*		Amount		Average Price*
Purchases with:
Excess cash flow		17,238		$	720,446		$	41.79		4,109	$	141,250	$	34.38
Option exercise proceeds		1,631	**		70,053	**		42.94		184		6,551		35.65

Total		18,869	**	$	790,499	**	$	41.89		4,293	$	147,801	$	34.43

*	All share and per share amounts have been adjusted to reflect the 2011 three-for-two stock split.

**	In 2011, Torchmark accepted 6 thousand shares at a value of $212 thousand as part of an employee stock option exercise.

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

A detailed discussion of our operations by component segment follows.

Life insurance, comparing the first nine months of 2011 with the first nine months of 2010. Life insurance is our predominant segment, representing 65% of premium income and 75% of insurance underwriting margin in the first nine months of 2011. In addition, investments supporting the reserves for life business generate the majority of excess investment income attributable to the investment segment. Life insurance premium income increased 4% to $1.3 billion. We have completed the combination of selected offices of our United American (UA) Exclusive Agency offices with the Liberty National Exclusive Agency. For this reason, all data for these agencies will be reported on a combined basis in this report. The following table presents Torchmark’s life insurance premium by distribution method.

Life Insurance

Premium by Distribution Method

(Dollar amounts in thousands)


	Nine months ended September 30,								Increase
	2011				2010				(Decrease)
	Amount		% of Total		Amount		% of Total		Amount			%
American Income Exclusive Agency	$	451,054		35	$	416,318		33	$	34,736			8
Direct Response		447,500		34		428,257		34		19,243			4
Liberty National Exclusive Agency		217,560		17		221,579		18		(4,019	)		(2	)
Other Agencies		178,043		14		182,161		15		(4,118	)		(2	)

Total Life Premium	$	1,294,157		100	$	1,248,315		100	$	45,842			4

Net sales, defined earlier in this report as an indicator of new business production, declined 3% to $245 million. Three of our four distribution groups experienced declines over the prior year nine months. An analysis of life net sales by distribution group is presented below.

Life Insurance

Net Sales by Distribution Method

(Dollar amounts in thousands)


	Nine months ended September 30,								Increase
	2011				2010				(Decrease)
	Amount		% of Total		Amount		% of Total		Amount			%
American Income Exclusive Agency	$	105,273		43	$	104,711		41	$	562			1
Direct Response		103,497		42		106,027		42		(2,530	)		(2	)
Liberty National Exclusive Agency		28,005		12		33,987		14		(5,982	)		(18	)
Other Agencies		7,784		3		8,129		3		(345	)		(4	)

Total Life Net Sales	$	244,559		100	$	252,854		100	$	(8,295	)		(3	)

First-year collected life premium, defined earlier in this report, was $183 million in the 2011 period, declining 2%. First-year collected life premium by distribution group is presented in the table below.

Life Insurance

First-Year Collected Premium by Distribution Method

(Dollar amounts in thousands)


	Nine months ended September 30,								Increase
	2011				2010				(Decrease)
	Amount		% of Total		Amount		% of Total		Amount			%
American Income Exclusive Agency	$	83,972		46	$	83,113		45	$	859			1
Direct Response		67,495		37		68,421		37		(926	)		(1	)
Liberty National Exclusive Agency		24,086		13		26,542		14		(2,456	)		(9	)
Other Agencies		7,153		4		7,928		4		(775	)		(10	)

Total	$	182,706		100	$	186,004		100	$	(3,298	)		(2	)

The American Income Exclusive Agency markets primarily to members of labor unions, but also to credit unions and other associations. This agency produced premium income of $451 million, an increase of 8%. American Income is Torchmark’s largest contributor to life premium of any distribution system, representing 35% of the total. This agency is also our fastest growing life insurance agency on the basis of premium growth. Net sales grew 1% to $105 million, while first-year collected premium rose 1% to $84 million. Growth in sales in our captive agencies is highly dependent on growing the size of the agency force. The American Income agent count was 4,448 at September 30, 2011, a 9% increase from a year earlier (4,065) and a 14% increase over the count at December 31, 2010 (3,912). The American Income Agency continues to emphasize the recruiting and retention of new agents, focusing on an incentive program to reward growth in both recruiting and production.

The Direct Response operation consists of two primary components: insert media and direct mail. Insert media, which targets primarily the adult market, involves placing insurance solicitations as inserts into a variety of media, such as coupon packets, newspapers, bank statements, and billings. Direct mail targets primarily young middle-income households with children. The juvenile life insurance policy is a key product. Not only is the juvenile market an important source of sales, but it also is a vehicle to reach the parents and grandparents of the juvenile policyholders, who are more likely to respond favorably to a Direct Response solicitation for life coverage on themselves than is the general adult population. Also, both the juvenile policyholders and their parents are low acquisition-cost targets for sales of additional coverage over time.

Direct Response’s life premium income rose 4% to $448 million, representing 34% of Torchmark’s total life premium. Net sales for this group of $103 million declined 2%, however. First-year collected premium of $67 million declined 1%.

The Liberty National Exclusive Agency markets primarily low-face-amount life insurance and supplemental health insurance. Life premium income for this agency was $218 million in the 2011 period, a 2% decline compared with $222 million in the 2010 period. First-year collected premium declined 9% to $24 million.

Net sales for this agency declined 18% to $28 million. The Liberty Agency had 1,578 producing agents at September 30, 2011, compared with 2,172 a year earlier, a decline of 27%. The decrease in agent count is due to a number of factors, one of which was the closing of several offices which had poor production. The decrease was also a result of certain agent compensation issues which resulted in the departure of a number of the less productive agents. While these modifications caused a loss of agents, they resulted in improved persistency and margins, and contributed to Torchmark’s overall improvement in life insurance margins.

The Liberty Exclusive Agency agent counts have also decreased due to issues related to its health insurance business. The agency’s health insurance marketing efforts had been focused on limited-benefit hospital-surgical plans. These limited-benefit hospital-surgical plans became less marketable due to healthcare reform developments. Sales of these limited-benefit hospital-surgical plans were discontinued after September, 2010. In response, the agency has shifted its marketing focus to a product mix more weighted towards life insurance and supplemental health insurance products (not affected by healthcare reform) that have higher margins and persistency. Additionally, we are in the process of changing the cost structure of this agency to a more commission-driven model. All new agent recruits will be independent contractors rather than employees. We believe these measures will increase the profitability of new sales.

The Other Agencies distribution systems offering life insurance include the Military Agency, the UA Independent Agency (which predominantly writes health insurance), and various smaller distribution channels. The Other Agencies distribution group contributed $178 million of life premium income, or 14% of Torchmark’s total in the 2011 period, but contributed only 3% of net sales.

