GLOBE LIFE INC. - FORM 8-K/A - EX-99.1

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8-K/A - 8-K/A - GLOBE LIFE INC.	d405843d8ka.htm
EX-12 - EX-12 - GLOBE LIFE INC.	d405843dex12.htm
EX-23 - EX-23 - GLOBE LIFE INC.	d405843dex23.htm

Exhibit 99.1

Item 6. Selected Financial Data

The following information should be read in conjunction with Torchmark’s Consolidated Financial Statements and related notes reported elsewhere in this Form 10-K:

(Amounts in thousands except per share and percentage data)


Year ended December 31,	2011			2010			2009			2008			2007
Premium revenue:
Life	$	1,726,244		$	1,663,699		$	1,591,853		$	1,544,219		$	1,495,363
Health		929,466			987,421			1,017,711			1,127,059			1,236,797
Other		608			638			541			622			602
Total		2,656,318			2,651,758			2,610,105			2,671,900			2,732,762
Net investment income		693,028			676,364			632,540			627,206			601,975
Realized investment gains (losses)		25,904			37,340			(129,492	)		(107,541	)		2,281
Total revenue		3,377,401			3,367,632			3,115,073			3,196,236			3,344,517
Income from continuing operations		497,616			504,095			364,273			404,380			458,656
Income from discontinued operations		0			29,784			18,901			22,559			38,298
Loss on disposal, net of tax		(455	)		(35,013	)		0			0			0
Net income		497,161			498,866			383,174			426,939			496,954
Per common share:
Basic earnings:
Income from continuing operations		4.60			4.13			2.93			3.06			3.24
Income (loss) from discontinued operations		(0.01	)		(0.04	)		0.15			0.17			0.27
Net income		4.59			4.09			3.08			3.23			3.51
Diluted earnings:
Income from continuing operations		4.53			4.09			2.93			3.05			3.19
Income (loss) from discontinued operations		0.00			(0.04	)		0.15			0.17			0.27
Net income		4.53			4.05			3.08			3.22			3.46
Cash dividends declared		0.46			0.41			0.38			0.37			0.35
Cash dividends paid		0.45			0.41			0.37			0.37			0.35
Basic average shares outstanding		108,278			122,009			124,550			132,079			141,476
Diluted average shares outstanding		109,815			123,123			124,550			132,774			143,769
As of December 31,	2011			2010			2009			2008			2007
Cash and invested assets	$	12,437,699		$	11,563,656		$	10,054,764		$	7,812,992		$	9,084,312
Total assets		16,588,272			15,622,973			15,514,761			13,053,558			14,804,890
Short-term debt		224,842			198,875			233,307			403,707			202,058
Long-term debt⁽¹⁾		914,282			913,354			919,761			622,760			721,723
Shareholders’ equity		3,859,631			3,667,329			3,068,043			1,913,837			3,040,877
Per diluted share		37.91			30.35			24.60			15.06			21.71
Effect of fixed maturity revaluation on diluted equity per share⁽²⁾		5.95			0.55			(2.23	)		(8.63	)		(0.44	)
Annualized premium in force:
Life		1,813,705			1,753,046			1,694,402			1,625,549			1,585,005
Health		1,016,393			973,625			1,026,560			1,098,349			1,233,884
Total		2,830,098			2,726,671			2,720,962			2,723,898			2,818,889
Basic shares outstanding		100,579			118,865			124,261			127,061			138,263
Diluted shares outstanding		101,808			120,815			124,739			127,061			140,074

(1)	Includes Torchmark’s 7.1% Junior Subordinated Debentures reported as “Due to affiliates” on the Consolidated Balance Sheets at year ends 2007 through 2011 in the amount of $123.7 million.

(2)

There is an accounting rule requiring available-for-sale fixed maturities to be revalued at fair value each period. The effect of this rule on diluted equity per share reflects the amount added or (deducted) under this rule to produce GAAP Shareholders’ equity per share. Please see the explanation and discussion under the caption Capital Resources in Management’s Discussion and Analysis in this report concerning the effect this rule has on Torchmark’s equity.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Selected Financial Data and Torchmark’s Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.

RESULTS OF OPERATIONS

Discontinued Operations: As described in Note 3—Discontinued Operations in the Notes to the Consolidated Financial Statements, we sold our subsidiary United Investors Life Insurance Company (United Investors) as of December 31, 2010. Because of the sale, United Investors’ financial results are excluded from this discussion since those operations are discontinued.

How Torchmark Views Its Operations: Torchmark is the holding company for a group of insurance companies which market primarily individual life and supplemental health insurance, and to a limited extent annuities, to middle income households throughout the United States. We view our operations by segments, which are the major insurance product lines of life, health, and annuities, and the investment segment that supports the product lines. Segments are aligned based on their common characteristics, comparability of the profit margins, and management techniques used to operate each segment.

Insurance Product Line Segments. As fully described in Note 14—Business Segments in the Notes to the Consolidated Financial Statements, the product line segments involve the marketing, underwriting, and benefit administration of policies. Each product line is further segmented by the various distribution units that market the insurance policies. Each distribution unit operates in a niche market offering insurance products designed for that particular market. Whether analyzing profitability of a segment as a whole, or the individual distribution units within the segment, the measure of profitability used by management is the underwriting margin, which is:

Premium revenue

Less:

Policy obligations

Policy acquisition costs and commissions

Investment Segment. The investment segment involves the management of our capital resources, including investments and the management of corporate debt and liquidity. Our measure of profitability for the investment segment is excess investment income, which is:

Net investment income

Less:

Interest credited to net policy liabilities

Financing costs

The tables in Note 14—Business Segments reconcile Torchmark’s revenues and expenses by segment to its major income statement line items for each of the years in the three-year period ending December 31, 2011. Additionally, this Note provides a summary of the profitability measures that demonstrates year-to-year comparability and which reconciles to net income. That summary is reproduced below from the Consolidated Financial Statements to present our overall operations in the manner that we use to manage the business.

Analysis of Profitability by Segment

(Dollar amounts in thousands)


	2011			2010*			2009			2011 Change			%			2010 Change			%
Life insurance underwriting margin	$	460,963		$	430,262		$	395,931		$	30,701			7		$	34,331			9
Health insurance underwriting margin		188,990			198,966			198,321			(9,976	)		(5	)		645			0
Annuity underwriting margin		2,345			1,348			312			997						1,036
Other insurance:
Other income		2,507			2,834			2,914			(327	)		(12	)		(80	)		(3	)
Administrative expense		(159,109	)		(155,615	)		(150,325	)		(3,494	)		2			(5,290	)		4
Excess investment income		258,986			265,245			245,714			(6,259	)		(2	)		19,531			8
Corporate and adjustments		(22,647	)		(20,657	)		(19,450	)		(1,990	)		10			(1,207	)		6

Pre-tax total		732,035			722,383			673,417			9,652			1			48,966			7
Applicable taxes		(238,335	)		(242,558	)		(226,426	)		4,223			(2	)		(16,132	)		7

After-tax total, before discontinued operations		493,700			479,825			446,991			13,875			3			32,834			7
Discontinued operations (after tax)		0			27,932			26,810			(27,932	)					1,122			4

Total		493,700			507,757			473,801			(14,057	)		(3	)		33,956			7
Realized gains (losses)—investments (after tax)		16,838			24,270			(85,345	)		(7,432	)					109,615
Realized gains (losses)—discontinued operations (after tax)		0			1,852			(7,909	)		(1,852	)					9,761
Loss on disposal of discontinued operations (after tax)		(455	)		(35,013	)		0			34,558						(35,013	)
Tax settlements (after tax)		0			0			2,858			0						(2,858	)
Cost of legal settlements (after tax)		(7,800	)		0			0			(7,800	)					0
State administrative settlement (after tax)		(4,486	)		0			0			(4,486	)					0
Loss on Company-occupied property (after tax)		0			0			(231	)		0						231
Loss on sale of equipment (after tax)		(636	)		0			0			(636	)					0

Net income	$	497,161		$	498,866		$	383,174		$	(1,705)			0		$	115,692			30

*	See the discussion of Realized Gains and Losses in this report.

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

Summary of Operations: Net income declined slightly from $499 million to $497 million in 2011. It rose 30% or $116 million in 2010, largely as a result of after-tax realized investment gains of $24 million in 2010, compared with losses of $85 million after tax in 2009. The 2009 losses included $94 million of write downs of fixed maturities which were determined to be other-than-temporarily impaired. Realized investment gains were $17 million in 2011. On a diluted per share basis, 2011 net income increased 12% to $4.53, after an increase in 2010 of 31% to $4.05. The above-mentioned after-tax realized investment gains added $.15 to 2011 net income per diluted share and $.20 per share in 2010, while the 2009 loss reduced net income $.69 per share of which the impairment writedowns accounted for $.76 of the loss. More information concerning realized investment gains and losses can be found under the caption Realized Gains and Losses in this report where there is a more complete discussion. Also, as explained in Note 14—Business Segments in the Notes to the Consolidated Financial Statements, we do not consider realized gains and losses to be a component of our core insurance operations or operating segments. Also included in 2010 results is a $35 million after tax loss on the disposal of United Investors, representing $.28 per diluted share.

As shown in the above chart, after tax segment operations, before discontinued operations, rose each year over the prior year from $447 million in 2009 to $480 million in 2010 to $494 million in 2011. The primary contributor to the growth in both 2011 and 2010 was the underwriting margin in our life insurance segment, which margins rose $31 million in 2011 and $34 million in 2010. The life insurance segment is our strongest segment and is the largest contributor to earnings in each year presented. Growth in 2010 was also affected positively by the $20 million increased contribution of excess investment income, the measure of profitability of the investment segment. Excess investment income in 2010 increased over 2009 investment segment income largely because of the unusually large holdings in low-yielding cash and short-term investments held in 2009 due to the uncertain economic climate at that time. These short-term holdings were invested in 2010 as financial conditions improved. Excess investment income was also negatively affected in 2009 because of our issuance of a $300 million 9¹/₄%

debt security in June, 2009 (net proceeds of $296 million) and repayment of a $99 million 8¹/₄% security which matured in August, 2009. These transactions resulted in a net increase in our financing costs in 2009 and reduced excess investment income. Growth in 2011 earnings was negatively affected by a decline in the health insurance segment underwriting margin of $10 million, and a $6 million decline in excess investment income from the investment segment. The 2011 decline in health contribution was largely a result of the discontinuance of sales of certain limited-benefit health insurance products because of healthcare reform. The decline in excess investment income was due to the continuing low-interest rate environment which has pressured investment yields and spreads over policy benefit requirements, discussed more fully under the captain Investments in this report.

Total revenues were flat in 2011 at $3.38 billion compared with $3.37 billion in 2010. Revenues increased 8% in 2010 over revenues of $3.12 billion in 2009. Life premium rose 4% or $63 million in 2011 and $72 million in 2010. Net investment income rose 2% or $17 million in 2011, compared with $44 million in 2010. However, growth in revenues in 2011 and 2010 were negatively affected by the declines in health premium described further under this caption.

While life insurance premium has grown steadily in each of the three years ending December 31, 2011, margins as a percentage of premium rose in 2011 to 27% from 26% in 2010 and 25% in 2009. Segment profits for life insurance were not only positively affected by the premium growth, but also by improvements in mortality and persistency in both periods. Life net sales declined 1% in 2011 to $325 million but rose 1% in 2010 to $330 million. Life insurance segment results are discussed further in this report under the caption Life Insurance.

We primarily market two health insurance products: Medicare Supplement insurance and the Medicare Part D prescription drug benefit. We also market limited-benefit cancer and accident health products and prior to September, 2010, an under-age-65 limited-benefit hospital-surgical product. Health premium declined 6% in 2011 to $929 million from $987 million in 2010. Health premium declined 3% in 2010. The decreases in both years were caused primarily by the de-emphasis and discontinuance of sales in 2010 of our limited-benefit hospital-surgical health product. Declines in agent counts in the distribution units that market our health products were another negative factor. These factors have caused reductions in net sales of health products which have in turn pressured premium growth. Medicare Supplement remains our largest contributor to total health premium, but increased competition has also dampened sales of this product in recent years, resulting in premium declines in each successive year. Our Medicare Part D premium declined 6% in 2011, after having increased 14% in 2010. However, enrollees into our Medicare Part D program for the plan year 2012 were 225 thousand, an increase of 56% over the 2011 enrollees. Therefore, we expect premium growth in 2012 at approximately the same rate. See the discussion under Health Insurance for a more detailed discussion of health insurance results.

We offer fixed annuities, but we do not emphasize sales of annuity products, favoring life insurance instead. With the sale of United Investors in 2010, we disposed of 37% of our annuity deposit balance. See the caption Annuities for further discussion of the Annuity segment.

