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TORCHMARK CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

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Results of Operations


Acquisition. As disclosed in Note H-Acquisition, Torchmark acquired Family
Heritage on November 1, 2012 for approximately $232 million. As noted, Family
Heritage is a specialty insurer focused primarily on selling individual
supplemental health insurance products through a captive agency force,
consisting of approximately 1,200 agents. We were attracted to the company
because it sells protection-oriented insurance to middle income families through
a captive agency force that we believe we can help grow. We currently intend to
operate the company as a stand-alone operation. We expect that the addition of
this acquisition will be accretive to earnings and earnings per share in both
2012 and 2013, excluding the effects of acquisition costs of the transaction as
described in Note G-Business Segments and Note H-Acquisition. These costs must
be expensed in their entirety in 2012 under applicable accounting guidance. The
transaction will have a minimal effect, if any, on our share repurchase program
and the regulatory capital ratios of the insurance subsidiaries.

Debt Transactions. As discussed in Note I-Debt Transactions, we closed two
separate debt issues on September 24, 2012 - a ten-year $300 million 3.8% Senior
Note issue and a forty-year $125 million 5.875% Junior Subordinated Debt issue
that is callable at par after five years. The Senior Notes were issued to
provide approximately $200 million to fund the acquisition of Family Heritage
and $94 million to pre-fund the eventual retirement of our August 2013 7 3/8%
Senior Notes. As we wanted to fund the majority of the Family Heritage
acquisition internally, the Parent Company issued $150 million of these Senior
Notes to two of our insurance companies. The $125 million in Junior Subordinated
Notes were issued to refinance our $120 million Trust Preferred Securities,
which carried an interest rate of 7.1%. The Trust Preferred Securities were
called on October 24, 2012.

The $150 million in the 3.8% Senior Notes owned by our insurance companies are
eliminated in consolidation and thus are not treated as outstanding debt or as
invested assets in our consolidated financial statements. Therefore, the
issuance of these two instruments resulted in net additional proceeds to the
Company of $268 million during September, 2012. After the older issues are
retired, the addition of these new debt issues will result in a small increase
in our debt to capitalization ratio and a reduction in interest cost. These
issuances will have no material effect on our debt covenants.

Effect of New Accounting Standard. As discussed in Note F - Adoption of New
Accounting Standard, Torchmark adopted ASU 2010-26, a new accounting rule
concerning the deferral of policy acquisition costs. Note F describes the effect
that this new guidance has on Torchmark. The new standard was adopted effective
January 1, 2012, but was adopted retroactively, meaning that all prior periods
give effect to the change as if we had always accounted for deferred acquisition
costs under the new guidance. Therefore, the results for prior periods presented
in this discussion have been restated as if the new rule had been in effect in
those periods.



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New Strategy to avoid RMDs

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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, 2012 and 2011. 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 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 2012 with the same period of 2011,
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 2012 with the first nine months
of 2011. Net income per diluted share increased 15% to $3.84 from $3.33.
Included in net income in 2012 were realized investment gains of approximately
$11 million after tax, or $.11 per share compared with $14 million or $.12 per
share in 2011. Realized investment gains and losses are presented 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).

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,



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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 rose 6% in 2012 to $2.1 billion. Total net sales rose 22%
to $372 million. After adjusting for the increased sales of Medicare Part D in
2012, largely caused by the addition of automatic enrollees discussed later in
this report, net sales rose 5% to $303 million. First-year collected premium
increased 42% to $348 million for the period. Excluding the increase in Part D
first-year premium, the increase was 6%.

Life insurance premium income grew 5% to $1.4 billion. Life net sales increased 6% to $260 million, as three of our four distribution units experienced increases. First-year collected life premium rose 6% to $193 million. Life underwriting margins increased 11% to $381 million.

New Strategy to avoid RMDs


Health insurance premium income, excluding Medicare Part D, declined 5% to $527
million. Health net sales, excluding Part D, were flat at $43 million for the
nine months, as a 5% increase in sales of Medicare Supplement policies were
offset by declines in sales of limited-benefit health products. First-year
collected health premium, excluding Part D, rose 7% to $46 million for the
period. Health premium continued to be restrained by the run off of certain
health products that we discontinued selling in 2010.

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 $234 million in
2012 compared with $148 million in 2011, an increase of 58%. This increase was
due to the addition of a large number of low-income automatic enrollees into our
Part D program in 2012.

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 $12.3 million after-tax charge
to earnings in 2012 ($.12 per share) and a $3.8 million charge in 2011 ($.03 per
share). We expect our 2012 full year benefit ratios to be approximately the same
as those for interim periods, as was the case in 2011 and prior years. For this
reason, there should be no material difference in our segment versus financial
statement reporting by year end 2012, as it relates to Medicare Part D. The
increase in this adjustment in 2012 resulted from the addition of the automatic
enrollees in Part D as noted above.

Excess investment income per diluted share increased 5% over 2011 to $1.83, while excess investment income declined 7% to $181 million. The increase in per share




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excess investment income in relation to the decline in dollar amount resulted
from the significant number of shares purchased over the past twelve months, as
discussed later in this report. Net investment income rose $6 million, or 1%.
While our average investment portfolio at amortized cost grew 3%, the average
effective yield on the fixed-maturity portfolio, which represented 93% of our
investments at amortized cost, decreased to 6.42% in the 2012 period from 6.57%
in the prior period. Excess investment income has been negatively affected by
the low-interest-rate environment in financial markets during recent periods.
Excess investment income declined despite the $6 million increase in net
investment income, however, because of the $20 million or 7% increase in
required interest on net insurance policy liabilities, as discussed under the
caption Investments (excess investment income) later in this report. Financing
costs also rose 1% in the period to $59 million.