Life Insurance

Summary of Results

(Dollar amounts in thousands)


	Nine months ended September 30,
	2011				2010				Increase
	Amount		% of Premium		Amount		% of Premium		Amount		%
Premium and policy charges	$	1,294,157		100	$	1,248,315		100	$	45,842		4
Net policy obligations		494,906		38		485,492		39		9,414		2
Commissions and acquisition expense		434,393		34		422,438		34		11,955		3

Insurance underwriting income before other income and administrative expense	$	364,858		28	$	340,385		27	$	24,473		7

Life insurance underwriting income before insurance administrative expense was $365 million, increasing 7%. This growth in underwriting income was caused primarily by premium growth but also by improved mortality. As a percentage of premium, underwriting income rose from 27% to 28% in 2011. This increase was primarily a result of the improved policy obligation ratios, particularly in the Liberty and Military Agencies.

In 2011, we implemented several initiatives designed to further improve life insurance lapse ratios. Based on initial results, we continue to expect this program to increase conservation of life in-force premium.

Health insurance, comparing the first nine months of 2011 with the first nine months of 2010. Health premium accounted for 35% of our total premium in the 2011 period, while the health underwriting margin accounted for 25% of total underwriting margin, reflective of the lower underwriting margin as a percent of premium for health compared with life insurance. Health insurance sold by Torchmark includes primarily Medicare Supplement and Medicare Part D prescription drug coverage to enrollees in the federal Medicare program, along with limited-benefit cancer and accident coverage. All health coverage plans other than Medicare Supplement and Medicare Part D are classified here as limited-benefit plans. Medicare Part D business is shown as a separate health component and will be discussed separately in the analysis of the health segment.

As explained in Note G—Business Segments, management does not view the government risk-sharing premium for Medicare Part D as a component of premium income. Excluding this risk-sharing premium, health insurance premium for the 2011 period was $703 million, declining 6%. A reconciliation between segment reporting for Medicare Part D and GAAP is presented in the chart in Note G—Business Segments, and those differences are fully discussed in that note.

The table below is an analysis of our health premium by distribution method.

Health Insurance

Premium by Distribution Method

(Dollar amounts in thousands)


	Nine months ended September 30,								Increase
	2011				2010				(Decrease)
	Amount		% of Total		Amount		% of Total		Amount			%
United American Independent Agency
Limited-benefit plans	$	27,879			$	36,131			$	(8,252	)		(23	)
Medicare Supplement		202,823				201,735				1,088			1

		230,702		41		237,866		40		(7,164	)		(3	)
Liberty National Exclusive Agency
Limited-benefit plans		133,159				153,104				(19,945	)		(13	)
Medicare Supplement		87,880				99,521				(11,641	)		(12	)

		221,039		40		252,625		43		(31,586	)		(13	)
American Income Exclusive Agency
Limited-benefit plans		59,329				58,627				702			1
Medicare Supplement		614				696				(82	)		(12	)

		59,943		11		59,323		10		620			1
Direct Response
Limited-benefit plans		283				307				(24	)		(8	)
Medicare Supplement		42,599				40,509				2,090			5

		42,882		8		40,816		7		2,066			5
Total Health Premium (Before Part D)
Limited-benefit plans		220,650		40		248,169		42		(27,519	)		(11	)
Medicare Supplement		333,916		60		342,461		58		(8,545	)		(2	)

Total (Before Part D)		554,566		100		590,630		100		(36,064	)		(6	)

Medicare Part D*		148,241				157,727				(9,486	)		(6	)

Total Health Premium*	$	702,807			$	748,357			$	(45,550	)		(6	)

Total Medicare Part D premium and health premium exclude the risk-sharing premiums of $5.4 million in 2011 and $1.2 million in 2010 receivable from the Centers for Medicare and Medicaid Services consistent with the Medicare Part D contract. This risk-sharing amount is a portion of the excess or deficiency of actual over expected claims, and therefore we view this payment as a component of policyholder benefits in our segment analysis.

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

Health Insurance

Net Sales by Distribution Method

(Dollar amounts in thousands)


	Nine months ended September 30,								Increase
	2011				2010				(Decrease)
	Amount		% of Total		Amount		% of Total		Amount			%
United American Independent Agency
Limited-benefit plans	$	781			$	4,406			$	(3,625	)		(82	)
Medicare Supplement		18,659				14,814				3,845			26

		19,440		45		19,220		43		220			1
Liberty National Exclusive Agency
Limited-benefit plans		10,723				7,921				2,802			35
Medicare Supplement		1,350				2,923				(1,573	)		(54	)

		12,073		28		10,844		24		1,229			11
American Income Exclusive Agency
Limited-benefit plans		7,370				10,241				(2,871	)		(28	)
Medicare Supplement		0				0				0			0

		7,370		17		10,241		23		(2,871	)		(28	)
Direct Response
Limited-benefit plans		797				536				261			49
Medicare Supplement		3,226				3,832				(606	)		(16	)

		4,023		10		4,368		10		(345	)		(8	)
Total Net Sales (Before Part D)
Limited-benefit plans		19,671		46		23,104		52		(3,433	)		(15	)
Medicare Supplement		23,235		54		21,569		48		1,666			8

Total (Before Part D)		42,906		100		44,673		100		(1,767	)		(4	)

Medicare Part D*		17,971				24,725				(6,754	)		(27	)

Total Net Sales *	$	60,877			$	69,398			$	(8,521	)		(12	)

*	Net sales for Medicare Part D represents only new first-time enrollees.

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

Health Insurance

First-Year Collected Premium by Distribution Method

(Dollar amounts in thousands)


	Nine months ended September 30,								Increase
	2011				2010				(Decrease)
	Amount		% of Total		Amount		% of Total		Amount			%
United American Independent Agency
Limited-benefit plans	$	1,325			$	4,696			$	(3,371	)		(72	)
Medicare Supplement		19,775				21,182				(1,407	)		(7	)

		21,100		49		25,878		46		(4,778	)		(18	)
Liberty National Exclusive Agency
Limited-benefit plans		7,179				10,017				(2,838	)		(28	)
Medicare Supplement		1,685				2,756				(1,071	)		(39	)

		8,864		21		12,773		23		(3,909	)		(31	)
American Income Exclusive Agency
Limited-benefit plans		8,910				10,757				(1,847	)		(17	)
Medicare Supplement		0				0				0			0

		8,910		21		10,757		19		(1,847	)		(17	)
Direct Response
Limited-benefit plans		400				385				15			4
Medicare Supplement		3,286				6,651				(3,365	)		(51	)

		3,686		9		7,036		12		(3,350	)		(48	)
Total First-Year Collected Premium (Before Part D)
Limited-benefit plans		17,814		42		25,855		46		(8,041	)		(31	)
Medicare Supplement		24,746		58		30,589		54		(5,843	)		(19	)

Total (Before Part D)		42,560		100		56,444		100		(13,884	)		(25	)

Medicare Part D*		20,040				36,439				(16,399	)		(45	)

Total First-Year Collected Premium*	$	62,600			$	92,883			$	(30,283	)		(33	)

*	First-year collected premium for Medicare Part D represents only premium collected from new first-time enrollees in their first policy year.

Health insurance, excluding Medicare Part D. 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. With regard to health insurance, agent turnover has increased due to the Company’s decision to deemphasize the marketing of certain limited-benefit products. Declines in these agent counts have resulted in lower net sales, which in turn have pressured premium growth. Health premium, excluding Part D premium, fell 6% to $555 million in the 2011 period. Medicare Supplement premium declined 2% to $334 million, while other limited-benefit health premium dropped 11% to $221 million. Medicare Supplement provides Torchmark with the greatest amount of health premium,

representing 60% of non-Part D health premium for the 2011 period, compared with 58% a year earlier.