As previously mentioned, the investment segment’s pretax profitability, or excess investment income, increased $20 million in 2010 but declined $6 million in 2011. Profitability in this segment is based on three major components: net investment income, required interest on net policy liabilities (interest applicable to insurance products), and financing costs. In recent years, growth in net investment income has been restricted in relation to the growth in the size of our portfolio. One reason that investment income has grown at a lower rate than mean invested assets has grown in recent years is that new investments have been made at yield rates lower than the yield rates earned on securities that matured or were otherwise disposed of. Also, there is sometimes a lag between the time when proceeds from maturities and dispositions are received and when the proceeds are reinvested, in which the funds are held in cash. Growth in total investment income has also been somewhat negatively affected by Torchmark’s share repurchase program (described later under this caption), which has diverted cash that could have otherwise been used to acquire investments. In 2011, net investment income rose 3% while the portfolio (at amortized cost) grew 4%, in accordance with the general pattern in recent periods. However, in 2010, the growth in net investment income slightly exceeded the growth in the average portfolio for the first time in many years, primarily as a result of the special constraints on the growth in 2009 net investment income. During 2009, due primarily to uncertainty

about liquidity in the financial markets, we held significantly more cash and short term investments than we normally would. Additionally, in 2009, we sold a significant portion of higher-yielding but lower-rated fixed maturities and reinvested the proceeds in lower-yielding but higher-rated bonds in 2009 and early 2010 to improve our risk-adjusted return. These factors contributed to reduced 2009 net investment income.

The interest required on net policy liabilities is deducted from net investment income, and generally grows in conjunction with the net policy liabilities that are supported by the invested assets. The lower new-money yields resulting from the low-interest-rate environment noted above have had the effect of compressing excess investment income as required interest has grown. We have implemented certain strategies to offset this effect, including lowering the discount rate going forward and increasing premium rates on sales of new products. Financing costs, which consist of the interest required for debt service on our long and short-term debt, are also deducted from net investment income. Financing costs in 2011 were $78 million, an increase of 3% over $75 million in 2010. This increase was primarily a result of increased charges related to our letters of credit facility. In 2010, financing costs increased 8% as interest expense on our long-term debt rose $9 million or 13%. As noted earlier, in 2009 we issued our $300 million 9¹/₄% Senior Notes but repaid our $99 million 8¹/₄% Senior Debentures, resulting in a higher balance of debt outstanding at a higher interest rate in 2010.

Torchmark’s current investment policy limits new investment acquisitions to investment-grade fixed maturities generally with longer maturities (often exceeding twenty years) that meet our quality and yield objectives. Approximately 96% of our invested assets at fair value consist of fixed maturities of which 95% were investment grade at December 31, 2011. The average quality rating of the portfolio was A-. The portfolio contains no securities backed by sub prime or Alt-A mortgages, no direct investment in residential mortgages, no direct investment in European Sovereign debt, no counterparty risks, no credit default swaps, or derivative contracts. See the analysis of excess investment income and investment activities under the caption Investments in this report and Note 4—Investments in the Notes to Consolidated Statements of Operations for a more detailed discussion of this segment.

As mentioned earlier, we used a portion of the $296 million proceeds from the offering of our 9¹/₄% Senior Notes ($300 million par amount) in 2009 to repay our $99 million 8¹/₄% Senior Debentures which also matured in 2009. More information on these transactions can be found in Note 11—Debt in the Notes to Consolidated Financial Statements and in our discussion of Capital Resources in this report.

In each of the years 2011 and 2009, income from continuing operations was affected by certain significant, unusual, and nonrecurring nonoperating items. We do not view these items as components of core operating results because they are not indicative of past performance or future prospects of the insurance operations. As reported in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial Statements under the caption Settlements, we have been involved in certain issues in 2011 or 2009 in which we either received settlements or incurred settlement losses and expenses. In 2011, we settled a state administrative matter in the pretax amount of $6.9 million ($4.5 million after tax) and accrued an estimated liability for a litigation settlement expected to settle in early 2012 in the pretax amount of $12.0 million ($7.8 million after tax). Both of these issues involved matters arising many years ago. Additionally, as described under the same caption of Note 1, we received a tax settlement in the amount of $2.9 million in 2009. The tax settlement primarily involved the results of prior year examinations. The state administrative settlement and the litigation accrual are included in “Other operating expense” and the tax settlement is an adjustment to “Income taxes” in the Consolidated Statements of Operations. However, as described in Note 1, we remove items such as these that are concerned with prior periods when evaluating the results of current operations, and therefore exclude such matters from our segment analysis for current periods.

Torchmark has in place an ongoing share repurchase program which began in 1986. With no specified authorization amount, we determine the amount of repurchases based on the amount of the Company’s excess cash flow, general market conditions, and other alternative uses. The majority of these

purchases are made from excess operating cash flow when market prices are favorable. Additionally, when stock options are exercised, proceeds from these exercises and the tax benefit are used to repurchase additional shares on the open market to minimize dilution as a result of the option exercises. Due to poor economic conditions, we temporarily suspended our share repurchase program in the first quarter of 2009. However, in the first quarter of 2010, the Board of Directors reactivated the Company’s share repurchase program in amounts and with timing that management, in consultation with the Board, determines to be in the best interest of the Company. The following chart summarizes share purchase activity for each of the three years ended December 31, 2011, retroactively restated for the three-for-two stock split described in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial Statements.

Analysis of Share Purchases

(Amounts in thousands)


	2011				2010				2009
Purchases	Shares		Amount		Shares		Amount		Shares		Amount
Excess cash flow and borrowings		18,901	$	787,697		5,707		$203,566		3,075	$	46,695
Option proceeds		4,380		184,859		1,074		42,440		30		869

Total		23,281	$	972,556		6,781		$246,006		3,105	$	47,564

Option proceeds increased significantly in 2011 due to optionholders exercising several years of option grants that are due to expire in 2012.

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

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

Life Insurance. Life insurance is our largest insurance segment, with 2011 life premium representing 65% of total premium. Life underwriting income before other income and administrative expense represented 71% of the total in 2011. Additionally, investments supporting the reserves for life products result in the majority of excess investment income attributable to the investment segment.

We completed the process of combining selected United American (UA) Exclusive Agency Branch Offices with the Liberty National Exclusive Agency during 2011. For this reason, all data will be reported on a combined basis in this report.

Life insurance premium rose 4% to $1.73 billion in 2011 after having increased 5% in 2010 to $1.66 billion. Life insurance products are marketed through several distribution channels. Premium income by channel for each of the last three years is as follows:

LIFE INSURANCE

Premium by Distribution Method

(Dollar amounts in thousands)


	2011					2010					2009
	Amount		% of Total			Amount		% of Total			Amount		% of Total
American Income Exclusive Agency	$	607,914		35	%	$	560,649		34	%	$	507,899		32	%
Direct Response		593,650		34			566,604		34			536,878		34
Liberty National Exclusive Agency		288,308		17			294,587		18			298,485		19
Other Agencies		236,372		14			241,859		14			248,591		15

	$	1,726,244		100	%	$	1,663,699		100	%	$	1,591,853		100	%

We use three statistical measures as indicators of premium growth and sales over the near term: “annualized premium in force,” “net sales,” and “first-year collected premium.” Annualized premium in force is defined as the premium income that would be received over the following twelve months at any given date on all active policies if those policies remain in force throughout the twelve-month period. Annualized premium in force is an indicator of potential growth in premium revenue. Net sales is annualized premium issued, net of cancellations in the first thirty days after issue, except in the case of Direct Response where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer period has expired. We believe that net sales is a superior indicator of the rate of premium growth relative to annualized premium issued. First-year collected premium is defined as the premium collected during the reporting period for all policies in their first policy year. First-year collected premium takes lapses into account in the first year when lapses are more likely to occur, and thus is a useful indicator of how much new premium is expected to be added to premium income in the future.

Annualized life premium in force was $1.81 billion at December 31, 2011, an increase of 3% over $1.75 billion a year earlier. Annualized life premium in force was $1.69 billion at December 31, 2009.

The following table shows net sales information for each of the last three years by distribution method.

LIFE INSURANCE

Net Sales by Distribution Method

(Dollar amounts in thousands)


	2011					2010					2009
	Amount		% of Total			Amount		% of Total			Amount		% of Total
American Income Exclusive Agency	$	141,793		44	%	$	137,554		42	%	$	127,688		39	%
Direct Response		136,663		42			136,653		41		$	131,566		40
Liberty National Exclusive Agency		36,338		11			44,763		14			55,146		17
Other Agencies		10,404		3			10,561		3			11,518		4

	$	325,198		100	%	$	329,531		100	%	$	325,918		100	%

The table below discloses first-year collected life premium by distribution channel.

LIFE INSURANCE

First-Year Collected Premium by Distribution Method

(Dollar amounts in thousands)


	2011					2010					2009
	Amount		% of Total			Amount		% of Total			Amount		% of Total
American Income Exclusive Agency	$	113,151		46	%	$	110,751		45	%	$	95,693		42	%
Direct Response		88,962		37			89,542		37			84,775		37
Liberty National Exclusive Agency		31,296		13			34,845		14			35,137		16
Other Agencies		9,413		4			10,364		4			10,313		5

	$	242,822		100	%	$	245,502		100	%	$	225,918		100	%

The American Income Exclusive Agency focuses primarily on members of labor unions, but also on credit unions and other associations as well as referrals from new customers for its life insurance sales. It is Torchmark’s highest profit margin business. The American Income Agency was also the largest contributor to life premium and net sales of any Torchmark distribution method in 2011. Life premium for this agency rose 8% to $608 million in 2011, after having increased 10% in 2010. Net sales increased 3% in 2011 to $142 million, after having risen 8% in 2010. Net sales rose 18% in 2009. First-year collected premium rose 2% in 2011 to $113 million, after having increased 16% in 2010. The average face amount of policies issued in 2011 was approximately $34 thousand. As in the case of all of Torchmark’s agency distribution systems, continued increases in product sales are largely

dependent on increases in agent count. The American Income agent count was 4,381 at December 31, 2011 compared with 3,912 a year earlier, an increase of 12%. However, the agent count had declined 6% in 2010 from 4,154 a year earlier. This agency continues to recruit new agents focusing on an incentive program to reward growth in both the recruiting of new agents and in the production of new business. Additionally, the systematic, centralized internet recruiting program has enhanced the recruitment of new agents.

Direct Response consists of two primary components: insert media and direct mail. Insert media targets primarily the adult market. It involves placing insurance solicitations as advertising inserts into a variety of media, such as coupon packets, newspapers, bank statements, and billings. Direct mail focuses primarily on young middle-income households with children. The juvenile life insurance policy is a key product for this group. 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. Parents and grandparents of these juvenile policyholders 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. At this time, we believe that the Direct Response unit is the largest U.S. writer of juvenile direct mail life insurance. We expect that sales to this demographic group will continue as one of Direct Response’s premier markets.

The Direct Response operation accounted for 34% of our life insurance premium during 2011, increasing 5% over 2010 premium. Life premium for this channel rose 6% in 2010 and 5% in 2009. Net sales were flat in 2011 after a 4% increase in 2010 to $137 million. First-year collected premium declined 1% to $89 million in 2011 after a 6% gain in 2010. The average face amount of policies issued in 2011 was approximately $20 thousand.

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 $288 million in 2011, a 2% decrease compared with $295 million in 2010. Life premium for this agency declined 1% in 2010 from 2009. First-year collected premium declined 10% to $31 million in 2011, after having also declined 1% in 2010. The average face amount of policies issued in 2011 was approximately $25 thousand.

The Liberty Agency’s net sales declined 19% to $36 million in 2011, after also having declined 19% a year earlier. As noted above, in the case of all of our agencies, the size of the agency drives product sales. This agency had 1,345 producing agents at December 31, 2011, compared with 2,001 a year earlier, a decline of 33%. The agent count at Liberty had also declined 19% in 2010 from 2,471. The decrease in agent count has been due in part to the closing of several offices which had low production. In addition, agent compensation issues that arose in 2009 have negatively impacted agent counts. The bonus thresholds proved more difficult for producing agents to meet than anticipated. Management reduced the bonus threshold later in 2009. Also, due to deteriorating first-year persistency, management modified compensation incentives in 2009 to place more emphasis on the persistency of newly issued policies. These changes resulted in the departure of a number of the less productive agents in 2010 and 2011. While these modifications caused a loss of agents, they resulted in improved persistency and margins, and contributed to Torchmark’s overall improvement in life insurance margins.

The Liberty Exclusive Agency agent counts have also decreased due to issues related to its health insurance business. This agency’s health insurance marketing efforts had historically been focused on limited-benefit hospital-surgical plans. These plans were subject to intense competition from other companies which offered lower-margin products providing agents with products that were easier to sell, thus discouraging sales of our products and ultimately resulting in decreases in agent counts. In addition, these limited-benefit hospital-surgical plans became less marketable due to healthcare reform developments. Sales of these limited-benefit hospital/surgical plans were discontinued after September, 2010. These developments caused further increases in agent turnover. In response, the agency has shifted its marketing focus to a product mix more weighted towards life insurance and supplemental health insurance products (not affected by healthcare reform) that have higher margins and persistency. Additionally, we are in the process of changing the cost structure of this agency to a more commission-driven model. Going forward, branch office operating expenses will be the responsibility of the branch managers and all new agent recruits will be independent contractors rather than employees. We are also implementing new agent recruiting and training programs similar to those used at American Income. We believe these changes will increase the Agency’s profitability and stability in the long run.