In the first nine months of 2012, we invested new money in our fixed-maturity
portfolio at an effective annual yield on new investments of 4.54%, compared
with 5.79% in the same period of 2011. Our fixed maturity portfolio yield was
6.33% (as of September 30, 2012) and the portfolio had an average rating of
BBB+. Approximately 94% of the portfolio at amortized cost was investment grade
at September 30, 2012. Cash and short-term investments were $685 million at that
date, compared with $105 million at December 31, 2011. The buildup in cash was
due to the debt issuances in late September, 2012 in anticipation of the
acquisition of Family Heritage and the October, 2012 call of our 7.1% Trust
Preferreds mentioned above. In addition, we had $484 million proceeds from total
security dispositions in the third quarter, including $465 million from
securities called, a large portion of which was awaiting reinvestment.

The unrealized gain position in our fixed-maturity portfolio grew during the
first nine months of 2012 from a net unrealized gain of $964 million at year end
2011 to a net unrealized gain position of $1.6 billion at September 30, 2012,
primarily as a result of lower interest rates. 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 August, 2012 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, 2012 and 2011.



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  Table of Contents

                          Analysis of Share Purchases

                             (Amounts in thousands)



                                            For the nine months ended September 30,
                                          2012                                   2011
                                                     Average                                 Average
                           Shares       Amount        Price        Shares       Amount        Price
Purchases with:
Excess cash flow             6,635     $ 318,227     $  47.96       17,238     $ 720,446     $  41.79
Option exercise proceeds     3,091       147,872        47.84        1,631        70,053        42.94

Total                        9,726     $ 466,099     $  47.92       18,869     $ 790,499     $  41.89


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 2012 with the first nine
months of 2011. Life insurance is our predominant segment, representing 64% of
premium income and 72% of insurance underwriting margin in the first nine months
of 2012. 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 5% to $1.4 billion. 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
                                                  2012                       2011                  (Decrease)
                                                          % of                       % of
                                           Amount        Total        Amount        Total       Amount        %
American Income Exclusive Agency         $   492,381         36     $   451,054         35     $ 41,327         9
Direct Response                              476,888         35         447,500         34       29,388         7
Liberty National Exclusive Agency            212,552         16         217,560         17       (5,008 )      (2 )
Other Agencies                               174,706         13         178,043         14       (3,337 )      (2 )


Total Life Premium                       $ 1,356,527        100     $ 1,294,157        100     $ 62,370         5



Net sales, defined earlier in this report as an indicator of new business
production, rose 6% to $260 million. Three of our four distribution groups had
increases in net sales over the prior year period. An analysis of life net sales
by distribution group is presented below.



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                                 Life Insurance

                        Net Sales by Distribution Method

                         (Dollar amounts in thousands)



                                                 Nine months ended September 30,                  Increase
                                                  2012                      2011                 (Decrease)
                                                          % of                     % of
                                            Amount       Total       Amount       Total       Amount         %
American Income Exclusive Agency          $  119,049         46     $ 105,273         43     $ 13,776         13
Direct Response                              109,055         42       103,497         42        5,558          5
Liberty National Exclusive Agency             23,743          9        28,005         12       (4,262 )      (15 )
Other Agencies                                 8,355          3         7,784          3          571          7


Total Life Net Sales                      $  260,202        100     $ 244,559        100     $ 15,643          6


First-year collected life premium, defined earlier in this report, was $193 million in the 2012 period, rising 6%. 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
                                                  2012                      2011                 (Decrease)
                                                          % of                     % of
                                            Amount       Total       Amount       Total       Amount         %
American Income Exclusive Agency          $   94,031         49     $  83,972         46     $ 10,059         12
Direct Response                               71,755         37        67,495         37        4,260          6
Liberty National Exclusive Agency             20,154         10        24,086         13       (3,932 )      (16 )
Other Agencies                                 7,136          4         7,153          4          (17 )        0


Total                                     $  193,076        100     $ 182,706        100     $ 10,370          6



The American Income Exclusive Agency markets primarily to members of labor
unions, but also to credit unions and other associations. This agency is the
largest contributor to life premium of any of Torchmark's distribution systems
at 36% of Torchmark's total life premium. This group produced premium income of
$492 million, an increase of 9%. This agency is also our fastest growing life
insurance agency on the basis of premium growth and sales. Net sales rose 13% to
$119 million, while first-year collected premium rose 12% to $94 million.
Increases in sales in our captive agencies are highly dependent on growth in the
size of the agency force. The American Income agent count rose 23% to 5,472 at
September 30, 2012 over the prior year (4,448). The count was also up 25% over
the count at December 31, 2011 (4,381). The American Income Agency has been
focusing on growing and strengthening middle management to support the growth of
the agency force.



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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 lower-middle and 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 7% to $477 million, representing 35% of Torchmark's total life premium in 2012. Net sales for this group of $109 million increased 5%. First-year collected premium gained 6% to $72 million.

The Liberty National Exclusive Agency markets primarily life insurance and
supplemental health insurance, focusing primarily on middle-income customers.
Life premium income for this agency was $213 million in the 2012 period, a 2%
decline compared with $218 million in the 2011 period. First-year collected
premium declined 16% to $20 million.

Net sales for the Liberty Agency declined 15% to $24 million. However, Liberty's
net life sales rose sequentially over each of the past two quarters, increasing
3% over second quarter 2012. Liberty had 1,401 producing agents at September 30,
2012, compared with 1,578 a year earlier, a decline of 11%. However, the agent
count has risen 4% since December 31, 2011, when it stood at 1,345, and has
risen 3% over the prior quarter. Decreases in agent counts prior to 2012 have
had a negative effect on premium growth in this agency. The past declines were
due to a number of factors, including the closing of several offices which had
poor production as well as certain agent compensation issues which resulted in
the departure of a number of the less productive agents. While these factors
caused a loss of agents, they have resulted in improved persistency and margins,
and have contributed to Torchmark's overall improvement in life insurance
margins. Additionally, we have changed the cost structure of this agency to a
more commission-driven model, which we believe will also 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 $175 million of life premium income, or 13% of
Torchmark's total in the 2012 period, but contributed only 3% of net sales.