Health net sales excluding Part D declined 4% to $43 million. Medicare Supplement net sales rose 8% to $23 million in the 2011 period. Limited-benefit net sales declined 15% to $20 million. The decline in limited-benefit health net sales was due in part to our discontinuance of the sale of a number of these products affected by healthcare reform. Non-Part D health first-year collected premium declined 25%.

The UA Independent Agency consists of independent agencies appointed with Torchmark who may also sell for other companies. The UA Independent Agency was Torchmark’s largest health agency in terms of non-Part D premium income and net sales. Premium income was $231 million, representing 41% of Torchmark’s total non-Part D health premium. Net sales were $19 million, representing 45% of Torchmark’s non-Part D health sales. This agency is also Torchmark’s largest producer of Medicare Supplement insurance, with Medicare Supplement premium of $203 million. This agency represents approximately 61% of all Torchmark Medicare Supplement premium and 80% of Medicare Supplement net sales. Net sales of Medicare Supplement products rose 26% in 2011 to $19 million. However, total health premium for this agency declined 3% from the prior year as a result of the decline in limited-benefit plan premium.

The Liberty National Exclusive Agency markets Medicare Supplements and limited-benefit health products including cancer insurance. This agency represented 40% of Torchmark’s non-Part D income health premium at $221 million in the 2011 nine months. Net sales in this agency rose 11% in the 2011 period. These increases in net sales were due in large part to sales of a new cancer insurance product.

Discussed under the Life Insurance caption, we noted the 27% decline in agent counts at Liberty over the prior twelve months. A primary factor in those declines was the discontinuance of the sales of certain health products after September, 2010. These declines in agent counts have had a negative effect on premium income and first-year collected premium. In the 2011 period, health premium income in the Liberty Agency declined 13% from the prior year premium of $253 million. First-year collected premium declined 31% to $9 million.

Other agencies. Certain of our other distribution channels market health products, although their main emphasis is on life insurance. On a combined basis, they accounted for 19% of health premium excluding Part D in the 2011 period and 17% in the same period of 2010. The American Income Exclusive Agency markets a variety of limited-benefit plans, primarily accident. The Direct Response group markets primarily Medicare Supplements to employer or union-sponsored groups. Direct Response is also involved in marketing Medicare Part D. On a combined basis, the health net sales of these agencies declined 22%, from $15 million in 2010 to $11 million in 2011. The Medicare Supplements sold by Direct Response are generally group products and are expected to fluctuate from period to period.

Medicare Part D. Coverage under Torchmark’s Medicare Part D prescription drug plan for Medicare beneficiaries is marketed through our Direct Response unit and to groups through our UA Independent Agency. As described in Note G—Business Segments, we report our Medicare Part D business for segment analysis purposes as we view the business, in which expected full-year benefits are matched with the related premium income which is received evenly throughout the policy year. At this time, we have expensed benefits based on our expected benefit ratio of approximately 83% for the entire 2011 contract year compared with 82% for the full year 2010. In 2011, we do not expect to benefit as much from drug rebate payments from the pharmacy benefits manager as we have in prior years. We describe the differences between the segment analysis and the GAAP operating results in Note G. Due to the design of the Medicare prescription drug product, claims are expected to be heaviest early in the calendar year. Management believes that the use of the full-year loss ratio is an appropriate measure for interim results, and also that these reporting differences will arise only on an interim basis and will be eliminated at the end of a full year, as they were in the full year of 2010.

Medicare Part D premium was $148 million in 2011, compared with $158 million in 2010, after removal of the risk-sharing adjustment in both periods. This represents a decline in premium of 6%. Medicare Part D underwriting results are presented in the following chart. The adjustments which reconcile Part D results in accordance with our health segment analysis to Part D GAAP results are presented in the charts in Note G—Business Segments.

Medicare Part D

Summary of Medicare Part D Results

(Dollar amounts in thousands)


	Nine months ended September 30,
	2011				2010
	Per Segment Analysis		GAAP		Per Segment Analysis		GAAP
Insurance underwriting income before other income and administrative expense	$	16,997	$	11,160	$	15,764	$	8,759

The number of enrollees in our Medicare Part D coverage declined 9% in the 2011 plan year compared with 2010, due to a decline in group sales and the discontinuance of one of our individual plans. However, for the plan year 2012, we have developed a new lower cost Part D plan which will allow us to pick up a large number of low-income automatic enrollees as well as possibly grow our own individual sales. Therefore, we expect a significant degree of Part D growth in 2012. Additionally, the new product is priced with the same underwriting margin as our existing product.

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

The following table presents underwriting margin data for health insurance.

Health Insurance

Summary of Results

(Dollar amounts in thousands)


	Nine months ended September 30, 2011
	Health *		% of Premium		Medicare Part D		% of Premium		Total Health		% of Premium
Premium and policy charges	$	554,566		100	$	148,241		100	$	702,807		100
Net policy obligations		327,637		59		123,234		83		450,871		64
Commissions and acquisition expense		122,300		22		8,010		6		130,310		19

Insurance underwriting income before other income and administrative expense	$	104,629		19	$	16,997		11	$	121,626		17


	Nine months ended September 30, 2010
	Health *		% of Premium		Medicare Part D		% of Premium		Total Health		% of Premium
Premium and policy charges	$	590,630		100	$	157,727		100	$	748,357		100
Net policy obligations		348,945		59		133,231		84		482,176		64
Commissions and acquisition expense		131,371		22		8,732		6		140,103		19

Insurance underwriting income before other income and administrative expense	$	110,314		19	$	15,764		10	$	126,078		17

*	Health other than Medicare Part D.

Underwriting income for health insurance declined 4% or $4 million to $122 million, largely as a result of the 6% decline in health premium. As a percentage of health premium, underwriting margins were stable at 17%. Underwriting margins excluding Part D were also stable at 19% in 2011, as our more persistent Medicare Supplement business has become a greater proportion of our health insurance in force when compared with our limited-benefit product.

Annuities. Annuities represent an insignificant part of our business. As described in Note F—Discontinued Operations, we sold our subsidiary United Investors, which prior to the sale was our carrier of variable annuities and a primary carrier of fixed annuities. As a result of the sale, we disposed of 37% of our annuity deposit balances at December 31, 2010, including all variable annuities. For this reason, annuities are not a significant part of our business and are not expected to be important to our marketing strategy going forward.

Operating expenses, comparing the first nine months of 2011 with the first nine months of 2010. Operating expenses consist of insurance administrative expenses and parent company expenses. Also included is stock compensation expense, which is viewed by us as a parent company expense. Insurance administrative expenses relate to premium income for a given period; therefore, we measure those expenses as a percentage of premium income. Total expenses are measured as a percentage of total revenues. An analysis of operating expenses is shown below.