We also offer life insurance through Other Agencies consisting of the Military Agency, the United American Independent Agency, and other small miscellaneous sales agencies. The Military Agency consists of a nationwide independent agency whose sales force is comprised primarily of former military officers who have historically sold primarily to commissioned and noncommissioned military officers and their families. This business consists of whole-life products with term insurance riders. Military premium represented 11% of life premium at December 31, 2011. The United American Independent Agency represented approximately 1% of Torchmark’s total life premium at that date. This agency is focused on health insurance, with life sales being incidental.

LIFE INSURANCE

Summary of Results

(Dollar amounts in thousands)


	2011						2010						2009
	Amount			% of Premium			Amount			% of Premium			Amount			% of Premium
Premium and policy charges	$	1,726,244			100	%	$	1,663,699			100	%	$	1,591,853			100	%

Policy obligations		1,118,909			65			1,082,423			65			1,040,248			65
Required interest on reserves		(458,029	)		(27	)		(434,319	)		(26	)		(410,917	)		(26	)

Net policy obligations		660,880			38			648,104			39			629,331			39
Commissions, premium taxes, and non-deferred acquisition expenses		152,347			9			141,792			8			141,139			9
Amortization of acquisition costs		452,054			26			443,541			27			425,452			27

Total expense		1,265,281			73			1,233,437			74			1,195,922			75

Insurance underwriting margin before other income and administrative expenses	$	460,963			27	%	$	430,262			26	%	$	395,931			25	%

Gross margins, as indicated by insurance underwriting margin before other income and administrative expense, rose 7% in 2011 and 9% in 2010. The margin increased to $461 million in 2011 after rising to $430 million in 2010. As a percentage of life insurance premium, the 2011 margin rose to 27% after rising to 26% a year earlier. Margin growth in all periods was primarily the result of premium growth. Improved mortality was also a factor in 2011.

Health Insurance. Health insurance sold by Torchmark includes primarily Medicare Supplement and Part D prescription drug coverage to enrollees in the federal Medicare program, cancer coverage, and accident coverage. All health coverage plans other than Medicare Supplement and Part D are classified here as limited-benefit plans. For several years, our primary health insurance product had been limited-benefit hospital/surgical plans. However, as previously discussed under the caption Life Insurance, these plans became subject to intense competition which resulted in decreasing agent counts, most notably in the Liberty National Exclusive Agency but also in the UA Independent Agency. In addition, these plans became less marketable due to healthcare reform developments. These factors contributed to the Company’s decisions to discontinue the marketing of these limited-benefit hospital/surgical products after September, 2010. We do continue to market the limited-benefit cancer and accident products. Since 2009, Medicare Supplement sales have exceeded those of the limited-benefit products, and represented 59% of health net sales exclusive of Medicare Part D in 2011. Medicare Supplement sales have been stronger than limited-benefit sales due in part to changes in agent counts in our health distribution groups discussed below.

Total health premium represented 35% of Torchmark’s total premium income in 2011. Excluding Part D premium, health premium represented 28% of total premium income in 2011, compared with 29% in 2010 and 32% in 2009. Health underwriting margin, excluding Part D, accounted for 25% of the total in 2011, compared with 28% in 2010 and 30% in 2009. These declines in the health percentages are indicative of the growth in the premium and profitability of our life segment in relation to our health segment. Health results have also been affected by the discontinuance of sales of the previously-mentioned health products. The following table indicates health insurance premium income by distribution channel for each of the last three years.

HEALTH INSURANCE

Premium by Distribution Method

(Dollar amounts in thousands)


	2011					2010					2009
	Amount		% of Total			Amount		% of Total			Amount		% of Total
United American Independent Agency
Limited-benefit plans	$	36,461				$	47,244				$	60,292
Medicare Supplement		270,029					267,280					266,150

		306,490		42	%		314,524		40	%		326,442		39	%
Liberty National Exclusive Agency
Limited-benefit plans		175,133					201,037					243,568
Medicare Supplement		114,974					130,019					144,954

		290,107		39			331,056		43			388,522		46
American Income Exclusive Agency
Limited-benefit plans		79,302					78,141					74,015
Medicare Supplement		817					918					1,082

		80,119		11			79,059		10			75,097		9
Direct Response
Limited-benefit plans		372					398					438
Medicare Supplement		56,695					53,930					46,117

		57,067		8			54,328		7			46,555		6
Total Premium (Before Part D)
Limited-benefit plans		291,268		40			326,820		42			378,313		45
Medicare Supplement		442,515		60			452,147		58			458,303		55

Total Premium (Before Part D)		733,783		100	%		778,967		100	%		836,616		100	%

Medicare Part D*		196,710					208,970					183,586

Total Health Premium*	$	930,493				$	987,937				$	1,020,202

Total Medicare Part D premium and health premium exclude $1.0 million in 2011, $516 thousand in 2010, and $2.5 million in 2009 of risk-sharing premium paid to 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.

We market supplemental health insurance products through a number of distribution channels with the United American Independent Agency being our market leader. The following table presents net sales by distribution method for the last three years.

HEALTH INSURANCE

Net Sales by Distribution Method

(Dollar amounts in thousands)


	2011					2010					2009
	Amount		% of Total			Amount		% of Total			Amount		% of Total
United American Independent Agency
Limited-benefit plans	$	1,065				$	4,596				$	12,256
Medicare Supplement		31,584					27,444					30,431

		32,649		51	%		32,040		50	%		42,687		44	%
Liberty National Exclusive Agency
Limited-benefit plans		15,033					10,385					25,306
Medicare Supplement		1,814					3,804					4,461

		16,847		26			14,189		22			29,767		31
American Income Exclusive Agency
Limited-benefit plans		9,572					13,081					13,393
Medicare Supplement		0					0					0

		9,572		15			13,081		20			13,393		14
Direct Response
Limited-benefit plans		868					549					665
Medicare Supplement		4,123					4,548					10,233

		4,991		8			5,097		8			10,898		11
Total Net Sales (Before Part D)
Limited-benefit plans		26,538		41			28,611		44			51,620		53
Medicare Supplement		37,521		59			35,796		56			45,125		47

Total Net Sales (Before Part D)		64,059		100	%		64,407		100	%		96,745		100	%

Medicare Part D*		115,122					38,799					43,004

Total Health Net Sales	$	179,181				$	103,206				$	139,749

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

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

HEALTH INSURANCE

First-Year Collected Premium by Distribution Method

(Dollar amounts in thousands)


	2011					2010					2009
	Amount		% of Total			Amount		% of Total			Amount		% of Total
United American Independent Agency
Limited-benefit plans	$	1,531				$	5,638				$	11,459
Medicare Supplement		28,044					29,999					16,066

		29,575		51	%		35,637		47	%		27,525		35	%
Liberty National Exclusive Agency
Limited-benefit plans		10,432					12,435					28,003
Medicare Supplement		2,144					3,324					4,973

		12,576		21			15,759		21			32,976		42
American Income Exclusive Agency
Limited-benefit plans		11,652					13,965					12,996
Medicare Supplement		0					0					0

		11,652		20			13,965		19			12,996		17
Direct Response
Limited-benefit plans		572					488					384
Medicare Supplement		4,209					9,162					4,251

		4,781		8			9,650		13			4,635		6
Total First-Year Collected Premium (Before Part D)
Limited-benefit plans		24,187		41			32,526		43			52,842		68
Medicare Supplement		34,397		59			42,485		57			25,290		32

Total (Before Part D)		58,584		100	%		75,011		100	%		78,132		100	%

Medicare Part D*		26,823					48,945					26,708

Total First-Year Collected Premium	$	85,407				$	123,956				$	104,840

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

The Medicare Part D Health product will be presented and discussed separately in this report.

Health insurance, excluding Medicare Part D. Health premium other than Part D has declined in each successive year presented, falling 6% in 2011 to $734 million and 7% in 2010. Net sales decreased 1% in 2011 to $64 million after a decline of 33% in 2010. First-year collected premium has also declined in each period considered. These declines in sales and premium resulted from several factors: (1) our previously-mentioned emphasis on life sales, due to life’s superior margins and its greater contribution to investment income; (2) the discontinuance of sales of various limited-benefit health products; and (3) the decline in agent counts in certain distribution units that market health products.

Medicare Supplement provides the greatest amount of health premium, partially because Medicare Supplement products are generally more persistent than the limited-benefit products, but also because of more stable sales in recent periods. Medicare Supplement premium also continues to grow in relation to our limited-benefit health premium. Medicare Supplement premium represented 60% of non-Part D health premium in 2011, compared with 58% in 2010 and 55% in 2009.

The Liberty National Exclusive Agency represented 39% of all Torchmark non-Part D health premium income at $290 million in 2011. The Liberty Agency markets Medicare Supplements and limited-benefit health products consisting primarily of cancer insurance. In 2011, health premium income in this Agency declined 12% from prior year premium of $331 million. Premium also fell 15% in 2010 from $389 million. First-year collected premium declined 20% to $13 million in 2011, after declining 52% a year earlier. As noted earlier, the discontinuance of sales of certain health products and the earlier increased competition in the health insurance market had caused steep declines in the agent count in this Agency. As of December 31, 2011, this Agency had 1,345 agents, a decline of 33% from the 2010 year end count of 2,001. In 2010, the number of agents fell 19% from 2,471 at year end 2009. The decline in agent counts has resulted in decreased new sales, translating into declines in premium. Net sales for 2011 rose 19% from $14 million in 2010 to $17 million due to the introduction of new products. In 2010, this Agency’s net sales fell 52%. Also discussed under the Life Insurance caption are efforts designed to strengthen this Agency.

The UA Independent Agency is Torchmark’s largest in terms of health premium income. This Agency is composed of independent agencies appointed with Torchmark whose size range from very large, multi-state organizations down to one-person offices. All of these agents generally sell for a number of insurance companies. Torchmark had 1,447 active producing agents at December 31, 2011 compared with 1,406 a year earlier. This agency is our largest distributor of non-Part D health insurance in terms of health net sales, representing 51% in 2011. This Agency is also our largest producer of Medicare Supplement insurance, with $270 million or 61% of our Medicare Supplement premium income in 2011. Net sales for this Agency increased 2% to $33 million in 2011, after having declined 25% in 2010 from $43 million in 2009. The greater amount of net sales in 2009 were due to increases in group Medicare Supplement sales. Group Medicare Supplement sales fluctuate greatly from period to period and do not indicate a trend. Total health premium income for the UA Independent Agency was $306 million in 2011, a 3% decline from 2010 premium of $315 million. Premium income also declined 4% in 2010. These declines in premium have resulted as new sales have not compensated for lapses.

The American Income Exclusive Agency, predominantly a life insurance distribution channel, is our third largest health insurance distributor based on premium income. Its health plans are comprised of various limited-benefit plans. Approximately 69% of the agency’s 2011 health premium was from accident policies. Sales of the plans by this Agency are generally made in conjunction with a life policy being sold to the same customer.

Health premium at this agency rose 1% in 2011 to $80 million, after having increased 5% to $79 million in 2010. However, net health sales declined 27% to $10 million in 2011. Net sales were $13 million in both 2010 and 2009. Net health sales comprised only 6% of the American Income Agency’s total net sales in 2011.

Direct Response, primarily a life operation, also offers health insurance, which is predominantly Medicare Supplements sold directly to employer or union sponsored groups. In both 2011 and 2010, net health sales were $5 million. In 2011, net health sales for this group represented approximately 4% of Direct Response’s total life and health net sales. Direct Response health premium income has risen each year over the prior year. Health premium rose 5% in 2011 to $57 million and 17% in 2010.

Medicare Part D. Torchmark, through its subsidiary United American, offers coverage under the government’s Medicare Part D plan. The Medicare Part D plan is a stand-alone prescription drug plan for Medicare beneficiaries. Part D is regulated and partially funded by the Centers for Medicare and Medicaid Services (CMS) for participating private insurers like United American. Under Part D, private carriers are the primary insurers, while CMS provides significant premium subsidies and reinsurance. Total Medicare Part D premium was $197 million in 2011, compared with $209 million in 2010, a decline of 6%. Part D premium rose 14% in 2010. Changes in Part D premium generally result from changes in the number of

enrollees. At December 31, 2011, United American had approximately 225 thousand enrollees for the 2012 Part D plan, compared with 144 thousand for the 2011 plan year and 158 thousand for the 2010 plan year. Growth for the plan year 2012 was largely a result of a new lower cost Part D plan which allowed us to pick up a large number of low-income automatic enrollees and to grow our own individual sales. The new product is priced to achieve the same underwriting margin as our existing product. Our Medicare Part D product is sold through the Direct Response operation and to groups through the UA Independent Agency. Part D net sales were $115 million in 2011, compared with $39 million in 2010 and $43 million in 2009. We count only sales to new first-time enrollees in net sales, and the majority of premium income was from previous enrollees.

We believe that the Medicare Part D program is a meaningful component of our health product offerings because of our experience with the senior-age market and with Medicare Supplements, the government assurances with regard to the risk-sharing agreements for participating insurers, limited-risk due to the incremental income added to our health insurance margins, and the renewal of the business every year. Due to our experience with service to the senior-age market and the use of our existing Direct Response marketing system, entry to this business required little new investment. However, as with any government-sponsored program, the possibility of regulatory changes could change the outlook for this market.