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                                 Life Insurance

                               Summary of Results

                         (Dollar amounts in thousands)



                                                 Nine months ended September 30,
                                               2012                          2011                    Increase
                                                       % of                          % of
                                       Amount         Premium        Amount         Premium       Amount       %
Premium and policy charges           $ 1,356,527           100     $ 1,294,157           100     $ 62,370        5
Net policy obligations                   518,863            38         494,906            38       23,957        5
Commissions and acquisition
expense *                                457,075            34         456,039            35        1,036        0

Insurance underwriting income
before other income and
administrative expense               $   380,589            28     $   343,212            27     $ 37,377       11




* 2011 expense has been retrospectively adjusted as a result of the adoption of

new accounting guidance as described in Note F - Adoption of New Accounting

   Standard. The restatement resulted in a reduction in the amortization of
   acquisition expense of $38 million and the addition of non-deferred
   acquisition expense of $60 million, for a net reduction in margin of $22
   million in 2011.


Reported margins for our life insurance business have been negatively affected
by the adopted accounting rule described in Note F which was adopted for all
periods presented and has the effect of delaying the recognition of
profitability on our insurance products. The recognition is delayed because we
are no longer allowed to capitalize certain acquisition costs which were
deferrable under previous accounting guidance. These costs that we no longer
defer are included in the chart above under the caption "Commissions and
acquisition expense" and were $42 million in 2012 and $60 million in 2011. While
the recognition of profits is now delayed, ultimate profitability on our
business is not affected by the change in accounting.

Life insurance underwriting income before insurance administrative expense was
$381 million, increasing 11%. As a percentage of premium, underwriting income
rose from 27% to 28% in 2012. Growth in underwriting income was caused partially
by premium growth but also by reductions in certain acquisition expenses.

In 2011, we implemented several initiatives designed to further improve life
insurance lapse ratios. This program has been very successful and has continued
to grow. We anticipate that it will conserve approximately $31 million of
additional annualized life premium during 2012.

Health insurance, comparing the first nine months of 2012 with the first nine
months of 2011. Health premium accounted for 36% of our total premium in the
2012 period, while the health underwriting margin accounted for 27% 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



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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
2012 period was $761 million, increasing 8%. 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.



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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
                                                  2012                      2011                  (Decrease)
                                                          % of                     % of
                                            Amount       Total       Amount       Total       Amount          %
United American Independent Agency
Limited-benefit plans                     $   19,372                $  27,879                $  (8,507 )      (31 )
Medicare Supplement                          204,215                  202,823                    1,392          1

                                             223,587         43       230,702         41        (7,115 )       (3 )
Liberty National Exclusive Agency
Limited-benefit plans                        122,799                  133,159                  (10,360 )       (8 )
Medicare Supplement                           77,281                   87,880                  (10,599 )      (12 )

                                             200,080         38       221,039         40       (20,959 )       (9 )
American Income Exclusive Agency
Limited-benefit plans                         59,142                   59,329                     (187 )        0
Medicare Supplement                              521                      614                      (93 )      (15 )

                                              59,663         11        59,943         11          (280 )        0
Direct Response
Limited-benefit plans                            262                      283                      (21 )       (7 )
Medicare Supplement                           43,422                   42,599                      823          2

                                              43,684          8        42,882          8           802          2
Total Health Premium (Before Part D)
Limited-benefit plans                        201,575         38       220,650         40       (19,075 )       (9 )
Medicare Supplement                          325,439         62       

333,916 60 (8,477 ) (3 )


Total (Before Part D)                        527,014        100       

554,566 100 (27,552 ) (5 )



Medicare Part D *                            233,811                  148,241                   85,570         58

Total Health Premium *                    $  760,825                $ 702,807                $  58,018          8




* Total Medicare Part D premium and health premium exclude the risk-sharing

premiums of $6.1 million in 2012 and $5.4 million in 2011 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.




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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
                                                    2012                     2011                 (Decrease)
                                                            % of                    % of
                                             Amount        Total       Amount      Total       Amount         %
United American Independent Agency
Limited-benefit plans                      $       753                $    781                $    (28 )       (4 )
Medicare Supplement                             20,603                  18,659                   1,944         10

                                                21,356         50       19,440         45        1,916         10
Liberty National Exclusive Agency
Limited-benefit plans                           10,353                  10,723                    (370 )       (3 )
Medicare Supplement                                534                   1,350                    (816 )      (60 )

                                                10,887         26       12,073         28       (1,186 )      (10 )
American Income Exclusive Agency
Limited-benefit plans                            6,567                   7,370                    (803 )      (11 )
Medicare Supplement                                  0                       0                       0          0

                                                 6,567         15        7,370         17         (803 )      (11 )
Direct Response
Limited-benefit plans                              678                     797                    (119 )      (15 )
Medicare Supplement                              3,223                   3,226                      (3 )        0

                                                 3,901          9        4,023         10         (122 )       (3 )
Total Net Sales (Before Part D)
Limited-benefit plans                           18,351         43       19,671         46       (1,320 )       (7 )
Medicare Supplement                             24,360         57       

23,235 54 1,125 5


Total (Before Part D)                           42,711        100       42,906        100         (195 )        0

Medicare Part D*                                68,925                  17,971                  50,954        284

Total Net Sales*                           $   111,636                $ 60,877                $ 50,759         83




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




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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
                                                    2012                     2011                 (Decrease)
                                                            % of                    % of
                                             Amount        Total       Amount      Total       Amount         %
United American Independent Agency
Limited-benefit plans                      $       629                $  1,325                $   (696 )      (53 )
Medicare Supplement                             22,970                  19,775                   3,195         16

                                                23,599         52       21,100         49        2,499         12
Liberty National Exclusive Agency
Limited-benefit plans                            9,961                   7,179                   2,782         39
Medicare Supplement                                889                   1,685                    (796 )      (47 )

                                                10,850         24        8,864         21        1,986         22
American Income Exclusive Agency
Limited-benefit plans                            7,813                   8,910                  (1,097 )      (12 )
Medicare Supplement                                  0                       0                       0          0

                                                 7,813         17        8,910         21       (1,097 )      (12 )
Direct Response
Limited-benefit plans                              485                     400                      85         21
Medicare Supplement                              2,794                   3,286                    (492 )      (15 )