Operating Expenses Selected Information

(Dollar amounts in thousands)


	Nine months ended September 30,
	2011					2010
	Amount			% of Premium		Amount			% of Premium
Insurance administrative expenses:
Salaries	$	55,739			2.8	$	53,459			2.7
Other employee costs		22,814			1.1		25,950			1.3
Other administrative costs		30,621			1.5		29,936			1.5
Legal expense - insurance		6,805			0.4		3,824			0.2
Medicare Part D direct administrative expense		1,817			0.1		1,753			0.1

Total insurance administrative expenses		117,796			5.9		114,922			5.8

Parent company expense		6,162					7,128
Stock compensation expense		11,032					9,070
Estimated state administrative settlement		6,000					0
Loss on sale of equipment		979					0

Total operating expenses, per Consolidated Statements of Operations	$	141,969				$	131,120

Insurance administrative expenses:
Increase (decrease) over prior year		2.5	%				1.2	%
Total operating expenses:
Increase (decrease) over prior year		8.3	%				2.0	%

Insurance administrative expenses increased 2.5% when compared with the prior year period, primarily as a result of $3 million in increased litigation costs, net of recoveries, and a $2 million increase in salary expense. These increases were partially offset by a $3 million decline in other employee costs, as employee health costs were greater in 2010 than in 2011. Total operating expenses rose 8% in 2011, primarily because of two non-recurring items. There was a charge during the period relating to a state administrative issue concerning events occurring over a period of many prior years in the pre-tax amount of $6 million. The Company does not consider items related to prior periods in its evaluation of current operating results. In addition, the Company

sold aviation equipment at a loss of $979 thousand. Sales of such equipment are infrequent and are not considered part of Torchmark’s ongoing insurance operations.

Investments (excess investment income), comparing the first nine months of 2011 with the first nine months of 2010. We manage our capital resources including investments, debt, and cash flow through the investment segment. Excess investment income represents the profit margin attributable to investment operations. It is the measure that we use to evaluate the performance of the investment segment as described in Note G—Business Segments in the Notes to the Consolidated Financial Statements. It is defined as net investment income less the interest credited to net policy liabilities and the interest cost associated with capital funding or “financing costs.” We also view excess investment income per diluted share as an important and useful measure to evaluate the performance of the investment segment. It is defined as excess investment income divided by the total diluted weighted average shares outstanding, representing the contribution by the investment segment to the consolidated earnings per share of the Company. Since implementing our share repurchase program in 1986, we have used $4.9 billion of cash flow to repurchase Torchmark shares after determining that the repurchases provided a greater return than other investment alternatives. Share repurchases reduce excess investment income because of the foregone earnings on the cash that would otherwise have been invested in interest-bearing assets, but they also reduce the number of shares outstanding. In order to put all capital resource uses on a comparable basis, we believe that excess investment income per diluted share is an appropriate measure of the investment segment.

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

Excess Investment Income

(Dollar amounts in thousands)


	Nine months ended September 30,						Increase (Decrease)
	2011			2010			Amount			%
Net investment income *	$	528,902		$	509,862		$	19,040			4
Required interest on net insurance policy liabilities		(250,344	)		(232,383	)		(17,961	)		8
Financing costs:
Interest on funded debt		(54,320	)		(54,531	)		211			0
Interest on short-term debt		(3,863	)		(1,810	)		(2,053	)		113

Total financing costs		(58,183	)		(56,341	)		(1,842	)		3

Excess investment income	$	220,375		$	221,138		$	(763	)		0

Excess investment income per diluted share	$	1.96		$	1.79		$	0.17			9

Average invested assets (at amortized cost)	$	11,227,543		$	10,765,199		$	462,344			4
Average net insurance policy liabilities **		6,061,133			5,686,410			374,723			7
Average debt and preferred securities (at amortized cost)		1,116,472			1,106,037			10,435			1

Net investment income per Torchmark’s segment analysis does not agree with Net investment income per the Consolidated Statements of Operations because management views the amortization of certain tax-advantaged low-income housing interests as an adjustment to increase tax expense while GAAP requires that it reduce net investment income, as presented in the Reconciliation in Note G— Business Segments. Additionally, management views our Trust Preferred Securities as consolidated debt, as also presented in Note G. GAAP requires those debt securities to be deconsolidated.

**	Net of deferred acquisition costs, excluding the associated unrealized gains and losses thereon.

As shown in the above table, excess investment income for the 2011 period declined slightly to $220 million, due to the low-interest environment in recent periods. However, excess investment income per share rose 9% as a result of our share purchases over the past 12 months. The 4% growth in net investment income correlated with the 4% growth in average invested assets (at amortized cost) year over year. Even though yields in the fixed-maturity portfolio were lower in the 2011 nine months, we held significantly more lower-yielding short-term securities in 2010.

Largely offsetting the increase in net investment income, required interest on net insurance policy liabilities increased $18 million or 8% to $250 million. The increase in required interest is slightly above the 7% growth in average net interest-bearing insurance policy liabilities.

Financing costs rose 3% to $58 million, primarily due to an increase in interest on short-term debt. Short-term interest expense rose $2.1 million, primarily as a result of an increase in fees related to our bank line and letters of credit. More information concerning short-term debt can be found in the Liquidity section of this report under the caption Short-term borrowings.

Excess investment income benefits from increases in long-term rates available on new investments and decreases in short-term borrowing rates. Of these two factors, higher investment rates have the greater impact because the amount of cash that we invest is significantly greater than the amount that we borrow at short-term rates. Therefore, Torchmark would benefit if rates, especially long-term rates, were to rise.

However, excess investment income is pressured when growth in income from the portfolio is less than that of the interest required by policy liabilities and financing costs, such as we have experienced in recent periods. 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 only 2% to 3% of fixed maturities on average are expected to run off each year over the next five years. Stress tests conducted during the third quarter of 2011 indicated that the deferred acquisition costs and benefit reserve balances on our life and health business would not be impacted by an extended low-interest-rate environment. Low interest rates could negatively impact deferred acquisition costs on our annuity business. However, any impact would be insignificant.

In response to the lower interest rates, we plan to raise the new business premium rates on the major life products. The increased premiums will provide additional margin on these policies to help offset the possible future reductions in excess investment income and are not expected to have a detrimental impact on sales.

Investments (acquisitions), comparing the first nine months of 2011 with the first nine months of 2010. Torchmark’s investment policy calls for investing almost exclusively in fixed maturities that are investment grade and meet our quality and yield objectives. We generally prefer to invest in securities with longer maturities because they more closely match the long-term nature of our policy liabilities. We believe this strategy is appropriate because our cash flows are generally stable and predictable. If available longer-term securities do not meet our quality and yield objectives, new money is invested in shorter-term fixed maturities.

The following table summarizes selected information for fixed-maturity purchases. The effective annual yield shown is the yield calculated to the “worst call date.” For noncallable bonds, the worst-call date is always the maturity date. For callable bonds, the worst-call date is the call date that produces the lowest yield (or the maturity date, if the yield calculated to the maturity date is lower than the yield calculated to each call date).