As presented in the following table, Torchmark’s health insurance underwriting margin before other income and administrative expense declined 5% in 2011 to $189 million but remained essentially flat at $199 million in 2010. As a percentage of premium income, margins were 20% in both 2011 and 2010 as compared with 19% in 2009.

HEALTH INSURANCE

Summary of Results

(Dollar amounts in thousands)



	2011
	Health*			% of Premium			Medicare Part D		% of Premium			Total Health			% of Premium
Premium**	$	733,783			100	%	$	196,710		100	%	$	930,493			100	%

Policy obligations		470,901			64			161,946		82			632,847			68
Required interest on reserves		(36,729	)		(5	)		0		0			(36,729	)		(4	)

Net policy obligations		434,172			59			161,946		82			596,118			64

Commissions, premium taxes, and non-deferred acquisition expenses		56,359			8			7,798		4			64,157			7
Amortization of acquisition costs		78,415			11			2,813		2			81,228			9

Total expense		568,946			78			172,557		88			741,503			80

Insurance underwriting income before other income and administrative expenses	$	164,837			22	%	$	24,153		12	%	$	188,990			20	%


	2010
	Health*			% of Premium			Medicare Part D		% of Premium			Total Health			% of Premium
Premium**	$	778,967			100	%	$	208,970		100	%	$	987,937			100	%

Policy obligations		497,576			64			172,131		82			669,707			68
Required interest on reserves		(35,368	)		(5	)		0		0			(35,368	)		(4	)

Net policy obligations		462,208			59			172,131		82			634,339			64

Commissions, premium taxes, and non-deferred acquisition expenses		60,224			8			8,341		4			68,565			7
Amortization of acquisition costs		82,609			11			3,458		2			86,067			9

Total expense		605,041			78			183,930		88			788,971			80

Insurance underwriting income before other income and administrative expenses	$	173,926			22	%	$	25,040		12	%	$	198,966			20	%


	2009
	Health*			% of Premium			Medicare Part D		% of Premium			Total Health			% of Premium
Premium**	$	836,616			100	%	$	183,586		100	%	$	1,020,202			100	%

Policy obligations		528,189			63			151,621		82			679,810			67
Required interest on reserves		(34,243	)		(4	)		0		0			(34,243	)		(3	)

Net policy obligations		493,946			59			151,621		82			645,567			64

Commissions, premium taxes, and non-deferred acquisition expenses		74,754			9			6,960		4			81,714			8
Amortization of acquisition costs		91,587			11			3,013		2			94,600			9

Total expense		660,287			79			161,594		88			821,881			81

Insurance underwriting income before other income and administrative expenses	$	176,329			21	%	$	21,992		12	%	$	198,321			19	%

Health other than Medicare Part D.

Total Medicare Part D premium and health premium excludes $1.0 million in 2011, $516 thousand in 2010, and $2.5 million in 2009 of risk-sharing premium paid to the CMS 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.

Annuities. As described in Note 3—Discontinued Operations, we sold our subsidiary United Investors. United Investors was our carrier of variable annuities and a primary carrier of fixed annuities. As a result of the sale, we disposed of approximately 37% of our annuity deposit balance as of December 31, 2010, including all of our variable annuities. Accordingly, we do not expect that annuities will be a significant portion of our business or marketing strategy going forward.

Our fixed annuity balances at the end of 2011, 2010, and 2009, were $1.29 billion, $1.24 billion, and $959 million, respectively. Underwriting income was $2.3 million, $1.3 million, and $3.2 thousand in each of the years 2011, 2010, and 2009, respectively.

While the fixed annuity account balance has increased each year over the prior year, policy charges and underwriting income have fluctuated only modestly. The stability in fixed annuity policy charges has resulted as the charges consist primarily of surrender charges and are not based on account size. These charges have remained somewhat level in recent periods. A considerable portion of fixed annuity profitability is derived from the spread of investment income exceeding contractual interest requirements, which can result in negative net policy obligations. In each of the years presented, the spreads for fixed annuities increased over the prior year as a result of credited rate reductions on the inforce annuities. Furthermore, spreads were increased by the introduction of a new annuity form on Liberty National paper in mid-2009. The amortization of deferred acquisition costs also rose as these costs are amortized in relation to gross profits.

Administrative expenses. Operating expenses are included in the Other and Corporate Segments and are classified into two categories: insurance administrative expenses and expenses of the parent company. The following table is an analysis of operating expenses for the three years ended December 31, 2011.

Operating Expenses Selected Information

(Dollar amounts in thousands)


	2011						2010						2009
	Amount			% of Prem.			Amount			% of Prem.			Amount			% of Prem.
Insurance administrative expenses:
Salaries	$	76,206			2.9	%	$	73,034			2.8	%	$	74,317			2.9	%
Other employee costs		30,294			1.1			34,109			1.3			27,356			1.1
Other administrative expense		43,085			1.6			41,736			1.6			40,294			1.5
Legal expense—insurance		9,524			.4			6,736			.2			8,358			.3

Total insurance administrative expenses		159,109			6.0	%		155,615			5.9	%		150,325			5.8	%


Parent company expense		7,693						8,809						9,590
Stock compensation expense		14,954						11,848						9,860
State administrative settlement		6,901						0						0
Settlement of prior period litigation		12,000						0						0
Loss on sale of property and equipment		979						0						355

Total operating expenses, per Consolidated Statements of Operations	$	201,636					$	176,272					$	170,130


Insurance administrative expenses:
Increase (decrease) over prior year		2.2	%					3.5	%					(3.7	)%

Total operating expenses:
Increase (decrease) over prior year		14.4	%					3.6	%					(6.6	)%

Insurance administrative expenses have trended upwards and rose 2% in 2011, after having increased 4% in 2010. As a percentage of premium, they increased .1% in each successive year to 6.0% in 2011. Employee costs increased 25% in 2010, primarily as a result of unusually high employee health insurance costs in that year. Partially offsetting the increase in 2010 employee costs was a decline in legal costs, as we favorably settled certain previously reserved litigation during 2010. In 2011, however, legal expenses returned to normal levels. Expenses for 2011 correlated more closely by expense component to 2009 expenses, as 2010 expenses reflected the aforementioned unusual items. Parent Company expense declined in 2011 primarily as a result of the decline in certain employee benefit liabilities related to retired employees. Stock compensation expense has risen in each successive year as the value of Torchmark stock has increased, resulting in higher values for grants of stock and options. As stated in Note 14—Business Segments in the Notes to Consolidated financial Statements, management views stock compensation expense as a corporate expense, and therefore treats it as a Parent Company expense.

As mentioned in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial Statements, we incurred two settlement expense issues in 2011 that related to events occurring many years ago: the settlement of a state administrative issue of $7 million and a litigation issue in the estimated amount of $12 million. In addition to these two items, we recorded two nonrecurring charges. In 2011, we sold aviation equipment at a loss of $979 thousand and in 2009, we wrote down Company-occupied real estate that was other-than-temporarily impaired in the amount of $355 thousand. While these nonrecurring expenses were included in “Operating expenses” for the respective year in the Consolidated Statements of Operations in accordance with accounting guidance, they are considered as non-operating expenses by management.

Investments. 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 14—Business Segments in the Notes to the Consolidated Financial Statements. It is defined as net investment income less both the required interest attributable to net policy liabilities and the interest cost associated with capital funding or “financing costs.” We also view excess investment income per diluted share as an important and useful measure to evaluate the performance of the investment segment. It is defined as excess investment income divided by the total diluted weighted average shares outstanding, representing the contribution by the investment segment to the consolidated earnings per share of the Company. Since implementing our share repurchase program in 1986, we have used over $5 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.

Excess Investment Income. The following table summarizes Torchmark’s investment income and excess investment income.

Analysis of Excess Investment Income

(Dollar amounts in thousands except for per share data)


	2011			2010			2009
Net investment income	$	693,028		$	676,364		$	632,540
Reclassification of low income housing expense⁽¹⁾		14,277			9,153			0
Reclassification of interest amount due to deconsolidation⁽²⁾		(264	)		(264	)		(264	)

Adjusted investment income (per segment analysis)		707,041			685,253			632,276
Interest on net insurance policy liabilities:
Interest on reserves		(551,798	)		(521,683	)		(487,000	)
Interest on deferred acquisition costs		181,387			176,940			170,106

Net required interest		(370,411	)		(344,743	)		(316,894	)
Financing costs		(77,644	)		(75,265	)		(69,668	)

Excess investment income	$	258,986		$	265,245		$	245,714

Excess investment income per diluted share	$	2.36		$	2.15		$	1.97

Mean invested assets (at amortized cost)	$	11,254,566		$	10,836,788		$	10,012,673
Average net insurance policy liabilities⁽³⁾		6,651,648			6,249,602			5,764,800
Average debt and preferred securities (at amortized cost)		1,119,964			1,112,147			1,111,940

(1)

Reclassified amortization of non-guaranteed low-income housing interests included in “Net investment income” in the Consolidated Statements of Operations but recorded in “Income taxes” in the segment analysis. See Note 1—Significant Accounting Policies in the Notes to Consolidated Financial Statements under the caption Low-Income Housing Tax Credit Interests for an explanation.

(2)	Deconsolidation of trusts liable for Trust Preferred Securities required by accounting guidance. See Note 11—Debt in the Notes to Consolidated Financial Statements.

(3)	Net of deferred acquisition costs, excluding the associated unrealized gains and losses thereon.

Excess investment income declined $6 million or 2% in 2011 from the prior year. Excess investment income rose $20 million or 8% in 2010. On a per diluted share basis, excess investment income rose 10% to $2.36 per share in 2011, after having risen 9% in the prior year. The favorable increases in the per share amounts relative to the changes in dollar amounts for excess investment income are a result of share purchases.

The largest component of excess investment income is net investment income, which rose 3% to $707 million in 2011. It increased 8% to $685 million in 2010 from $632 million in 2009. Presented in the following chart is the growth in net investment income compared with the growth in mean invested assets.


	2011			2010			2009
Growth in net investment income		3.2	%		8.4	%		0.9	%
Growth in mean invested assets (at amortized cost)		3.9			8.2			5.4

Growth in net investment income generally correlates somewhat with the growth in mean invested assets at amortized cost. With the exception of the years 2009 and 2010, growth in investment income has slightly lagged the growth in mean assets for several years. One of the primary reasons that investment income has grown at a lower rate than the growth in mean invested assets in recent years is due to the low-interest-rate environment during that period. As a result, new investments have been made at yield rates lower than the yield rates earned on securities that matured or were otherwise disposed of. Another factor that has contributed to the relatively slower growth rate of investment income is the time lag between the date proceeds from maturities and dispositions are received and the date such proceeds are reinvested. During these lags, we have held cash at lower yields. During 2009, because of the uncertainty about liquidity in the financial markets, we held significantly more cash and short-term investments than in other years. Holding this larger balance of low-yielding securities in 2009 resulted in the extremely low growth rate in income in that year, and also affected the higher growth rate in 2010 as these lower yielding cash balances were invested in 2010. The trend of lags in growth in net investment income in relation to the growth in mean invested assets is expected to continue until yields on suitable new investments exceed the portfolio yield.

Excess investment income is reduced by required interest on net insurance policy liabilities and the interest paid on corporate debt. Information about interest on policy liabilities is shown in the following table.

Required Interest on Net Insurance Policy Liabilities

(Dollar amounts in millions)


	Required Interest			Average Net Insurance Policy Liabilities			Average Discount Rate
2011
Life and Health	$	309.5		$	5,442.4			5.69	%
Annuity		60.9			1,209.2			5.03

Total		370.4			6,651.6			5.57
Increase in 2011		7.45	%		6.43	%
2010
Life and Health	$	288.9		$	5,111.1			5.65	%
Annuity		55.8			1,138.5			4.91

Total		344.7			6,249.6			5.52
Increase in 2010		8.79	%		8.41	%
2009
Life and Health	$	270.7		$	4,815.2			5.62	%
Annuity		46.2			949.6			4.87

Total		316.9			5,764.8			5.50
Increase in 2009		9.95	%		9.59	%

The combined average interest discount rate has risen in each of the last three years due to changes in the mix of the in force business. For more specific information on life and health discount rates, please refer to Note 6—Future Policy Benefit Reserves in the Notes to Consolidated Financial Statements.

Excess investment income is also impacted by financing costs. Financing costs for the investment segment primarily consist of interest on our various debt instruments and are deducted from excess investment income. The table below reconciles interest expense per the Consolidated Statements of Operations to financing costs.

The table below presents the components of financing costs.

Analysis of Financing Costs

(Amounts in thousands)


	2011			2010			2009
Interest on funded debt	$	72,697		$	72,889		$	64,369
Interest on short-term debt		5,207			2,589			5,513
Other		4			51			50

Interest expense per Consolidated Statements of Operations		77,908			75,529			69,932
Reclassification of interest due to deconsolidation ⁽¹⁾		(264	)		(264	)		(264	)

Financing costs	$	77,644		$	75,265		$	69,668

(1)	See Principles of Consolidation in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial Statements for an explanation of deconsolidation.