                                                 3,279          7        3,686          9         (407 )      (11 )
Total First-Year Collected Premium
(Before Part D)
Limited-benefit plans                           18,888         41       17,814         42        1,074          6
Medicare Supplement                             26,653         59       24,746         58        1,907          8

Total (Before Part D)                           45,541        100       42,560        100        2,981          7

Medicare Part D*                               109,261                  20,040                  89,221        445

Total First-Year Collected Premium*        $   154,802                $ 62,600                $ 92,202        147





*  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. Health premium, excluding Part D premium, fell 5% to $527 million in the
2012 period. Medicare Supplement premium declined 3% to $325 million, while
other limited-benefit health premium decreased 9% to $202 million. Medicare
Supplement provides Torchmark with the greatest amount of health premium,
representing 62% of non-Part D health premium for the 2012 period, compared with
60% a year earlier.



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Health net sales, excluding Part D, were flat at $43 million. Medicare
Supplement net sales rose 5% to $24 million in the 2012 period. Limited-benefit
net sales decreased 7% to $18 million. Non-Part D health first-year collected
premium rose 7%.

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 $224 million, representing 43% of Torchmark's total
non-Part D health premium. Net sales were $21 million, or 50% of Torchmark's
non-Part D health sales. This agency is also Torchmark's largest producer of
Medicare Supplement insurance, with Medicare Supplement premium income of $204
million. This agency represents approximately 63% of all Torchmark Medicare
Supplement premium and 85% of Medicare Supplement net sales. Medicare Supplement
premium in this agency rose 1% while net sales of these products rose 10% in
2012. However, total health premium declined 3%.

The Liberty National Exclusive Agency markets Medicare Supplement products and
limited-benefit health products including cancer insurance. This agency
represented 38% of Torchmark's non-Part D health premium income at $200 million
in 2012. Discussed under the Life Insurance caption, we noted the 11% decline in
agent counts at Liberty over the prior twelve months. Declines in agent counts
have also had a negative effect on health net sales and premium income. In the
2012 period, health premium income in the Liberty Agency declined 9% from the
prior year premium of $221 million. Net health sales in this agency declined 10%
in the 2012 nine months to $11 million. However, first-year collected premium
rose 22% to $11 million, due to an increase in cancer sales over the prior
twelve months.

Other distribution. Certain of our other distribution channels market health
products, although their main emphasis is on life insurance. On a combined
basis, they accounted for 19% of health premium excluding Part D in the 2012
period. 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 8%, from $11.4 million in 2011 to
$10.5 million in 2012.

Medicare Part D. Coverage under Torchmark'sMedicare 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 85% for



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the entire 2012 contract year compared with 82% for the full year 2011. 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 2011.

Medicare Part D premium was $234 million in 2012, compared with $148 million in
2011, after removal of the risk-sharing adjustment in both periods. This
represents an increase in premium of 58%. Growth in premium in 2012 resulted
from a new lower-cost Part D plan which qualified us to receive a large number
of low-income automatic enrollees and to grow our own individual sales. The new
product was priced to achieve the same underwriting margin as our existing
products. We expect to have only minimal growth in Part D premium in 2013
because we will not receive as many new low-income automatic enrollees in 2013
as we did in 2012.

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,
                                                        2012                           2011
                                                  Per                           Per
                                                Segment                       Segment
                                               Analysis         GAAP         Analysis          GAAP
Insurance underwriting income before other
income and administrative expense              $  23,374       $ 4,452      

$ 17,450$ 11,613

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

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The following table presents underwriting margin data for health insurance.


                                Health Insurance

                               Summary of Results

                         (Dollar amounts in thousands)



                                                          Nine months ended September 30, 2012
                                                   % of         Medicare         % of           Total          % of
                                   Health*        Premium        Part D         Premium        Health         Premium
Premium and policy charges        $ 527,014            100      $ 233,811            100      $ 760,825            100

Net policy obligations              312,336             59        198,634             85        510,970             67
Commissions and acquisition
expense                              95,195             18         11,803              5        106,998             14


Insurance underwriting income
before other income and
administrative expense            $ 119,483             23      $  23,374             10      $ 142,857             19


                                                          Nine months ended September 30, 2011
                                                   % of         Medicare         % of           Total          % of
                                   Health*        Premium        Part D         Premium        Health         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**                           102,384             19          7,557              5        109,941             16

Insurance underwriting income
before other income and
administrative expense            $ 124,545             22      $  17,450             12      $ 141,995             20





* Health other than Medicare Part D.

** 2011 expense has been retrospectively adjusted as a result of the adoption of

new accounting guidance as described in Note F- Adoption of New Accounting

   Standard. The restatement resulted in a reduction in the amortization of
   acquisition expense of $32.3 million and the addition of non-deferred
   acquisition expense of $11.9 million in 2011.


Underwriting income for health insurance rose slightly to $143 million. Medicare
Part D underwriting income was up $6 million or 34%, while non-Part D health
underwriting income declined $5 million or 4% to $119 million in the period. The
2012 decline in health margins (excluding Part D) was primarily the result of
the decline in premium income. The increased underwriting income for Medicare
Part D in 2012 was a result of the previously-mentioned increased volume of
business, partially offset by the increased benefit ratio. As a percentage of
health premium, underwriting margins declined from 20% to 19%, due to the
greater proportion of Medicare Part D business in 2012.



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As discussed under the caption Life Insurance, reported underwriting margins
have been affected by the newly adopted accounting standard which has limited
the deferral of product acquisition costs. Health margins for 2011 that were
retrospectively adjusted for the new accounting guidance were positively
benefited, as the increase in non-deferred acquisition expenses caused by the
new rules of $12 million was less than the decrease in amortization expense of
$32 million (from $93 million to $61 million). As noted earlier, the new
guidance only affects the timing of the recognition of product profitability,
and has no effect on ultimate profitability.