Fixed Maturity Acquisitions Selected Information

(Dollar amounts in millions)


	For the nine months ended September 30,
	2011			2010
Cost of acquisitions:
Investment-grade corporate securities	$	818		$	1,247
Taxable municipals		11			119
Other		2			33

Total fixed-maturity acquisitions	$	831		$	1,399

Effective annual yield *		5.79	%		5.91	%
Average life, in years to:
Next call		27.2			23.6
Maturity		28.0			25.5
Average rating		A-			A-

*	One-year compounded yield on a tax-equivalent basis, whereby the yield on tax-exempt securities is adjusted to produce a yield equivalent to the pretax yield on taxable securities.

During the first nine months of 2011, we acquired $831 million of fixed maturities with an average effective yield of 5.79% and an average rating of A-. This compares with $1.4 billion of fixed maturities with an average yield of 5.91% and an average rating of A- acquired during the same period of 2010. These acquisitions consisted primarily of corporate bonds in both periods, with securities spanning a diversified range of issuers, industry sectors, and geographical regions. All of the acquired securities were investment grade.

Investments (portfolio composition). The composition of the investment portfolio at book value on September 30, 2011 was as follows:

Invested Assets At September 30, 2011

(Dollar amounts in millions)


	Amount		% of Total
Fixed maturities(at amortized cost)	$	10,716		95.7
Equities (at cost)		15		0.1
Mortgage loans		1		0.0
Investment real estate		1		0.0
Policy loans		395		3.5
Other long-term investments		23		0.2
Short-term investments		49		0.5

Total	$	11,200		100.0

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 less than 4% of our investments. We also have insignificant investments in equity securities,

mortgage loans, 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.

Fixed Maturities. The following table summarizes certain information about our fixed-maturity portfolio by component at September 30, 2011.

Fixed Maturities by Component

(Dollar amounts in millions)


	Cost or		Gross		Gross					% of Total Fixed Maturities
	Amortized		Unrealized		Unrealized			Fair Value		at Amortized Cost		at Fair Value
	Cost		Gains		Losses			Fair Value		at Amortized Cost		at Fair Value
Corporates	$	8,138	$	1,019	$	(134	)	$	9,023		76		78
Redeemable preferred stock		1,187		27		(64	)		1,150		11		10
Municipals		1,213		125		(2	)		1,336		12		12
Government-sponsored enterprises		34		1		0			35		0		0
Governments & agencies		36		1		0			37		0		0
Residential mortgage-backed*		15		1		0			16		0		0
Collateralized debt obligations		59		0		(34	)		25		1		0
Other asset-backed securities		34		3		(1	)		36		0		0

Total fixed maturities	$	10,716	$	1,177	$	(235	)	$	11,658		100		100

*	Includes GNMA’s

At September 30, 2011, fixed maturities had a fair value of $11.7 billion, compared with $10.5 billion at December 31, 2010. The net unrealized gain position in the fixed-maturity portfolio improved from a net gain of $108 million at December 31, 2010 to a net gain of $942 million at September 30, 2011, as a result of the previously- mentioned tightening in credit spreads.

Investments in fixed-maturity securities are diversified over a wide range of industry sectors. The following table summarizes certain information about our fixed-maturity portfolio by sector at September 30, 2011.

Fixed Maturities by Sector

(Dollar amounts in millions)


	Cost or		Gross		Gross					% of Total Fixed Maturities
	Amortized		Unrealized		Unrealized			Fair Value		Amortized Cost			Fair Value
	Cost		Gains		Losses			Fair Value		Amortized Cost			Fair Value
Financial - Life/Health/PC Insurance	$	1,780	$	104	$	(66	)	$	1,818		17	%		16	%
Financial - Bank		1,338		38		(63	)		1,313		13			12
Financial - Financial Guarantor		17		0		(3	)		14		0			0
Financial - Insurance Broker		47		2		0			49		0			0
Financial - Other		445		30		(13	)		462		4			4

Subtotal Financial		3,627		174		(145	)		3,656		34			32
Utilities		1,699		307		(10	)		1,996		16			17
Government (US, municipal, and foreign)		1,283		127		(2	)		1,408		12			12
Mortgage-backed Securities		15		1		0			16		0			0
Energy		1,194		154		0			1,348		11			12
Consumer, Non-cyclical		518		97		(4	)		611		5			5
Consumer, Cyclical		333		34		(10	)		357		3			3
Communications		469		60		(12	)		517		4			4
Basic Materials		734		99		(5	)		828		7			7
Transportation		312		57		0			369		3			3
Other Industrials		473		67		(13	)		527		4			5
Collateralized debt obligations		59		0		(34	)		25		1			0

Total fixed maturities	$	10,716	$	1,177	$	(235	)	$	11,658		100	%		100	%

At September 30, 2011, approximately 50% of the fixed-maturity assets at amortized cost (49% at fair value) were in the financial and utility sectors. The balance of the portfolio is spread among 259 issuers in a wide variety of sectors.

At September 30, 2011, our net unrealized gain of $942 million consisted of gross unrealized gains of $1.2 billion offset by $235 million of gross unrealized losses. This compares with a net unrealized gain of $108 million at December 31, 2010, consisting of a gross unrealized gain of $476 million and gross loss of $368 million. The financial sector had a net unrealized gain of $29 million at September 30, 2011, compared with a loss of $115 million at December 31, 2010. We expect our investment in temporarily impaired securities to be fully recoverable.

An analysis of the fixed-maturity portfolio at September 30, 2011 by a composite quality rating is shown in the table below. The composite rating for each security is the average of the security’s ratings as assigned by Moody’s Investor Service, Standard & Poor’s, Fitch Ratings, and Dominion Bond Rating Service, LTD. The ratings assigned by these four nationally recognized statistical rating organizations are evenly weighted when calculating the average.

Fixed Maturities by Rating

(Dollar amounts in millions)


	Amortized Cost		%		Fair Value		%
Investment grade:
AAA	$	509		5	$	550		5
AA		1,281		12		1,403		12
A		2,981		28		3,423		29
BBB+		2,062		19		2,282		20
BBB		2,157		20		2,371		20
BBB-		992		9		1,021		9

Investment grade		9,982		93		11,050		95
Below investment grade:
BB		444		5		405		3
B		143		1		109		1
Below B		147		1		94		1

Below investment grade		734		7		608		5

	$	10,716		100	$	11,658		100

Of the $10.7 billion of fixed maturities at September 30, 2011, $10.0 billion or 93% at amortized cost were investment grade with an average rating of A-. Below-investment -grade bonds were $734 million with an average rating of B+ and were 7% of fixed maturities, compared with 8% at the end of 2010. Below-investment-grade bonds at fair value were 15% of our shareholders’ equity as of September 30, 2011. Overall, the total portfolio was rated A- based on amortized cost, compared with BBB+ at the end of 2010. Our investment policy is to acquire only investment-grade obligations. Thus, any increases in below-investment-grade issues are a result of ratings downgrades of existing holdings. Our investment portfolio contains no commercial mortgage-backed securities or securities backed by sub-prime or Alt-A mortgages. We have no direct investments in residential mortgages, nor do we have any counterparty risks as we are not a party to any credit default swaps or other derivative contracts. We do not participate in securities lending. There are no off-balance sheet investments, as all investments are reported on our Consolidated Balance Sheets.