Financing costs increased $2 million or 3% in 2011. They rose $6 million or 8% in 2010. The increase in financing costs in 2010 reflects the issuance in June 2009 of $300 million principal amount 9¼% Senior Notes due in 2019. In 2010, we incurred a full year of interest on this issue. The 2011 increase in interest on short-term debt was primarily a result of the $2.1 million increase in financing charges on our letter of credit facility, arising from the December, 2010 restructuring of our credit facility. More information on this facility is disclosed under the caption Short-Term Borrowings in the Financial Condition section of this report and in Note 11—Debt in the Notes to Consolidated Financial Statements. The 2010 decrease was due to a decline in short-term rates over the previous year, but was also impacted by a 22% decline in the average balance of commercial paper outstanding compared with 2009.

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.

However, growth in our excess investment income decreases when growth in income from the portfolio is less than that of the interest required by policy liabilities and financing costs, such as we have experienced in recent periods. In an extended low-interest-rate environment, the portfolio yield will tend to decline as we invest new money at lower long-term rates. We believe, however, the decline would be relatively slow, as only 2% to 3% of fixed maturities on average are expected to run off each year over the next five years. We also believe that the deferred acquisition costs and benefit reserve balances on our life and health business would not be impacted by an extended low-interest-rate environment. While these balances for annuities could be affected, the impact would be immaterial.

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

Investment Acquisitions. Torchmark’s current investment policy calls for investing almost exclusively in investment-grade fixed maturities generally with long maturities (maturity date more than 20 years after acquisition date) that 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. Further, we believe this strategy is appropriate because our strong positive cash flows are generally stable and predictable. If such longer-term securities do not meet our quality and yield objectives, we consider investing in short-term securities, taking into consideration the slope of the yield curve and other factors at the time. During calendar years 2009 through 2011, Torchmark invested almost exclusively in fixed-maturity securities, primarily with longer-term maturities as presented in the chart below.

The following table summarizes selected information for fixed-maturity purchases. The effective annual yield shown in the table is the yield calculated to the potential termination date that produces the lowest yield. This date is commonly known as the “worst call date.” Two different average life calculations are shown, average life to the next call date and average life to the maturity date.

Fixed Maturity Acquisitions Selected Information

(Dollar amounts in millions)


	For the Year
	2011			2010			2009
Cost of acquisitions:
Investment-grade corporate securities	$	1,078.3		$	1,478.5		$	1,431.6
Taxable municipal securities		10.7			201.2			754.4
Other investment-grade securities		15.2			33.7			15.4

Total fixed-maturity acquisitions	$	1,104.2		$	1,713.4		$	2,201.4

Effective annual yield (one year compounded*)		5.65	%		5.89	%		6.43	%
Average life (in years, to next call)		27.4			24.2			16.3
Average life (in years to maturity)		28.1			26.1			21.2
Average rating		A-			A-			A
* Tax-equivalent basis, where the yield on tax-exempt securities is adjusted to produce a yield equivalent to the pretax yield on taxable securities.

We prefer to invest primarily in bonds that are not callable (on other than a make-whole basis) prior to maturity, but we periodically invest some funds in callable bonds when the incremental yield available on such bonds warrants doing so. For investments in callable bonds, the actual life of the investment will depend on whether the issuer calls the investment prior to the maturity date. Given our investments in callable bonds, the actual average life of our investments can not be known at the time of the investment. However, the average life will not be less than the average life to next call and will not exceed the average life to maturity. Data for both of these average life measures is provided in the above chart. The average life of funds invested in 2009 (to both next call and maturity) was lower than that of funds invested during 2011 and 2010 due to actions taken for statutory capital management purposes and the limited availability of longer term investments.

During the three years 2009 through 2011, we have invested primarily in investment-grade corporate bonds. Purchases in 2011 were almost entirely in these corporates. During 2009 and 2010, we acquired a significant amount of taxable municipal bonds, primarily Build America Bonds authorized by the American Recovery and Retirement Act of 2009. The investments in these municipal bonds consisted almost exclusively of general obligation bonds and revenue bonds for essential services. In assessing the creditworthiness of these bonds, we took into account a number of factors, including the geographic location of the municipalities.

New cash flow available for investment is primarily provided through our insurance operations, but has also been affected by other factors. Issuer calls, as a result of the low-interest environment experienced during the past three years are a factor. Issuers are more likely to call bonds when rates are low because they often can refinance them at a lower cost. Calls increase funds available for investment,

but they can have a negative impact on investment income if the proceeds from the calls are reinvested in bonds that have lower yields than that of the bonds that were called. Issuer calls were $187 million in 2011, $109 million in 2010, and $181 million in 2009. The higher level of acquisitions in 2009 was primarily due to the additional cash flow available from the special sales transactions noted below.

Sales transactions. During 2009, the Company sold $703 million of fixed maturities at amortized cost, including $293 million of below- investment-grade securities. The market value for some of these securities increased significantly during the period to a level where, even though the sales price was less than amortized cost, management determined that better risk-adjusted returns could be achieved by selling rather than continuing to hold the securities. Other securities were sold at prices that produced gains to offset these losses for tax purposes. Due in large part to selling below-investment-grade securities and reinvesting the proceeds in investment-grade securities, below-investment-grade securities declined significantly as a percentage of total fixed maturities at year end 2009. The reduction in below-investment-grade securities had a positive impact on the risk-based capital position of our insurance subsidiaries at that date and thereafter.

Portfolio Analysis. Because Torchmark has recently invested almost exclusively in fixed-maturity securities, the relative percentage of our assets invested in various types of investments varies from industry norms. The following table presents a comparison of Torchmark’s components of invested assets at amortized cost as of December 31, 2011 with the latest industry data.


	Torchmark
	Amount (in millions)		%			Industry %⁽¹⁾
Bonds	$	9,761		85	%		76	%
Preferred stock (redeemable and perpetual)⁽²⁾		1,177		10			0
Common stocks		1		0			2
Mortgage loans		1		0			10
Real estate		3		0			1
Policy loans		401		4			4
Other invested assets		22		0			4
Cash and short terms		105		1			3

	$	11,471		100			100

(1) Latest data available from the American Council of Life Insurance as of December 31, 2010. (2) Includes redeemable preferred of $1.2 billion or 10% and perpetual preferred of $14 million or 0%.

At December 31, 2011, approximately 95% of our investments at book value were in a diversified fixed-maturity portfolio. Policy loans, which are secured by policy cash values, made up an additional 4%. The remaining balance was comprised of other investments including equity securities, mortgage loans, and other long-term and short-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. An analysis of our fixed-maturity portfolio by component at December 31, 2011 and December 31, 2010 is as follows:

Fixed Maturities by Component

At December 31, 2011

(Dollar amounts in millions)


	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		% of Total Fixed Maturities
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost			Fair Value
Corporates	$	8,358	$	1,051	$	(138	)	$	9,271		77	%		78	%
Redeemable preferred stock		1,163		27		(68	)		1,122		11			10
Municipals		1,213		119		(2	)		1,330		11			11
Government-sponsored enterprises		46		1		0			47		0			1
Governments & agencies		36		1		0			37		0			0
Residential mortgage-backed securities		14		1		0			15		0			0
Commercial mortgage-backed securities		0		0		0			0		0			0
Collateralized debt obligations		60		0		(30	)		30		1			0
Other asset-backed securities		34		3		(1	)		36		0			0

Total fixed maturities	$	10,924	$	1,203	$	(239	)	$	11,888		100	%		100	%

Fixed Maturities by Component

At December 31, 2010

(Dollar amounts in millions)


	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		% of Total Fixed Maturities
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost			Fair Value
Corporates	$	7,708	$	423	$	(210	)	$	7,921		74	%		75	%
Redeemable preferred stock		1,312		36		(80	)		1,268		13			12
Municipals		1,212		11		(42	)		1,181		12			12
Government-sponsored enterprises		58		0		(1	)		57		1			1
Governments & agencies		35		2		0			37		0			0
Residential mortgage-backed securities		16		2		0			18		0			0
Commercial mortgage-backed securities		0		0		0			0		0			0
Collateralized debt obligations		57		0		(34	)		23		0			0
Other asset-backed securities		37		2		(1	)		38		0			0

Total fixed maturities	$	10,435	$	476	$	(368	)	$	10,543		100	%		100	%

At December 31, 2011, fixed maturities had a fair value of $11.9 billion, compared with $10.5 billion at December 31, 2010. At December 31, 2011, fixed maturities were in a $964 million net unrealized gain position compared with an unrealized gain position of $108 million at December 31, 2010. Approximately 77% of our fixed maturity assets at December 31, 2011 at amortized cost were corporate bonds and 11% were redeemable preferred stocks. This compares with 74% corporate bonds and 13% redeemable preferred stocks at year end 2010. On a combined basis, residential mortgage-backed securities, other asset-backed securities, and collateralized debt obligations (CDOs) were less than 2% of the assets at amortized cost at December 31, 2011. The $60 million of CDOs at amortized cost made up less than 0.6% of the assets and are backed primarily by trust preferred securities issued by banks and insurance companies. The $14 million of residential mortgage-backed securities are rated AAA. For more information about our fixed-maturity portfolio by component at December 31, 2011 and 2010, including an analysis of unrealized investment losses and a schedule of maturities, see Note 4—Investments in the Notes to Consolidated Financial Statements.

Due to the strong and stable cash flows generated by its insurance products, Torchmark has the ability to hold securities with temporary unrealized losses until recovery. Even though these fixed maturity investments are available for sale, Torchmark generally expects and intends to hold to maturity any securities which are temporarily impaired.

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

Fixed Maturity Portfolio Selected Information



	At December 31, 2011			At December 31, 2010
Average annual effective yield ⁽¹⁾		6.49	%		6.63	%
Average life, in years, to:
Next call ⁽²⁾		17.3			16.6
Maturity ⁽²⁾		22.2			22.3
Effective duration to:
Next call ⁽²⁾, ⁽³⁾		9.9			9.0
Maturity ⁽²⁾, ⁽³⁾		11.6			10.9
(1) Tax-equivalent basis, where the yield on tax-exempt securities is adjusted to produce a yield equivalent to the pretax yield on taxable securities.
(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.

Credit Risk Sensitivity. Credit risk is the level of certainty that a security’s issuer will maintain its ability to honor the terms of that security until maturity. Approximately 88% of our fixed-maturity holdings at book value are in corporate securities (including redeemable preferred and asset-backed securities). As we continue to invest in corporate bonds with relatively long maturities, credit risk is a concern. We mitigate this ongoing risk, in part, by acquiring only investment-grade bonds and by analyzing the financial fundamentals of each prospective issuer. We continue to monitor the status of issuers on an ongoing basis. We also seek to reduce credit risk by maintaining investments in a large number of issuers over a wide range of industry sectors.

The following table presents the relative percentage of our fixed maturities by industry sector at December 31, 2011.


Fixed Maturities by Sector At December 31, 2011 (Dollar amounts in millions)
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		% of Total Fixed Maturities
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		At Amortized Cost			At Fair Value
Financial - Life/Health/PC Insurance	$	1,785	$	92	$	(63	)	$	1,814		16	%		16	%
Financial - Bank		1,320		32		(71	)		1,281		12			11
Financial - Other		509		41		(17	)		533		4			4

Total Financial		3,614		165		(151	)		3,628		32			31
Utilities		1,709		319		(9	)		2,019		16			17
Energy		1,243		188		0			1,431		11			12
Government		1,295		121		(2	)		1,414		12			12
Basic Materials		758		108		(3	)		863		7			7
Consumer Non-cyclical		539		90		(4	)		625		5			5
Other Industrials		519		60		(19	)		560		5			5
Communications		464		66		(12	)		518		4			4
Consumer Cyclical		394		34		(9	)		419		4			4
Transportation		315		51		0			366		3			3
Collateralized debt obligations		60		0		(30	)		30		1			0
Mortgage-backed securities		14		1		0			15		0			0

Total fixed maturities	$	10,924	$	1,203	$	(239	)	$	11,888		100	%		100	%

At December 31, 2011, approximately 32% of the fixed maturity assets at amortized cost (31% at fair value) were in the financial sector, including 16% in life and health or property casualty insurance companies and 12% in banks at amortized cost. Financial guarantors, mortgage insurers, and insurance brokers comprised approximately 4% of the portfolio. After financials, the next largest sector was utilities, which comprised 16% of the portfolio at amortized cost. The balance of the portfolio is spread among 262 issuers in a wide variety of sectors. As previously noted, gross unrealized losses were $239 million at December 31, 2011, declining from $368 million a year earlier. The portfolio was in a net unrealized gain position of $964 million at December 31, 2011.

As shown in the table above, the ratio of gross unrealized losses to book value was approximately 50% for our investments in CDOs. As previously noted, CDOs represented less than 0.6% of our fixed maturity investments at December 31, 2011. We evaluated each of the impaired securities in this and all other sectors to determine whether or not any of the impairments were other-than-temporary. Our portfolio consisted of five CDO investments at December 31, 2011, in which three were carried at a value of $0, one was considered only temporarily impaired, and one was previously considered other-than-temporarily impaired.