Annuities. While we do underwrite annuities, they represent an insignificant 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 2012 with the first nine
months of 2011. 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,
                                                           2012                           2011
                                                                   % of                           % of
                                                  Amount          Premium        Amount          Premium
Insurance administrative expenses:
Salaries                                         $  56,421             2.6      $  56,665             2.8
Other employee costs                                20,516             1.0         23,020             1.2
Other administrative costs                          37,602             1.8         31,300             1.6
Legal expense-insurance                              6,403             0.3          6,811             0.3

Total insurance administrative expenses            120,942             5.7        117,796             5.9


Parent company expense                               6,203                          6,162
Stock compensation expense                          16,547                         11,032
Estimated state administrative settlement                0                  

6,000

Loss on sale of equipment                                0                  

979

Family Heritage acquisition expense                    615                              0


Total operating expenses, per
Consolidated Statements of Operations            $ 144,307                  

$ 141,969



Insurance administrative expenses:
Increase (decrease) over prior year                    2.7 %                

2.5 %


Total operating expenses:
Increase (decrease) over prior year                    1.6 %                          8.3 %




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Insurance administrative expenses increased $3.1 million or 3% when compared
with the prior year period, primarily as a result of the $3.9 million loss of a
contract fee for insurance policy service that was in place in 2011. Total
operating expenses rose 2% in 2012. Affecting total operating expenses were two
2011 non-recurring expense 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. In 2012, there was a $5.5 million
increase in 2012 stock compensation expense, which was due primarily to an
increase in the market price of Torchmark stock in 2012.

Investments (excess investment income), comparing the first nine months of 2012
with the first nine months of 2011. 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 required interest on net policy liabilities and the interest cost associated
with capital funding or "financing costs." We also view excess investment income
per diluted 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 $5.3 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.

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                            Excess Investment Income

                         (Dollar amounts in thousands)



                                                    Nine months ended                  Increase
                                                      September 30,                   (Decrease)
                                                  2012              2011           Amount         %
Net investment income*                        $    535,325      $    528,902      $   6,423         1
Required interest on net insurance policy
liabilities                                       (295,502 )        (275,537 )      (19,965 )       7
Financing costs:
Interest on funded debt                            (54,630 )         (54,320 )         (310 )       1
Interest on short-term debt                         (4,335 )         
(3,863 )         (472 )      12

Total financing costs                              (58,965 )         (58,183 )         (782 )       1


Excess investment income                      $    180,858      $    195,182      $ (14,324 )      (7 )

Excess investment income per diluted share $ 1.83 $ 1.74 $ 0.09 5



Average invested assets (at amortized cost)   $ 11,584,173      $ 11,227,543      $ 356,630         3
Average net insurance policy liabilities**       6,976,612         6,611,257        365,355         6
Average debt and preferred securities (at
amortized cost)                                  1,161,356         1,116,472         44,884         4



* 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 2012 period
declined 7% to $181 million, primarily as a result of the effect of the
low-interest environment on net investment income in recent periods and the
increase in required interest on net policy liabilities as discussed below.
However, excess investment income per share rose 5% as a result of our share
purchases over the past 12 months. Net investment income rose $6 million or 1%
in 2012, while average invested assets (with fixed maturities at amortized cost)
rose 3% year over year. In the 2012 nine months, fixed maturity yields averaged
6.42% on a tax-equivalent and effective-yield basis, compared with 6.57% a year
earlier. This was a result of proceeds from dispositions during the period being
invested at rates lower than the average portfolio yield.

Offsetting the increase in net investment income, required interest on net insurance policy liabilities increased $20 million or 7% to $296 million. The increase in required interest was higher than the 6% growth in average net interest-bearing insurance policy liabilities, caused by an increase in the weighted-average discount rate on the net policy liabilities resulting from changes in the mix of in force business as discussed below.

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Essentially all of our life and health insurance policies are fixed
interest-rate protection policies, not investment products, and are accounted
for under current accounting guidance for long-duration insurance products
(formerly SFAS 60, now incorporated into ASC 944-20-05), which mandates that
interest rate assumptions be "locked in" for the life of that block of business.
Each calendar year, we set the discount rate to be used to calculate the benefit
reserve liability and the deferred acquisition cost asset for all insurance
policies issued that year. That rate is based on the new money yields that we
expect to earn on premiums received in the future from policies of that issue
year, and cannot be changed.

The discount rate used for policies issued in the current year has no impact on
the in force policies issued in prior years as the rates of all prior issue
years are also locked in. As such, the overall discount rate for the entire in
force block is a weighted average of the discount rates being used from all
issue years. Changes in the overall weighted-average discount rate over time are
caused by changes in the mix of the reserves and the deferred acquisition cost
asset by issue year on the entire block of in force business. Business issued in
the current year has very little impact on the overall weighted-average discount
rate due to the size of our in force business.

Financing costs rose 1% to $59 million, as a result of an increase in interest
on short-term debt and the $254 thousand of additional interest on funded debt
from the issuance of new debt securities described in Note I-Debt Transactions.
Short-term interest expense rose $472 thousand, primarily as a result of the
larger average balance of our commercial paper outstanding, especially during
the second quarter of this year. 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 net 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, that any
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.

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



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Because actuarial discount rates are locked in for life on essentially all of
our business, benefit reserves and deferred acquisition costs are not affected
by changes in investment yields unless a loss recognition event occurs. Due to
the strength of our underwriting margins and the current positive spread between
the yield on our investment portfolio and the weighted-average discount rate of
our in force block, we expect that an extended low-interest-rate environment
will not cause a loss recognition event.

During the third quarter of 2012, we had $465 million proceeds from securities
that were called, $307 million of which were hybrid securities issued by banks.
The $465 million of called securities had an average yield rate of 6.89%.
Assuming these funds are reinvested at an average effective yield rate of 4.25%,
the annual loss in net investment income is projected to be $7.7 million after
tax.