An analysis of the changes in our portfolio of below-investment-grade bonds at amortized cost during the first nine months of 2011 is as follows:

(Dollar amounts in millions)


Balance as of December 31, 2010	$	862
Downgrades by rating agencies		72
Upgrades by rating agencies		(60	)
Disposals		(142	)
Amortization and other		2

Balance as of September 30, 2011	$	734

Additional information concerning the fixed-maturity portfolio is as follows.

Fixed Maturity Portfolio Selected Information


	At September 30, 2011			At December 31, 2010			At September 30, 2010
Average annual effective yield (1)		6.53	%		6.63	%		6.66	%
Average life, in years, to:
Next call (2)		17.2			16.6			16.3
Maturity (2)		22.4			22.3			22.2
Effective duration to:
Next call (2), (3)		9.8			9.0			9.1
Maturity (2), (3)		11.6			10.9			11.1

(1)	Tax-equivalent basis, whereby the yield on tax-exempt securities is adjusted to produce a yield equivalent to the pretax yield on taxable securities.

(2)	Torchmark calculates the average life and duration of the fixed-maturity portfolio two ways: (a) based on the next call date which is the next call date for callable bonds and the maturity date for noncallable bonds, and (b) based on the maturity date of all bonds, whether callable or not.

(3)	Effective duration is a measure of the price sensitivity of a fixed-income security to a particular change in interest rates.

Realized Gains and Losses, comparing the first nine months of 2011 with the first nine months of 2010. As discussed in Note G—Business Segments, our core business of providing insurance coverage requires us to maintain a large and diverse investment portfolio to support our insurance liabilities. From time to time, investments are disposed of or written down prior to maturity for reasons generally beyond the control of management, resulting in realized gains or losses. For this reason, management removes the effects of such gains and losses when evaluating its overall core operating results.

The following table summarizes our tax-effected realized gains (losses) by component. As described in Note D—Investments, under the caption Other-Than-Temporary Impairments, we wrote certain securities down to fair value during 2011 and 2010 because we determined they were other-than-temporarily impaired.

Analysis of Realized Gains (Losses), Net of Tax

(Dollar amounts in thousands, except for per share data)


	Nine months ended September 30,
	2011						2010
	Amount			Per Share			Amount			Per Share
Fixed maturities and equities:
Investment sales	$	(1,463	)	$	(0.02	)	$	(845	)	$	(0.01	)
Investments called or tendered		15,485			0.14			9,395			0.08
Writedowns *		(13	)		0.00			(1,113	)		(0.01	)
Loss on extinguishment of debt		0			0.00			(1,070	)		(0.01	)
Other		(262	)		0.00			330			0.00

Total	$	13,747		$	0.12		$	6,697		$	0.05

*	Written down due to other-than-temporary impairment.

Financial Condition

Liquidity. Liquidity provides Torchmark with the ability to meet on demand the cash commitments required by our business operations and financial obligations. Our liquidity is evidenced by positive cash flow, a portfolio of marketable investments, and the availability of a line of credit facility.

Insurance subsidiary liquidity. The operations of our insurance subsidiaries have historically generated substantial cash inflows in excess of immediate cash needs. Sources of cash flows for the insurance subsidiaries include primarily premium and investment income. Cash outflows from operations include policy benefit payments, commissions, administrative expenses, and taxes. The funds to provide for policy benefits, the majority of which are paid in future periods, are invested primarily in long-term fixed maturities to meet these long-term obligations. In addition to investment income, maturities and scheduled repayments in the investment portfolio are sources of cash. Excess cash available from the insurance subsidiaries’ operations is generally distributed as a dividend to the parent company, subject to regulatory restriction. The dividends are generally paid in amounts equal to the subsidiaries’ prior year statutory net income excluding realized capital gains.

Parent Company liquidity. An important source of Parent Company liquidity is the dividends from the insurance subsidiaries noted above. These dividends are used by the Parent Company to pay dividends on common and preferred stock, interest and principal repayment requirements on Parent Company debt, and operating expenses of

the Parent Company. In the first nine months of 2011, the Parent Company received $731 million of dividends and transfers from the life insurance subsidiaries, including $305 million available from the proceeds from the sale of United Investors. For the full year 2011, dividends and transfers from the life insurance subsidiaries are expected to total approximately $788 million.

Additional sources of liquidity for the Parent Company are cash, intercompany receivables, and a credit facility. At September 30, 2011, the Parent Company had $166 million of invested cash and net intercompany receivables. The credit facility is discussed below under the caption “Short-term borrowings.”

Short-term borrowings. We have a credit facility that is in place with a group of lenders which allows for unsecured borrowings and stand-by letters of credit up to $600 million. The facility may be expanded by $200 million if certain conditions are met. Up to $250 million in letters of credit can be issued against the facility. The facility is further designated as a back-up credit line for a commercial paper program under which we may borrow from either the credit line or issue commercial paper at any time, with total commercial paper outstanding not to exceed the facility maximum, less any letters of credit issued. Interest is charged at variable rates. The facility has no ratings-based acceleration triggers which would require early repayment. The facility terminates January 7, 2015. In accordance with the agreement, we are subject to certain covenants regarding capitalization and interest coverage with which we were in full compliance at September 30, 2011.

The following table presents certain information about our short-term borrowings, all of which was commercial paper at September 30, 2011 and December 31, 2010.

Short-term Borrowings - Commercial Paper

(Dollar amounts in millions)


	For the Nine months ended September 30,						At September 30, 2011			At December 31, 2010
	2011			2010			At September 30, 2011			At December 31, 2010
At end of period:
Balance							$	226		$	199
Annualized interest rate								.39	%		.45	%
Letters of credit outstanding		N/A			N/A		$	198		$	198
Remaining amount available under credit line							$	176		$	203
Average balance outstanding during period:
Balance	$	203		$	190
Daily-weighted average interest rate*		.35	%		.43	%		N/A			N/A
Maximum daily amount outstanding during period	$	272		$	235

*	Annualized

There have been no difficulties in accessing the commercial paper market under this facility during the nine-month periods ending September 30, 2011 and 2010.

In summary, Torchmark expects to have readily available funds for the foreseeable future to conduct its operations and to maintain target capital ratios in the insurance subsidiaries through internally generated cash flow and the credit facility. In the unlikely event that more liquidity is needed, the Company could generate additional funds through multiple sources including, but not limited to, the issuance of debt, an additional short-term credit facility, and intercompany borrowing.

Consolidated liquidity. Consolidated net cash inflows from operations were $684 million in the first nine months of 2011, compared with $745 million in the same period of 2010. In addition to cash inflows from operations, our companies have received $204 million in investment calls and tenders and $169 million in scheduled maturities or repayments during the 2011 period. As previously noted under the caption Short-term borrowings, we have in place a line of credit facility. The insurance companies have no additional outstanding credit facilities.