The CDO considered temporarily impaired was carried at an amortized cost of $23.4 million and had a fair value of $7.7 million. The CDO considered other-than-temporarily impaired was previously written down and carried at an amortized cost of $37.0 million, based on the present value of expected cash flows at the original purchase yield. This CDO had a fair value of $22.7 million at December 31, 2011. The collateral underlying these CDOs is primarily trust preferred securities issued by banks and insurance companies, and no sub-prime or Alt-A mortgages are included in the collateral.

In reaching these conclusions concerning the other-than-temporary impairment of our CDOs, we reviewed and discussed with the collateral managers of each of these CDOs the current status of the collateral underlying our investments, the credit events (defaults and deferrals in underlying collateral) experienced to date, and the possibility of future credit events. We calculated expected future cash flows using assumptions for expected future credit events that reflect actual historical experience and expected future experience. We reviewed the actual versus expected cash flows received to date and the impact that potential future credit events could have on our expected future cash flows. We calculated the magnitude of future credit events that could be experienced without negatively impacting the recovery of our investment and our expected yield rate. While there is a possibility that future credit events will exceed our current expectations, we believe there is ample evidence to support our conclusions.

An analysis of the fixed-maturity portfolio by a composite rating at December 31, 2011 is shown in the table below. The composite rating for each security is the average of the security’s ratings as assigned by Moody’s Investor Service, Standard & Poor’s, Fitch Ratings, and Dominion Bond Rating Service, LTD. The ratings assigned by these four nationally recognized statistical rating organizations are evenly weighted when calculating the average.

Fixed Maturities by Rating

At December 31, 2011

(Dollar amounts in millions)


	Amortized Cost		%		Fair Value		%
Investment grade:
AAA	$	473		4.3	$	505		4.2
AA		1,338		12.2		1,457		12.3
A		2,941		26.9		3,399		28.6
BBB+		2,172		19.9		2,400		20.2
BBB		2,212		20.3		2,419		20.3
BBB-		1,087		10.0		1,129		9.5

Investment grade		10,223		93.6		11,309		95.1

Below investment grade:
BB		410		3.8		370		3.2
B		170		1.6		134		1.1
Below B		121		1.0		75		0.6

Below investment grade		701		6.4		579		4.9

	$	10,924		100.0	$	11,888		100.0	%

The portfolio has a weighted average quality rating of A- based on amortized cost. Approximately 93% of the portfolio at amortized cost was considered investment grade. Our investment portfolio contains no securities backed by sub-prime or Alt-A mortgages (loans for which some of the typical documentation was not provided by the borrower). We have no direct investments in residential mortgages, nor do we have any counterparty risks as we are not a party to any credit default swaps or other derivative contracts. We do not participate in securities lending. There are no off-balance sheet investments, as all investments are reported on our Consolidated Balance Sheets. We have no direct exposure to European sovereign debt.

Our current 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.

An analysis of changes in below-investment grade fixed maturities at amortized cost is as follows.


	Year Ended December 31,
	2011
	(in $ millions)

Balance at January 1	$	863
Downgrades by rating agencies		76
Upgrades by rating agencies		(98	)
Disposals		(143	)
Amortization		3

Balance at December 31	$	701

Market Risk Sensitivity. Torchmark’s financial securities are exposed to interest rate risk, meaning the effect of changes in financial market interest rates on the current fair value of the company’s investment portfolio. Since 96% of the book value of our investments is attributable to fixed-maturity investments (and virtually all of these investments are fixed-rate investments), the portfolio is highly subject to market risk. Declines in market interest rates generally result in the fair value of the investment portfolio exceeding the book value of the portfolio and increases in interest rates cause the fair value to decline below the book value. Under normal market conditions, we do not expect to realize these unrealized gains and losses because it is generally our investment strategy to hold these investments to maturity. The long-term nature of our insurance policy liabilities and strong cash-flow operating position substantially mitigate any future need to liquidate portions of the portfolio. The increase or decrease in the fair value of insurance liabilities and debt due to increases or decreases in market interest rates largely offset the impact of rates on the investment portfolio. However, in accordance with GAAP, these liabilities are not marked to market.

The following table illustrates the market risk sensitivity of our interest-rate sensitive fixed-maturity portfolio at December 31, 2011 and 2010. This table measures the effect of a change in interest rates (as represented by the U.S. Treasury curve) on the fair value of the fixed-maturity portfolio. The data measures the change in fair value arising from an immediate and sustained change in interest rates in increments of 100 basis points.


	Market Value of Fixed Maturity Portfolio ($ millions)
Change in Interest Rates (in basis points)	At December 31, 2011	At December 31, 2010
-200	$14,847	$12,919
-100	13,261	11,656
0	11,888	10,543
100	10,694	9,559
200	9,650	8,686

Realized Gains and Losses. Our life and health insurance companies collect premium income from policyholders for the eventual payment of policyholder benefits, sometimes paid many years or even decades in the future. In addition to the payment of these benefits, we also incur acquisition costs, administrative expenses, and taxes as a part of insurance operations. Because benefits are expected to be paid in future periods, premium receipts in excess of current expenses are invested to provide for these obligations. For this reason, we hold a significant investment portfolio as a part of our core insurance operations. This portfolio consists primarily of high-quality fixed maturities containing an adequate yield to provide for the cost of carrying these long-term insurance product obligations. As a result, fixed maturities are generally held for long periods to support the liabilities. Expected yields on these investments are taken into account when setting insurance premium rates and product profitability expectations.

Investments are occasionally sold or called, resulting in a realized gain or loss. These gains and losses occur only incidentally, usually as the result of sales because of deterioration in investment quality of issuers or calls by the issuers. Investment losses are also caused by writedowns due to impairments. We do not engage in trading investments for profit. Therefore, gains or losses which occur in protecting the portfolio or its yield, or which result from events that are beyond our control, are only secondary to our core insurance operations of providing insurance coverage to policyholders.

Realized gains and losses can be significant in relation to the earnings from core insurance operations, and as a result, can have a material positive or negative impact on net income. The significant fluctuations caused by gains and losses can cause the period-to-period trends of net income not to be indicative of historical core operating results nor predictive of the future trends of core operations. Accordingly, they have no bearing on core insurance operations or segment results as we view operations. For these reasons, and in line with industry practice, we remove the effects of realized gains and losses when evaluating overall insurance operating results.

The following table summarizes our tax-effected realized gains (losses) by component for each of the years in the three-year period ended December 31, 2011.

Analysis of Realized Gains (Losses), Net of Tax

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


	Year Ended December 31,
	2011					2010						2009
	Amount			Per Share		Amount			Per Share			Amount			Per Share
Investments:
Sales	$	673		$	0.01	$	10,761		$	0.09		$	7,644		$	0.06
Called or tendered		15,512			0.14		17,265			0.14			1,878			0.02
Writedowns*		(13	)		0.00		(3,152	)		(0.02	)		(94,367	)		(0.77	)
Loss on redemption of debt		0			0.00		(1,070	)		(0.01	)		(1	)		0.00
Other		666			0.00		466			0.00			(499	)		0.00

Total	$	16,838		$	0.15	$	24,270		$	0.20		$	(85,345	)	$	(0.69	)

Written down due to other-than-temporary impairment.

As described in Note 4—Investments under the caption Other-than temporary impairments in the Notes to Consolidated Financial Statements, we wrote certain securities down to fair value during each year 2009 through 2011 as a result of other-than-temporary impairment. The impaired securities met our criteria for other-than-temporary impairment as discussed in Note 4 and in our Critical Accounting Policies in this report. The writedowns resulted in pretax charges of $20 thousand in 2011 ($13 thousand after tax), $5 million in 2010 ($3 million after tax), and $143 million in 2009 ($94 million after tax). The 2009 charge included $83 million on CDOs ($55 million after tax) and $24 million on monoline financial guarantors and mortgage insurers ($16 million after tax). The remaining writedowns in 2009 were from losses on a variety of corporate bonds. In 2010, we acquired $7.3 million book value of our 9¹/₄% Senior Notes at a cost of $8.9 million, resulting in an after-tax loss on debt redemption of $1.1 million.

FINANCIAL CONDITION

Liquidity. Liquidity provides Torchmark with the ability to meet on demand the cash commitments required by its business operations and financial obligations. Our liquidity is primarily derived from three sources: positive cash flow from operations, a portfolio of marketable securities, and 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. The leading source of the excess cash is investment income. However, due to our high underwriting margins and effective expense control, a significant portion of the excess cash comes from underwriting income.

Parent Company Liquidity. Cash flows from the insurance subsidiaries are used to pay interest and principal repayments on Parent Company debt, operating expenses of the Parent, and Parent Company dividends to Torchmark shareholders. In 2011, the Parent received $790 million of dividends and transfers from its insurance subsidiaries, as compared with $401 million in 2010 and $392 million in 2009. The 2011 dividend included $305 million of additional dividends available as a result of the sale of United Investors. After paying debt obligations, shareholder dividends, and other expenses (but before share repurchases), Torchmark Parent had excess operating cash flow in 2011 of approximately $672 million, including the $305 million from the sale of United Investors. Parent Company cash flow in excess of its operating requirements is available for other corporate purposes, such as strategic acquisitions or share repurchases. In 2012, it is expected that the Parent Company will receive approximately $470 million in dividends and transfers from subsidiaries, and that approximately $360 million will be available as excess cash flow. Certain restrictions exist on the payment of these dividends. For more information on the restrictions on the payment of dividends by subsidiaries, see the restrictions section of Note 12—Shareholders’ Equity in the Notes to Consolidated Financial Statements. Although these restrictions exist, dividend availability from subsidiaries historically has been sufficient for the cash flow needs of the Parent Company. As additional liquidity, the Parent held $27 million of cash and short-term investments at December 31, 2011, compared with $63 million a year earlier. The Parent also had available a $51 million receivable from subsidiaries at December 31, 2011.

Short-Term Borrowings. An additional source of parent company liquidity is a line of credit facility with a group of lenders which allows unsecured borrowings and stand-by letters of credit up to $600 million. As of December 31, 2011, we had available $177 million of additional borrowing capacity under this facility, as compared with $203 million a year earlier. For detailed information about this line of credit facility, see the Commercial Paper section of Note 11—Debt.

The following table presents certain information about our short-term borrowings, all of which was commercial paper.

Short-term Borrowings—Commercial Paper

(Dollar amounts in millions)


	At December 31,
	2011			2010
Balance at end of period	$	225.0		$	199.0
Daily-weighted average interest rate*		0.47	%		0.45	%
Letters of credit outstanding	$	198.0		$	198.0
Remaining amount available under credit line	$	177.0		$	203.0

	For the Year
	2011			2010			2009
Average balance outstanding during period	$	206.1		$	196.3		$	251.5
Daily-weighted average interest rate*		0.39	%		0.43	%		1.10	%

Maximum daily amount outstanding during period	$	271.8		$	250.0		$	325.0
* Annualized

There have been no difficulties in accessing the commercial paper market under this facility during the three years ended December 31, 2011.

In summary, Torchmark expects to have readily available funds for 2012 and 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 additional debt, a short-term credit facility, and intercompany borrowing.

Consolidated Liquidity. Consolidated net cash inflows provided from operations were $859 million in 2011, compared with $1.03 billion in 2010, and $976 million in 2009. In addition to cash inflows from operations, our companies have received $230 million in investment calls and tenders and $180 million of scheduled maturities or repayments during 2011. Maturities, tenders, and calls totaled $639 million in 2010 and $761 million in 2009.

Our cash and short-term investments were $105 million at year-end 2011 and $582 million at year-end 2010. Included in cash at December 31, 2010 was the $343 million of proceeds received from the sale of United Investors on that date. Additionally, we have a portfolio of marketable fixed and equity securities that are available for sale in the event of an unexpected need. These securities had a fair value of $11.9 billion at December 31, 2011. However, our strong cash flows from operations, investment maturities, and the availability of our credit line make any need to sell securities for liquidity unlikely.

Off-Balance Sheet Arrangements. As described in Note 11—Debt in the Notes to the Consolidated Financial Statements and under the subcaption Funded Debt, Torchmark had outstanding $120 million (par amount) 7.1% Trust Preferred Securities at both December 31, 2011 and 2010. The capital trust liable for these securities is the legal entity which is responsible for the securities and facilitates the payment of dividends to shareholders. As described in Note 15—Commitments and Contingencies in the Notes to Consolidated Financial Statements, we have guaranteed the performance of the capital trust to meet its financial obligations to the Trust Preferred shareholders. The trust is an off-balance sheet arrangement which we are required to deconsolidate in accordance with GAAP rules, because the capital trust is considered to be a variable interest entity in which we have no variable interest. While these liabilities are not on our Consolidated Balance Sheets, they are represented by Torchmark’s 7.1% Junior Subordinated Debentures due to the trust in the amount of $124 million which is on our balance sheets at both December 31, 2011 and 2010. The 7.1% preferred dividends due to the preferred shareholders are funded by our 7.1% interest payment on our debt to the trusts.

As a part of its above-mentioned credit facility, Torchmark had outstanding $198 million in stand-by letters of credit at December 31, 2011. However, these letters are issued among our subsidiaries and have no impact on company obligations as a whole.