Additionally, at September 30, 2012, we held approximately $402 million book
value of bank hybrid securities. Under the Dodd-Frank Act, the capital treatment
of these bank securities will change beginning in 2013. Approximately $334
million book value of these securities have provisions which allow them to be
called in the event of a change in capital treatment, including $261 million
book value with an average book yield rate of 7.18% callable at par and $73
million book value with an average book yield rate of 6.71% callable at a
make-whole price. In addition, approximately $35 million of bank hybrid
securities with an average book yield rate of 8.65% are currently callable at
par.

We do not know when and how much, if any, of the contingently callable
securities or of the currently callable securities will be called, but we
currently expect most of the $296 million callable at par to be called before
the end of 2013. If all $296 million book value of these securities were called
and the call proceeds were reinvested at 4.25%, the annual loss in investment
income would be approximately $5.8 million after tax.

Of the $296 million book value expected to be called during 2013, approximately
$167 million was rated below-investment-grade. If these bonds are called, we
will see a reduction in both (i) the ratio of below-investment-grade bonds to
the total investment portfolio and (ii) required capital.

Investments (acquisitions), comparing the first nine months of 2012 with the
first nine months of 2011.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 generally invested in
shorter-term fixed maturities.



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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,
                                                    2012            2011
          Cost of acquisitions:
          Investment-grade corporate securities   $     749        $   818
          Taxable municipals                              1             11
          Other                                           5              2

          Total fixed-maturity acquisitions       $     755        $   831

          Effective annual yield*                      4.54 %         5.79 %

          Average life, in years to:
          Next call                                    24.3           27.2
          Maturity                                     26.0           28.0
          Average rating                               BBB+             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.

Acquisitions in both periods consisted primarily of corporate bonds, 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, 2012 was as follows:

                     Invested Assets At September 30, 2012

                          (Dollar amounts in millions)



                                                                  % of
                                                     Amount      Total
              Fixed maturities(at amortized cost)   $ 10,929         93 %
              Equities (at cost)                          15          0
              Mortgage loans                               1          0
              Investment real estate                       4          0
              Policy loans                               417          4
              Other long-term investments                 21          0
              Short-term investments                     386          3

              Total                                 $ 11,773        100 %





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Approximately 93% 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, 2012.


                         Fixed Maturities by Component

                          (Dollar amounts in millions)



                                                                                                      % of Total Fixed Maturities
                                     Cost or          Gross            Gross
                                    Amortized       Unrealized      Unrealized         Fair       at Amortized             at Fair
                                      Cost            Gains           Losses          Value           Cost                  Value
Corporates                         $     8,784     $      1,462     $       (57 )    $ 10,189                81                    82
Redeemable preferred stock                 809               37             (19 )         827                 7                     7
Municipals                               1,177              171               0         1,348                11                    11
Government-sponsored enterprises            11                1               0            12                 0                     0
Governments & agencies                      36                1               0            37                 0                     0
Residential mortgage-backed*                13                1               0            14                 0                     0
Collateralized debt obligations             64                0             (26 )          38                 1                     0
Other asset-backed securities               35                4              (1 )          38                 0                     0

Total fixed maturities             $    10,929     $      1,677     $      (103 )    $ 12,503               100                   100





* Includes GNMA's


At September 30, 2012, fixed maturities had a fair value of $12.5 billion,
compared with $11.9 billion at December 31, 2011. The net unrealized gain
position in the fixed-maturity portfolio increased from a net gain of $964
million at December 31, 2011 to a net gain of $1.6 billion at September 30,
2012, as a result of a reduction in interest rates. While our September, 2012
net unrealized gain of $1.6 billion consisted of gross unrealized gains of $1.7
billion offset by $103 million of gross unrealized losses, our December, 2011
net unrealized gain of $964 million consisted of a gross unrealized gain of $1.2
billion and gross unrealized loss of $239 million.

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, 2012.



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                           Fixed Maturities by Sector

                          (Dollar amounts in millions)




                                       Cost or           Gross             Gross                            % of Total Fixed Maturities
                                      Amortized        Unrealized       Unrealized          Fair         Amortized                 Fair
                                        Cost             Gains            Losses           Value            Cost                  Value
Financial - Life/Health/PC
Insurance                            $     1,824      $        194      $       (20 )     $  1,998                17 %                   16 %
Financial - Bank                             938                69              (22 )          985                 9                      8
Financial - Other                            579                79               (5 )          653                 5                      5

Subtotal Financial                         3,341               342              (47 )        3,636                31                     29

Utilities                                  1,926               384               (6 )        2,304                18                     19
Energy                                     1,236               238                0          1,474                11                     12
Government (US, municipal, and
foreign)                                   1,224               174                0          1,398                11                     11
Basic Materials                              783               121               (2 )          902                 7                      7
Consumer, Non-cyclical                       558               118               (1 )          675                 5                      6
Other Industrials                            559                86              (11 )          634                 5                      5
Communications                               463                89               (7 )          545                 4                      4
Transportation                               386                75                0            461                 4                      4
Consumer, Cyclical                           376                49               (3 )          422                 3                      3
Collateralized debt obligations               64                 0              (26 )           38                 1                      0
Mortgage-backed Securities                    13                 1                0             14                 0                      0


Total fixed maturities               $    10,929      $      1,677      $      (103 )     $ 12,503               100 %                  100 %



At September 30, 2012, approximately 49% of the fixed-maturity assets at
amortized cost (48% at fair value) were in the financial and utility sectors.
The balance of the portfolio is spread among 262 issuers in a wide variety of
sectors. The financial sector had a net unrealized gain of $295 million at
September 30, 2012, compared with a gain of $14 million at December 31, 2011. We
expect our investment in temporarily impaired securities to be fully
recoverable.

An analysis of the fixed-maturity portfolio at September 30, 2012 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.