Cash and short term investments were $224 million at September 30, 2011, compared with $582 million at December 31, 2010 and $150 million at the end of September, 2010. The December 31, 2010 balance included the $343 million proceeds from the sale of United Investors. In addition to these liquid assets, the entire $11.7 billion (fair value at September 30, 2011) portfolio of fixed-income and equity securities is available for sale in the event of an unexpected need. Substantially all of our fixed-income and equity securities are publicly traded. We generally expect to hold fixed-income securities to maturity, and even though these securities are classified as available for sale, we have the ability and intent to hold any securities which are temporarily impaired until they mature. Our strong cash flows from operations, investment maturities, and credit line availability make any need to sell securities for liquidity unlikely.

Capital Resources. Our insurance subsidiaries maintain capital at a level adequate to support their current operations and meet the requirements of the regulatory authorities and the rating agencies. Our insurance subsidiaries generally target a capital ratio of around 325% of company action level required capital under Risk-Based Capital (RBC), a measure established by insurance regulatory authorities to monitor the adequacy of capital. Company action level is a level of capital that is calculated using formulas established by the National Association of Insurance Commissioners. The 325% target is considered sufficient because of the insurance companies’ strong reliable cash flows, the relatively low risk of their product mix, and because that ratio exceeds regulatory requirements and is in line with rating agency expectations for Torchmark. As of December 31, 2010, our insurance subsidiaries had a consolidated RBC ratio of 421%. In the event of a decline in the RBC ratios of the insurance companies due to ratings downgrades in the investment portfolios, impairments, or other circumstances, we have available cash on hand and credit

availability at the Parent Company to make additional contributions as necessary to maintain the ratio at or above 325%.

On a consolidated basis, Torchmark’s capital structure consists of short-term debt (comprised of the commercial paper outstanding discussed above), long-term funded debt, and shareholders’ equity. The outstanding long-term debt at book value, including our Junior Subordinated Debentures, was $914 million at September 30, 2011, compared with $913 million at December 31, 2010. An analysis of long-term debt issues outstanding is as follows at September 30, 2011.

(Dollar amounts in millions)


Instrument	Year Due		Interest Rate			Par Value		Book Value			Fair Value
Notes		2013		7 3/8	%	$	94.1	$	93.8		$	101.7
Senior Notes		2016		6 3/8			250.0		247.8			279.4
Senior Notes		2019		9 1/4			292.6		289.6			381.3
Notes		2023		7 7/8			165.6		163.3			199.5
Issue expenses (1)									(4.1	)

Total long-term debt							802.3		790.4			961.9
Junior Subordinated Debentures (2)		2046		7.1			123.7		123.7			120.0	(3)

Total						$	926.0	$	914.1		$	1,081.9

(1)	Unamortized issue expenses related to Torchmark’s Trust Preferred Securities.

(2)	Included in “Due to Affiliates” in accordance with accounting standards.

(3)	Market value of the 7.1% Trust Preferred Securities, par value $120 million, which are obligations of an unconsolidated trust.

Shareholders’ equity was $4.2 billion at September 30, 2011. This compares with $4.0 billion at December, 31, 2010 and $4.3 billion at September 30, 2010. During the twelve months since September 30, 2010, shareholders’ equity was decreased by $889 million because of share purchases. However, shareholders’ equity has also been increased by unrealized gains of $193 million after tax in the fixed-maturity portfolio, as financial markets have improved over this period of time. Net income added over the same twelve-month period was $546 million.

As previously noted under the caption Highlights in this report, we acquired 17 million of our outstanding common shares under our share repurchase program during the first nine months of 2011. These shares were acquired at a cost of $720 million ($41.79 per share), compared with purchases of 4 million shares at a cost of $141 million in the first nine months of 2010.

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

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

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

Selected Financial Data


	At September 30, 2011						At December 31, 2010						At September 30, 2010
	GAAP			Effect of Accounting Rule Requiring Revaluation *			GAAP			Effect of Accounting Rule Requiring Revaluation *			GAAP			Effect of Accounting Rule Requiring Revaluation *
Fixed maturities (millions)	$	11,658		$	942		$	10,543		$	107		$	10,965		$	572
Deferred acquisition costs (millions) **		3,448			(42	)		3,406			(4	)		3,356			(21	)
Assets of discontinued operations		0			0			0			0			1,646			52
Total assets (millions)		16,971			900			16,160			103			17,716			603
Short-term debt (millions)		226			0			199			0			189			0
Long-term debt (millions)		914			0			913			0			913			0
Shareholders’ equity (millions)		4,183			585			4,016			67			4,268			392

Book value per diluted share		40.92			5.72			33.24			0.55			35.18			3.23
Debt to capitalization ***		21.4	%		(2.6	)%		21.7	%		(0.3	)%		20.5	%		(1.6	)%

Diluted shares outstanding (thousands)		102,233						120,815						121,315
Actual shares outstanding (thousands)		102,185						118,865						120,297

*	Amount added to (deducted from) comprehensive income to produce the stated GAAP item, per accounting rule ASC 320-10-35-1, formerly SFAS 115.

**	Includes the value of insurance purchased.

***	Torchmark’s debt covenants require that the effect of this accounting rule be removed to determine this ratio. This ratio is computed by dividing total debt by the sum of total debt and shareholders’ equity.

Interest coverage was 10.8 times in the 2011 nine months, compared with 11.0 times in the 2010 period. Interest coverage is computed by dividing interest expense into the sum of pretax income and interest expense.

New Unadopted Accounting Rules

The FASB has issued new accounting guidance potentially applicable to Torchmark, effective in future periods.

Comprehensive Income (ASU 2011-05). Under this guidance, the components of comprehensive income must be presented as either 1) a continuous statement (including the components of net income) or 2) as two separate but consecutive statements (an income statement followed by a comprehensive income statement). This guidance is effective for us in interim and annual periods beginning in 2012. Because we already present comprehensive income as contemplated by the second alternative, this guidance should not result in any change.

Fair Value Measurement and Disclosure (ASU 2011-04). The primary purpose of this new guidance is to converge the measurement criteria and disclosures of fair value in U.S. GAAP with those of International Accounting Standards. The measurement principles are generally consistent with current U.S. GAAP and are not expected to have a material impact on our financial statements. The guidance will require additional disclosures, including expanded disclosures for fair value measurements categorized in Level 3 of the fair value hierarchy and a requirement to disclose the level in the fair value hierarchy of items whose fair value is disclosed but not measured at fair value on the balance sheet. The guidance is effective for us in calendar 2012, with early adoption prohibited.

Goodwill Impairment Testing (ASU 2011-08). The issuance of this update permits an optional qualitative assessment in order to simplify how an entity tests its goodwill for impairment. Under this assessment, if an entity concludes that a reporting units’ fair value is more likely than not greater than its carrying amount, it would not be required to perform any further impairment testing for that reporting unit. Otherwise, the two-step impairment test under current guidance would be required for the reporting unit. This new guidance lists factors to consider in making the qualitative assessment. The revised guidance is applicable to us beginning in 2012, with early adoption permitted. We do not expect this new guidance to impact the value of our goodwill, only to modify the way we test for its impairment.