As of December 31, 2011, we had no other significant unconsolidated affiliates and no guarantees of the obligations of third-party entities other than as described above. All of our guarantees, other than the Trust Preferred guarantee, were guarantees of the performance of consolidated subsidiaries, as disclosed in Note 15—Commitments and Contingencies.

The following table presents information about future payments under our contractual obligations for the selected periods as of December 31, 2011.

(Amounts in millions)


	Actual Liability		Total Payments		Less than One Year		One to Three Years		Four to Five Years		More than Five Years
Fixed and determinable:
Debt—principal⁽¹⁾	$	1,139	$	1,151	$	225	$	94	$	250	$	582
Debt—interest⁽²⁾		7		741		73		136		122		410
Capital leases		0		0		0		0		0		0
Operating leases		0		13		3		4		3		3
Purchase obligations		109		109		85		23		0		1
Pension obligations⁽³⁾		74		185		14		31		34		106
Future insurance obligations⁽⁴⁾		9,572		40,332		1,208		2,351		2,241		34,532

Total	$	10,901	$	42,531	$	1,608	$	2,639	$	2,650	$	35,634

(1)	Funded debt is itemized in Note 11—Debt in the Notes to Consolidated Financial Statements and includes short-term commercial paper.

(2)	Interest on debt is based on our fixed contractual obligations.

(3)

Pension obligations are primarily liabilities in trust funds that are calculated in accordance with the terms of the pension plans. They are offset by invested assets in the trusts, which are funded through periodic contributions by Torchmark in a manner which will provide for the settlement of the obligations as they become due. Therefore, our obligations are offset by those assets when reported on Torchmark’s Consolidated Balance Sheets. At December 31, 2011, these pension obligations were $332 million, but there were also assets of $258 million in the pension entities. The schedule of pension benefit payments covers ten years and is based on the same assumptions used to measure the pension obligations, except there is no interest assumption because the payments are undiscounted. Please refer to Note 10—Postretirement Benefits in the Notes to Consolidated Financial Statements for more information on pension obligations.

(4)

Future insurance obligations consist primarily of estimated future contingent benefit payments on policies in force at December 31, 2011. These estimated payments were computed using assumptions for future mortality, morbidity and persistency. The actual amount and timing of such payments may differ significantly from the estimated amounts shown. Management believes that the assets supporting the liability of $9.6 billion at December 31, 2011, along with future premiums and investment income, will be sufficient to fund all future insurance obligations.

Capital Resources. Torchmark’s capital structure consists of short-term debt (the commercial paper facility described in Note 11—Debt in the Notes to Consolidated Financial Statements), long-term funded debt, Junior Subordinated Debentures supporting its Trust Preferred Securities, and shareholders’ equity. The Junior Subordinated Debentures are payable to Torchmark’s Capital Trust III which is liable for its Trust Preferred Securities. In accordance with GAAP, these instruments are included in “Due to affiliates” on the Consolidated Balance Sheets. A complete analysis and description of long-term debt issues outstanding is presented in Note 11—Debt in the Notes to Consolidated Financial Statements.

The carrying value of the funded debt was $914 million at December 31, 2011, compared with $913 million a year earlier. As fully explained in Note 11—Debt, we issued $300 million principal amount of 9¼% Senior Notes due in 2019 in June of 2009 for proceeds of $296 million. A portion of these proceeds were used to repay the $99 million due upon the August, 2009 maturity of our 8¼% Senior Debentures. In addition, we also used $175 million to strengthen the capital position of certain of our insurance subsidiaries in 2009 in the form of capital contributions and surplus notes. The regulatory capital positions of these subsidiaries had been negatively affected by rating-agency downgrades of bonds in their investment portfolios. The subsidiaries in turn invested these funds in investment-grade fixed maturities.

Our insurance subsidiaries generally target a capital ratio of at least 325% of required regulatory capital under Risk-Based Capital (RBC), a formula designed by insurance regulatory authorities to monitor the adequacy of capital. The 325% target is considered sufficient for the subsidiaries because of their strong reliable cash flows, the relatively low risk of their product mix, and because that ratio is in line with rating agency expectations for Torchmark. At December 31, 2011, our insurance subsidiaries in the aggregate had RBC ratios of approximately 336%. Should we experience additional impairments and ratings downgrades in the future that cause the ratio to fall below 325%, management has more than sufficient liquidity at the Parent Company to make additional contributions as necessary to maintain the ratios at or above 325%.

As noted under the caption Summary of Operations in this report, we reactivated our share repurchase program during the first quarter of 2010. We previously had suspended the program indefinitely in March, 2009 due to general economic conditions at that time. However, since reactivation, we have made share purchases each quarter of 2010 and 2011. Under this program, we acquired 19 million shares at a cost of $788 million in 2011 (average of $41.68 per share), 6 million shares for $204 million in 2010, and 3 million shares for $47 million in 2009. The majority of purchased shares are retired each year. Please refer to the description of our share repurchase program under the caption Summary of Operations in this report.

Torchmark has recently increased the dividend on its common shares. In the first quarter of 2010, the dividend was increased from $.0933 per share to $.10 per share and in the fourth quarter of 2010, it was further increased to $.1067 per share. In the second quarter of 2011, it was again raised to $.12 per share.

Shareholders’ equity was $3.9 billion at December 31, 2011, compared with $3.7 billion at December 31, 2010. During the twelve months since December 31, 2010, shareholders’ equity was reduced by the $788 million in share purchases under the repurchase program and another $185 million to offset the dilution from stock option exercises, but has been increased by the $497 million of net income and by after tax unrealized gains of $538 million in the fixed maturity portfolio as conditions in financial markets have improved.

We plan to use excess cash as efficiently as possible in the future but we will be cautious in doing so. Excess cash flow could be used for share repurchases, acquisitions, increases in shareholder dividends, investment in fixed maturities, or repayment of short-term debt. We will determine the best use of excess cash after ensuring that desired capital levels are maintained in our companies.

We maintain a significant available-for-sale fixed-maturity portfolio to support our insurance policyholders’ liabilities. Current accounting guidance requires that we revalue our portfolio to fair market value at the end of each accounting period. The period-to-period changes in fair value, net of their associated impact on deferred acquisition costs and income tax, are reflected directly in shareholders’ equity. Changes in the fair value of the portfolio can result from changes in interest rates and liquidity in financial markets. While invested assets are revalued, accounting rules do not permit interest-bearing insurance policy liabilities to be valued at fair value in a consistent manner as that of assets, with changes in value applied directly to shareholders’ equity. Due to the size of our policy liabilities in relation to our shareholders’ equity, this inconsistency in measurement usually has a material impact on the reported value of shareholders’ equity. If these liabilities were revalued in the same manner as the assets, the effect on equity would be largely offset. Fluctuations in interest rates cause undue volatility in the period-to-period presentation of our shareholders’ equity, capital structure, and financial ratios which would be essentially removed if interest-bearing liabilities were valued in the same manner as assets. From time to time, the market value of our fixed maturity portfolio may be depressed as a result of bond market illiquidity which could result in a significant decrease in 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 losses due to fluctuations in market value of fixed maturities caused by interest rate changes and temporarily illiquid markets. Accordingly, our management, credit rating agencies, lenders, many industry analysts, and certain other financial statement users prefer to remove the effect of this accounting rule when analyzing our balance sheet, capital structure, and financial ratios.

The following tables present selected data related to our capital resources. Additionally, the tables present the effect of this accounting guidance on relevant line items, so that investors and other financial statement users may determine its impact on Torchmark’s capital structure.

Selected Financial Data


	At December 31, 2011						At December 31, 2010						At December 31, 2009
	GAAP			Effect of Accounting Rule Requiring Revaluation*			GAAP			Effect of Accounting Rule Requiring Revaluation*			GAAP			Effect of Accounting Rule Requiring Revaluation*
Fixed maturities (millions)	$	11,888			964		$	10,543		$	107		$	9,104		$	(456	)
Deferred acquisition costs (millions)		2,917			(33	)		2,870			(4	)		2,811			28
Total assets (millions)		16,588			931			15,623			103			15,515			(428	)
Short-term debt (millions)		225			0			199			0			233			0
Long-term debt (millions) **		914			0			913			0			920			0
Shareholders’ equity (millions)		3,860			605			3,667			67			3,068			(278	)

Book value per diluted share		37.91			5.95			30.35			0.55			24.60			(2.23	)
Debt to capitalization ***		21.2	%		(2.7	)%		21.7	%		(0.3	)%		25.3	%		1.5	%

Diluted shares outstanding (thousands)		101,808						120,815						124,739
Actual shares outstanding (thousands)		100,579						118,865						124,261

*	Amount added to (deducted from) comprehensive income to produce the stated GAAP item

**	Includes Torchmark’s 7.1% Junior Subordinated Debentures in each period in the amount of $124 million.

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

Previously, the FASB issued guidance which offered an option which, if elected, would permit us to value our interest-bearing policy liabilities and debt at fair value in our Consolidated Balance Sheets. However, unlike current accounting rules which permit us to account for changes in our available-for-sale bond portfolio through other comprehensive income, the new rule requires such changes to be recorded in earnings. Because both the size and duration of the investment portfolio do not match those attributes of our policyholder liabilities and debt, the impact on earnings could be very significant and volatile, causing reported earnings not to be reflective of core results. Therefore, we have not elected this option.

Torchmark’s ratio of earnings before interest and taxes to interest requirements (times interest earned) was 10.7 times in 2011, compared with 11.3 times in 2010 and 9.3 times in 2009. This times-interest-earned ratio is computed by dividing interest expense into the sum of pre-tax income from continuing operations and interest expense. A discussion of our interest expense is included in the discussion of financing costs under the caption Investments in this report.

Financial Strength Ratings.

The financial strength of our major insurance subsidiaries is rated by Standard & Poor’s and A. M. Best. The following chart presents these ratings for our four largest insurance subsidiaries at December 31, 2011.


	Standard & Poor’s		A.M. Best
Liberty		AA-		A+ (Superior)
Globe		AA-		A+ (Superior)
United American		AA-		A+ (Superior)
American Income		AA-		A+ (Superior)

A.M. Best states that it assigns an A+ (Superior) rating to those companies which, in its opinion, have demonstrated superior overall performance when compared to the norms of the life/health insurance industry. A+ (Superior) companies have a superior ability to meet their obligations to policyholders over a long period of time.

The AA financial strength rating category is assigned by Standard & Poor’s Corporation to those insurers which have very strong financial security characteristics, differing only slightly from those rated higher. The minus sign (-) shows the relative standing within the major rating category.

OTHER ITEMS

Litigation. Torchmark and its subsidiaries are subject to being named as parties to pending or threatened litigation, much of which involves punitive damage claims based upon allegations of agent misconduct at the insurance subsidiaries. Such punitive damage claims that are tried in Alabama state courts may have the potential for significant adverse results since punitive damages in Alabama are based upon the compensatory damages (including mental anguish) awarded and the discretion of the jury in awarding compensatory damages is not precisely defined. Additionally, it should be noted that our subsidiaries actively market insurance in the State of Mississippi, a jurisdiction which is nationally recognized for large punitive damage verdicts. This bespeaks caution since it is impossible to predict the likelihood or extent of punitive damages that may be awarded if liability is found in any given case. Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not presently considered by us to be material. For more information concerning litigation, please refer to Note 15—Commitments and Contingencies in the Notes to the Consolidated Financial Statements.

NEW UNADOPTED ACCOUNTING RULES

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES

Future Policy Benefits. Because of the long-term nature of insurance contracts, our insurance companies are liable for policy benefit payments that will be made in the future. The liability for future policy benefits is determined by standard actuarial procedures common to the life insurance industry. The accounting policies for determining this liability are disclosed in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial Statements. A list of the significant assumptions used to calculate the liability for future policy benefits is reported in Note 6—Future Policy Benefit Reserves.

Approximately 81% of our liabilities for future policy benefits at December 31, 2011 were traditional insurance liabilities whereby the liability is determined as the present value of future benefits less the present value of the portion of the gross premium required to pay for such benefits. The assumptions used in estimating the future benefits for this portion of business are set at the time of contract issue. These assumptions are “locked in” and are not revised for the lifetime of the contracts, except where there is a premium deficiency, as defined in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial Statements under the caption Future Policy Benefits. Otherwise, variability in the accrual of policy reserve liabilities after policy issuance is caused only by variability of the inventory of in force policies. Torchmark had no premium deficiency event for its traditional business during the three years ended December 31, 2011.

The remaining portion of liabilities for future policy benefits pertains to business accounted for as deposit business, where the recorded liability is the fund balance attributable to the benefit of policyholders as determined by the policy contract at the financial statement date. Accordingly, there are no assumptions used to determine the future policy benefit liability for deposit business.

Deferred Acquisition Costs. Certain costs of acquiring new business are deferred and recorded as an asset. Deferred acquisition costs eligible for deferral consist primarily of sales commissions and other underwriting costs related to the successful issuance of a new insurance contract, as indicated in Note 1—Significant Accounting Policies under the caption Deferred Acquisition Costs in the Notes to Consolidated Financial Statements. Additionally, our policies for accounting for deferred acquisition costs and the associated amortization are reported under the same caption in Note 1.