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                           Fixed Maturities by Rating

                          (Dollar amounts in millions)



                                       Amortized                  Fair
                                         Cost           %        Value         %
            Investment grade:
            AAA                       $       374         3     $    420         3
            AA                              1,245        12        1,426        12
            A                               2,967        27        3,606        29
            BBB+                            2,317        21        2,662        21
            BBB                             2,413        22        2,759        22
            BBB-                              928         9        1,014         8

            Investment grade               10,244        94       11,887        95

            Below investment grade:
            BB                                385         3          379         3
            B                                 176         2          151         1
            Below B                           124         1           86         1

            Below investment grade            685         6          616         5

                                      $    10,929       100     $ 12,503       100



Of the $10.9 billion of fixed maturities at September 30, 2012, $10.2 billion or
94% at amortized cost were investment grade with an average rating of A-.
Below-investment-grade bonds were $685 million with an average rating of B+ and
were 6% of fixed maturities, the same as at the end of 2011.
Below-investment-grade bonds at amortized cost were 21% of our shareholders'
equity, excluding the effect of unrealized gains and losses on fixed maturities
as of September 30, 2012. Overall, the total portfolio was rated BBB+ based on
amortized cost, compared with A- at the end of 2011.

An analysis of the changes in our portfolio of below-investment-grade bonds at amortized cost during the first nine months of 2012 is as follows:



                          (Dollar amounts in millions)

                    Balance as of December 31, 2011$ 701
                    Downgrades by rating agencies         58
                    Upgrades by rating agencies          (71 )
                    Disposals                             (5 )
                    Amortization and other                 2

                    Balance as of September 30, 2012$ 685



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



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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, we have no off-balance sheet
investments, and we have no direct exposure to European Sovereign debt.

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

                 Fixed Maturity Portfolio Selected Information



                                                 At                         At                        At
                                            September 30,              December 31,              September 30,
                                                2012                       2011                      2011
Average annual effective yield (1)                    6.33 %                    6.49 %                     6.53 %
Average life, in years, to:
Next call (2)                                         17.9                      17.3                       17.2
Maturity (2)                                          22.4                      22.2                       22.4
Effective duration to:
Next call (2), (3)                                    10.5                       9.9                        9.8
Maturity (2), (3)                                     11.9                      11.6                       11.6




    (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 2012 with the
first nine months of 2011. 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, resulting
in realized gains or losses. Because these dispositions and writedowns are
outside the course of our normal operations, management removes the effects of
such gains and losses when evaluating its overall core operating results.



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The following table summarizes our tax-effected realized gains (losses) by
component.

                Analysis of Realized Gains (Losses), Net of Tax

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



                                               Nine months ended September 30,
                                              2012                         2011
                                     Amount       Per Share       Amount   

Per Share

Fixed maturities and equities:

   Investment sales                 $  8,037     $      0.08     $ (1,463 ) 

$ (0.02 )

   Investments called or tendered      2,759            0.03       15,485             0.14
   Writedown*                              0            0.00          (13 )           0.00
   Other                                 221            0.00         (262 )           0.00

   Total                            $ 11,017     $      0.11     $ 13,747      $      0.12




* 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 2012, the Parent
Company received $417 million of dividends and transfers from subsidiaries. This
compared with $731



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million in 2011, but 2011 dividends included $305 million available from the
proceeds of the 2010 sale of United Investors. For the full year 2012, dividends
and transfers from the life insurance subsidiaries are expected to total
approximately $492 million.

Additional sources of liquidity for the Parent Company are cash, intercompany
receivables, and a credit facility. At September 30, 2012, the Parent Company
had $504 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 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 either borrow from the
credit line or issue commercial paper at any time, with total commercial paper
outstanding not to exceed the facility maximum, less any letters of credit
issued. Interest is charged at variable rates. The facility has no ratings-based
acceleration triggers which would require early repayment. 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, 2012.

Included in short-term debt is the commercial paper outstanding, noted above, as
well as the current maturity of long-term debt. At September 30, 2012, we had
$94 million par value and carrying value of our 7 3/8% Senior Note due in
August, 2013 classified as short-term debt. The following table presents certain
information about our commercial paper borrowings.

                    Short-term Borrowings - Commercial Paper

                          (Dollar amounts in millions)



                                             At                       At                      At
                                        September 30,            December 31,            September 30,
                                            2012                     2011                    2011
Balance at end of period               $         225.9          $        225.0          $         225.8
Annualized interest rate                           .45 %                   .55 %                    .39 %
Letters of credit outstanding          $         198.0          $        198.0          $         198.0
Remaining amount available under
credit line                            $         176.1          $        177.0          $         176.2

                                              For the nine months ended
                                        September 30,           September 30,
                                            2012                     2011
Average balance outstanding
during period                          $         256.3          $        202.8
Daily-weighted average interest
rate*                                              .44 %                   .35 %
Maximum daily amount outstanding
during period                          $         385.0          $        271.8




* Annualized




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Our balance of commercial paper outstanding at September 30, 2012 was $226
million, differing insignificantly from balances at the previous year end and a
year ago. We have had no difficulties in accessing the commercial paper market
under this facility during the nine-month periods ended September 30, 2012 and
2011.

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 $698
million in the first nine months of 2012, compared with $684 million in the same
period of 2011. In addition to cash inflows from operations, our companies have
received $572 million in investment calls and tenders and $53 million in
scheduled maturities or repayments during the 2012 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 $685 million at September 30, 2012,
compared with $105 million at December 31, 2011 and $224 million at the end of
September, 2011. The large increase in cash balance at September 30, 2012 was
due to the proceeds from our debt offerings in the last week of September
discussed below under the caption Capital Resources in this report to be used to
buy Family Heritage and to redeem the 7.1% Trust Preferreds in the fourth
quarter of 2012. Additionally, as discussed under the caption Investments, there
were a large number of trust preferred calls in the third quarter, 2012 which
were awaiting investment at September 30, 2012. In addition to these liquid
assets, the entire $12.5 billion (fair value at September 30, 2012) 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
regulatory capital under Risk-Based Capital (RBC), a measure established by
insurance regulatory authorities to monitor the adequacy of capital. 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



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with rating agency expectations for Torchmark. As of December 31, 2011, our
insurance subsidiaries had a consolidated RBC ratio of 336%. 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 and the
current maturity of long-term debt issues), long-term funded debt, and
shareholders' equity. The outstanding long-term debt at book value, including
our 7.1% Junior Subordinated Debentures, was $1.1 billion at September 30, 2012,
compared with $914 million at December 31, 2011, as a result of new debt
offerings noted below. An analysis of long-term debt issues outstanding is as
follows at September 30, 2012.