Health Insurer’s Fees Paid to the Federal Government (ASU 2011-06). Private health insurance carriers will be required to pay a new fee to the federal government beginning in calendar year 2014 under the Patient Protection and Affordable Care Act. This guidance addresses questions about how to recognize and classify the fees, basically requiring that it be expensed ratably throughout the year. It is effective for Torchmark beginning in the year 2014. Because the majority of Torchmark’s health products are excluded from the mandate, the impact of adoption should be immaterial.

Policy Acquisition Costs (ASU 2010-26). This accounting guidance amends the accounting for costs associated with acquiring or renewing insurance contracts in order to address the diversity in practice surrounding the capitalization and deferral of these costs. This guidance is effective for Torchmark beginning January 1, 2012, with early adoption permitted. Prospective or retrospective application is permitted, and we intend to adopt the guidance retrospectively. While we continue to evaluate the new guidance, we currently expect it to reduce our assets in an approximate range of 3% to 5% and shareholders’ equity in an approximate range of 9% to 15% at the time of adoption. We also expect it will reduce 2012 earnings in a range of 1% to 2%. The adoption of this guidance will have no impact on our cash flows or liquidity.

Cautionary Statements

We caution readers regarding certain forward-looking statements contained in the previous discussion and elsewhere in this document, and in any other statements made by, or on behalf of Torchmark whether or not in future filings with the Securities and Exchange Commission. Any statement that is not a historical fact or that might otherwise be considered an opinion or projection concerning Torchmark or its business, whether express or implied, is meant as and should be considered a forward-looking statement. Such statements represent management’s opinions concerning future operations, strategies, financial results or other developments. We specifically disclaim any obligation to update or revise any forward-looking statement because of new information, future developments, or otherwise.

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

Changing general economic conditions leading to unexpected changes in lapse rates and/or sales of our policies, as well as levels of mortality, morbidity, and utilization of health care services that differ from Torchmark’s assumptions;

Regulatory developments, including changes in governmental regulations (particularly those impacting taxes and changes to the Federal Medicare program that would affect Medicare Supplement and Medicare Part D insurance);

Market trends in the senior-aged health care industry that provide alternatives to traditional Medicare (such as Health Maintenance Organizations and other managed care or private plans) and that could affect the sales of traditional Medicare Supplement insurance;

Interest rate changes that affect product sales and/or investment portfolio yield;

General economic, industry sector or individual debt issuers’ financial conditions that may affect the current market value of securities we own, or that may impair an issuer’s ability to make principal and/or interest payments due on those securities;

Changes in pricing competition;

Litigation results;

Levels of administrative and operational efficiencies that differ from our assumptions;

Our inability to obtain timely and appropriate premium rate increases for health insurance policies due to regulatory delay;

10)

The customer response to new products and marketing initiatives; and

11)

Reported amounts in the financial statements which are based on management’s estimates and judgments which may differ from the actual amounts ultimately realized.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no quantitative or qualitative changes with respect to market risk exposure during the three months ended September 30, 2011.

Item 4. Controls and Procedures

Torchmark, under the direction of the Chairman and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, has established disclosure controls and procedures that are designed to ensure that information required to be disclosed by Torchmark in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to Torchmark’s management, including the Chairman and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

As of the end of the fiscal quarter completed September 30, 2011, an evaluation was performed under the supervision and with the participation of Torchmark management, including the Chairman and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of Torchmark’s disclosure controls and

procedures (as those terms are defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon their evaluation, the Chairman and Chief Executive Officer and the Executive Vice President and Chief Financial Officer have concluded that Torchmark’s disclosure controls and procedures are effective as of the date of this Form 10-Q. In compliance with Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350), each of these officers executed a Certification included as an exhibit to this Form 10-Q.

As of the date of this Form 10-Q for the quarter ended September 30, 2011, there have not been any changes in Torchmark’s internal control over financial reporting or in other factors that could significantly affect this control over financial reporting subsequent to the date of their evaluation which have materially affected, or are reasonably likely to materially affect, Torchmark’s internal control over financial reporting. No material weaknesses in such internal controls were identified in the evaluation and as a consequence, no corrective action was required to be taken.

Part II – Other Information

Item 1. Legal Proceedings

Torchmark and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including claims involving tax matters, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of Torchmark’s subsidiaries, employment discrimination, and miscellaneous other causes of action. Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, management does not believe that such litigation will have a material adverse effect on Torchmark’s financial condition, future operating results or liquidity; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future. This bespeaks caution, particularly in states with reputations for high punitive damage verdicts such as Alabama and Mississippi. 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, particularly Alabama and Mississippi, creating the potential for unpredictable material adverse judgments in any given punitive damage suit.

Torchmark subsidiary, United American Insurance Company (United American) was named as defendant in purported class action litigation filed on May 31, 2011 in Cross County Arkansas Circuit Court (Kennedy v. United American Insurance Company (Case # CV-2011-84-5). In the litigation, filed on behalf of a proposed nationwide class of owners of certain limited hospital and surgical expense benefit policies from United American, the plaintiff alleges that United American breached the policy by failing and/or refusing to pay benefits for the total number of days an insured is confined to a hospital

and by limiting payment to the number of days for which there are incurred hospital room charges rather than also including benefits for services and supplies. Claims for unjust enrichment, breach of contract, bad faith refusal to pay first party benefits, breach of the implied duty of good faith and fair dealing, bad faith, and violation of the Arkansas Deceptive Trade Practices Act were initially asserted. The plaintiff is seeking declaratory relief, restitution and/or monetary damages, punitive damages, costs and attorneys fees. In September 2011, the plaintiff dismissed all causes of action, except for the breach of contract claim.

Item 1A. Risk Factors

Torchmark has had no material changes to its risk factors.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

(e)

Purchases of Certain Equity Securities by the Issuer and Others


Period	(a) Total Number of Shares Purchased		(b) Average Price Paid Per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number of Shares (or Approximate Dollar Amount) that May Yet Be Purchased Under the Plans or Programs
July 1-31, 2011		512,541	$	41.90		512,541
August 1-31, 2011		1,585,345		35.86		1,585,345
September 1-30, 2011		1,346,330		35.52		1,346,330

All share information presented above reflects Torchmark’s three-for-two stock split.

At its April 28, 2011 meeting, the Board of Directors reaffirmed the Company’s share repurchase program in amounts and with timing that management, in consultation with the Board, determines to be in the best interest of the Company. The program has no defined expiration date or maximum shares to be repurchased.

Item 6. Exhibits

(a)

Exhibits



(11)		Statement re Computation of Per Share Earnings

(31.1)		Rule 13a-14(a)/15d-14(a) Certification by Mark S. McAndrew

(31.2)		Rule 13a-14(a)/15d-14(a) Certification by Gary L. Coleman

(32.1)		Section 1350 Certification by Mark S. McAndrew and Gary L. Coleman

(101)		Interactive Data Files for the Torchmark Corporation Form 10-Q for the periods ended September 30, 2011

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


				TORCHMARK CORPORATION

Date: November 8, 2011				/s/ Mark S. McAndrew
				Mark S. McAndrew
				Chairman and Chief Executive Officer


Date: November 8, 2011				/s/ Gary L. Coleman
				Gary L. Coleman, Executive Vice President and Chief Financial Officer