                      Long Term Debt at September 30, 2012

                          (Dollar amounts in millions)



                                            Year       Interest          Par          Book           Fair
Instrument                                  Due          Rate           Value         Value          Value
Senior Notes                                 2016          6 3/8 %    $   250.0     $   248.2      $   284.9
Senior Notes                                 2019          9 1/4          292.7         289.9          389.1
Senior Notes (1)                             2022            3.8          150.0         147.1          153.3
Senior Notes                                 2023          7 7/8          165.6         163.4          214.3
Junior Subordinated Debentures               2052          5 7/8          125.0         120.8          126.8
Issue expenses (2)                                                                       (4.1 )

Total long-term debt                                                      983.3         965.3        1,168.4
Junior Subordinated Debentures (3)           2046            7.1          123.7         123.7          121.1 (4)

Total                                                                 $ 1,107.0     $ 1,089.0      $ 1,289.5




(1) An additional $150 million par value and book value is held by insurance

subsidiaries that eliminates in consolidation.

(2) Unamortized issue expenses related to Torchmark's Trust Preferred Securities.

(3) Included in "Due to Affiliates" in accordance with accounting standards.

(4) Market value of the 7.1% Trust Preferred Securities, par value $120 million,

which are obligations of an unconsolidated trust.



As discussed in Note I-Debt Transactions, we issued two new debt offerings in
the third quarter of 2012 and called our 7.1% Trust Originated Preferred
Securities in October, 2012. Proceeds to the Parent company from both of the new
offerings were $417 million, but $121 million of this amount was required to
call the Trust Preferreds. The call of the Trust Preferreds resulted in the
liquidation of our 7.1% Junior Subordinated Debentures payable to the Trust
which held the Preferred Securities at September 30, 2012. We plan to use the
majority of the remaining proceeds to fund the acquisition of Family Heritage
and for other corporate purposes, including the repurchase or repayment of the
$94 million principal amount of our 7 3/8% Senior Notes due in August, 2013.
These notes have been reclassified as short-term debt because



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they mature within one year. The additional debt caused a slight increase in our
debt to capitalization ratio at September 30, 2012, but will be largely offset
by the repayments of the Trust Preferreds and the 7 3/8% Notes. The offerings
had no material effect on our debt covenants.

Shareholders' equity was $4.3 billion at September 30, 2012. This compares with
$3.9 billion at December, 31, 2011 and $3.8 billion at September 30, 2011.
During the twelve months since September 30, 2011, shareholders' equity was
decreased by $648 million because of share purchases. However, shareholders'
equity has also been increased by unrealized gains of $411 million after tax in
the fixed-maturity portfolio, as financial markets have improved over this
period of time. Stock option exercises increased equity by $279 million due to a
large number of options scheduled to expire in 2012. Net income added $501
million over the same twelve-month period.

As previously noted under the caption Highlights in this report, we acquired
6.6 million of our outstanding common shares under our share repurchase program
during the first nine months of 2012. These shares were acquired at a cost of
$318 million ($47.96 per share), compared with purchases of 17.2 million shares
at a cost of $720 million in the first nine months of 2011.

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
gains or losses due to fluctuations in the market value of fixed maturities
caused by interest rate changes or losses caused by temporarily illiquid
markets. Accordingly, management removes the effect of this rule when analyzing
Torchmark's balance sheet, capital structure, and financial ratios in order to
provide a more consistent and meaningful portrayal of the Company's financial
position from period to period.

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.



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                            Selected Financial Data



                                                        At September 30, 2012                            At December 31, 2011                              At September 30, 2011
                                                                        Effect of                                        Effect of                                          Effect of
                                                                        Accounting                                       Accounting                                         Accounting
                                                                           Rule                                             Rule                                               Rule
                                                                        Requiring                                        Requiring                                          Requiring
                                                   GAAP               Revaluation(1)               GAAP               Revaluation(1,3)               GAAP                Revaluation(1,3)
Fixed maturities (millions)                     $    12,503          $          1,574          $     11,888          $              964          $      11,658          $              942
Deferred acquisition costs (millions)                 2,995                       (27 )               2,917                         (33 )                2,885                         (41 )
Total assets (millions)                              17,940                     1,547                16,588                         931                 16,409                         900
Short-term debt (millions)                              320                         0                   225                           0                    226                           0
Long-term debt (millions)                             1,089                         0                   914                           0                    914                           0
Shareholders' equity (millions)                       4,309                     1,006                 3,860                         605                  3,817                         585

Book value per diluted share                          44.86                     10.47                 37.91                        5.95                  37.34                        5.72
Debt to capitalization (2)                             24.6 %                    (5.3 )%               22.8 %                      (3.1 )%                23.0 %                      (3.1 )%

Diluted shares outstanding
(thousands)                                          96,058                                         101,808                                            

102,233

Actual shares outstanding
(thousands)                                          94,882                                         100,579                                            102,185



(1) Amount added to (deducted from) comprehensive income to produce the stated

GAAP item, per accounting rule ASC 320-10-35-1, formerly SFAS 115.

(2) 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.

(3) The 2011 Balances have been retroactively adjusted to give effect to the

adoption of the new accounting standard as described in Note F-Adoption of

New Accounting Standard.



Interest coverage was 10.2 times in the 2012 nine months, compared with 10.4
times in the 2011 period. Interest coverage is computed by dividing interest
expense into the sum of pretax income and interest expense.

                             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.



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



1) 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;

2) 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);


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


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

5) General economic, industry sector or individual debt issuers' financial

conditions that may affect the current market value of securities we own,

or that may impair an issuer's ability to make principal and/or interest

        payments due on those securities;


  6) Changes in pricing competition;


  7) Litigation results;

8) Levels of administrative and operational efficiencies that differ from our

assumptions;

9) 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.

Wordcount: 12363



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