Approximately 98% of our recorded amounts for deferred acquisition costs at December 31, 2011 were related to traditional products and are being amortized over the premium-paying period in proportion to the present value of actual historic and estimated future gross premiums. The projection assumptions for this business are set at the time of contract issue. These assumptions are “locked-in” at that time and, except where there is a loss recognition issue, are not revised for the lifetime of the contracts. Absent a premium deficiency, variability in amortization after policy issuance is caused only by variability in premium volume. We have not recorded a deferred acquisition cost loss recognition event for assets related to this business for any period in the three years ended December 31, 2011.

The remaining 2% of deferred acquisition costs pertain to deposit business for which deferred acquisition costs are amortized over the estimated lives of the contracts in proportion to actual and estimated future gross profits. These contracts are not subject to lock-in. The assumptions must be updated when actual experience or other evidence suggests that earlier estimates should be revised. As noted earlier in this report, our variable annuity block was disposed of as of December 31, 2010. Revisions related to our deposit business assets have not had a material impact on the amortization of deferred acquisition costs during the three years ended December 31, 2011.

Policy Claims and Other Benefits Payable. This liability consists of known benefits currently payable and an estimate of claims that have been incurred but not yet reported to us. The estimate of unreported claims is based on prior experience and is made after careful evaluation of all information available to us. However, the factors upon which these estimates are based can be subject to change from historical patterns. Factors involved include the litigation environment, regulatory mandates, and the introduction of policy types for which claim patterns are not well established, and medical trend rates and medical cost inflation as they affect our health claims. Changes in these estimates, if any, are reflected in the earnings of the period in which the adjustment is made. We believe that the estimates used to produce the liability

for claims and other benefits, including the estimate of unsubmitted claims, are the most appropriate under the circumstances. However, there is no certainty that the resulting stated liability will be our ultimate obligation. At this time, we do not expect any change in this estimate to have a material impact on earnings or financial position consistent with our historical experience.

Valuation of Fixed Maturities. We hold a substantial investment in high-quality fixed maturities to provide for the funding of our future policy contractual obligations over long periods of time. While these securities are generally expected to be held to maturity, they are classified as available for sale and are sold from time to time, primarily to manage risk. We report this portfolio at fair value. Fair value is the price that we would expect to receive upon sale of the asset in an orderly transaction. The fair value of the fixed-maturity portfolio is primarily affected by changes in interest rates in financial markets, having a greater impact on longer-term maturities. Because of the size of our fixed-maturity portfolio, small changes in rates can have a significant effect on the portfolio and the reported financial position of the Company. This impact is disclosed in 100 basis point increments under the caption Market Risk Sensitivity in this report. However, as discussed under the caption Financial Condition in this report, we believe these unrealized fluctuations in value have no meaningful impact on our actual financial condition and, as such, we remove them from consideration when viewing our financial position and financial ratios.

At times, the values of our fixed maturities can also be affected by illiquidity in the financial markets. Illiquidity would contribute to a spread widening, and accordingly unrealized losses, on many securities that we would expect to be fully recoverable. Even though our fixed maturity portfolio is available for sale, we have the ability and intent to hold the securities until maturity as a result of our strong and stable cash flows generated from our insurance products. Considerable information concerning the policies, procedures, classification levels, and other relevant data concerning the valuation of our fixed-maturity investments is presented in Note 4—Investments under the caption Fair Value Measurements.

Impairment of Investments. We continually monitor our investment portfolio for investments that have become impaired in value, where fair value has declined below carrying value. While the values of the investments in our portfolio constantly fluctuate due to market conditions, an other-than-temporary impairment charge is recorded only when a security has experienced a decline in fair market value which is deemed to be other than temporary. The policies and procedures that we use to evaluate and account for impairments of investments are disclosed in Note 1—Significant Accounting Policies and Note 4—Investments in the Notes to Consolidated Financial Statements and the discussions under the captions Investments and Realized Gains and Losses in this report. While every effort is made to make the best estimate of status and value with the information available regarding an other-than-temporary impairment, it is difficult to predict the future prospects of a distressed or impaired security.

Defined benefit pension plans. We maintain funded defined benefit plans covering most full-time employees. We also have unfunded nonqualified defined benefit plans covering certain key and other employees. Our obligations under these plans are determined actuarially based on specified actuarial assumptions. In accordance with GAAP, an expense is recorded each year as these pension obligations grow due to the increase in the service period of employees and the interest cost associated with the passage of time. These obligations are offset, at least in part, by the growth in value of the assets in the funded plans. At December 31, 2011, our gross liability under these funded plans was $282 million, but was offset by assets of $258 million.

The actuarial assumptions used in determining our obligations for pensions include employee mortality and turnover, retirement age, the expected return on plan assets, projected salary increases, and the discount rate at which future obligations could be settled. These assumptions have an important effect on the pension obligation. A decrease in the discount rate or rate of return on plan assets will cause an increase in the pension obligation. A decrease in projected salary increases will cause a decrease in this obligation. Small changes in assumptions may cause material differences in reported results for these plans. While we have used our best efforts to determine the most reliable assumptions, given the information available from company experience, economic data, independent consultants and other sources, we cannot be certain that actual results will be the same as expected. Our discount rate, rate of return on assets, and projected salary increase assumptions are disclosed and the criteria used to determine those assumptions are discussed in Note 9—Postretirement Benefits in the Notes to Consolidated Financial Statements. The assumptions are reviewed annually and revised, if necessary,

based on more current information available to us. Note 9 also contains information about pension plan assets, investment policies, and other related data.

CAUTIONARY STATEMENTS

We caution readers regarding certain forward-looking statements contained in the foregoing discussion and elsewhere in this document, and in any other statements made by us or on our behalf 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 us or our business, whether express or implied, is meant as and should be considered a forward-looking statement. Such statements represent our opinions concerning future operations, strategies, financial results or other developments.

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 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) Changes in lapse rates and/or sales of our insurance policies as well as levels of mortality, morbidity and utilization of healthcare services that differ from our assumptions;

2) Federal and state legislative and regulatory developments, 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 (HMOs) 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 that we own, or that may impair issuers’ ability to pay interest due us 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 our estimates and judgments which may differ from the actual amounts ultimately realized.

Readers are also directed to consider other risks and uncertainties described in our other documents on file with the Securities and Exchange Commission.

Item 8. Financial Statements and Supplementary Data


	Page
Report of Independent Registered Public Accounting Firm		56
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2011 and 2010		57
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2011		58
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2011		59
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2011		60
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2011		61
Notes to Consolidated Financial Statements		62

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Torchmark Corporation

McKinney, Texas

We have audited the accompanying consolidated balance sheets of Torchmark Corporation and subsidiaries (Torchmark) as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of Torchmark’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Torchmark Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the accompanying consolidated financial statements have been retrospectively adjusted for the Company’s adoption of guidance relating to a change in accounting for costs associated with acquiring or renewing insurance contracts.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Torchmark’s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2012 expressed an unqualified opinion on Torchmark’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Dallas, Texas

February 28, 2012

(June 29, 2012, as to the effects of the retrospective application of accounting guidance adopted on January 1, 2012 relating to the accounting for costs associated with acquiring or renewing insurance contracts as discussed in Note 1)

TORCHMARK CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands except per share data)


	December 31,
	2011			2010
Assets:
Investments:
Fixed maturities—available for sale, at fair value (amortized cost: 2011—$10,924,244; 2010—$10,435,497)	$	11,888,205		$	10,543,034
Equity securities, at fair value (cost: 2011—$14,875; 2010—$14,875)		17,056			17,154
Policy loans		400,914			378,124
Other long-term investments		26,167			42,985
Short-term investments		21,244			216,680

Total investments		12,353,586			11,197,977

Cash		84,113			365,679
Accrued investment income		192,325			183,861
Other receivables		253,549			230,319
Deferred acquisition costs		2,916,732			2,869,546
Goodwill		396,891			396,891
Other assets		391,076			378,700

Total assets	$	16,588,272		$	15,622,973


Liabilities:
Future policy benefits	$	9,572,257		$	9,150,031
Unearned and advance premiums		69,539			74,165
Policy claims and other benefits payable		222,254			221,598
Other policyholders’ funds		92,487			91,293

Total policy liabilities		9,956,537			9,537,087

Current and deferred income taxes payable		1,319,853			1,021,556
Other liabilities		312,417			284,062
Short-term debt		224,842			198,875
Long-term debt (estimated fair value: 2011—$947,142; 2010—$933,336)		790,571			789,643
Due to affiliates		124,421			124,421

Total liabilities		12,728,641			11,955,644

Shareholders’ equity:
Preferred stock, par value $1 per share—Authorized 5,000,000 shares; outstanding: 0 in 2011 and in 2010		0			0
Common stock, par value $1 per share—Authorized 320,000,000 shares; outstanding: (2011—112,312,123 issued, less 11,732,658 held in treasury and 2010—119,812,123 issued, less 947,497 held in treasury)*		112,312			119,812
Additional paid-in capital		425,331			432,608
Accumulated other comprehensive income (loss)		549,916			23,092
Retained earnings*		3,264,711			3,124,436
Treasury stock		(492,639	)		(32,619	)

Total shareholders’ equity		3,859,631			3,667,329

Total liabilities and shareholders’ equity	$	16,588,272		$	15,622,973

Amounts have been retroactively adjusted for stock split described in Note 1.

See accompanying Notes to Consolidated Financial Statements.

TORCHMARK CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands except per share data)


	Year Ended December 31,
	2011			2010			2009
Revenue:
Life premium	$	1,726,244		$	1,663,699		$	1,591,853
Health premium		929,466			987,421			1,017,711
Other premium		608			638			541

Total premium		2,656,318			2,651,758			2,610,105

Net investment income		693,028			676,364			632,540
Realized investment gains (losses)		25,924			42,190			13,879
Other-than-temporary impairments		(20	)		(4,850	)		(164,137	)
Portion of impairment loss recognized in other comprehensive income		0			0			20,766
Other income		2,151			2,170			1,920

Total revenue		3,377,401			3,367,632			3,115,073

Benefits and expenses:
Life policyholder benefits		1,118,909			1,082,423			1,040,248
Health policyholder benefits		631,820			669,191			677,319
Other policyholder benefits		42,547			41,430			35,762

Total policyholder benefits		1,793,276			1,793,044			1,753,329

Amortization of deferred acquisition costs		364,583			362,390			355,986
Commissions, premium taxes, and non-deferred acquisition expenses		216,216			209,827			222,126
Other operating expense		201,636			176,272			170,130
Interest expense		77,908			75,529			69,932

Total benefits and expenses		2,653,619			2,617,062			2,571,503

Income from continuing operations before income taxes		723,782			750,570			543,570

Income taxes		(226,166	)		(246,475	)		(179,297	)


Income from continuing operations		497,616			504,095			364,273

Discontinued operations:
Income from discontinued operations, net of tax		0			29,784			18,901
Loss on disposal, net of tax benefit of $467 in 2011 and $2,868 in 2010		(455	)		(35,013	)		0

Income (loss) from discontinued operations		(455	)		(5,229	)		18,901

Net income	$	497,161		$	498,866		$	383,174


Basic net income per share*:
Continuing operations	$	4.60		$	4.13		$	2.93
Discontinued operations		(0.01	)		(0.04	)		0.15

Total basic net income per share	$	4.59		$	4.09		$	3.08


Diluted net income per share*:
Continuing operations	$	4.53		$	4.09		$	2.93
Discontinued operations		0.00			(0.04	)		0.15

Total diluted net income per share	$	4.53		$	4.05		$	3.08


Dividends declared per common share*	$	.46		$	.41		$	.38

Per share amounts have been retroactively adjusted for stock split described in Note 1.

See accompanying Notes to Consolidated Financial Statements.

TORCHMARK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)


	Year Ended December 31,
	2011			2010			2009
Net income	$	497,161		$	498,866		$	383,174

Other comprehensive income (loss):
Unrealized investment gains (losses):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period		882,467			615,503			1,223,157
Reclassification adjustment for (gains) losses on securities included in net income		(27,771	)		(38,170	)		161,323
Reclassification adjustment for other-than-temporarily impaired debt securities for which a portion of the loss was recognized in earnings		0			0			(20,766	)
Reclassification adjustment for amortization of (discount) premium		(1,880	)		(3,820	)		(6,183	)
Foreign exchange adjustment on securities marked to market		3,510			(7,735	)		(18,199	)

Unrealized gains (losses) on securities		856,326			565,778			1,339,332

Unrealized gains (losses), adjustment to deferred acquisition costs		(28,292	)		(31,975	)		(79,603	)
Unrealized gains (losses) on other assets		366			0			0

Total unrealized investment gains (losses)		828,400			533,803			1,259,729

Less applicable taxes		(289,941	)		(186,832	)		(440,905	)

Unrealized gains (losses), net of tax		538,459			346,971			818,824

Foreign exchange translation adjustments, other than securities		(3,261	)		5,006			21,833
Less applicable taxes		699			(1,752	)		(7,642	)

Foreign exchange translation adjustments, other than securities, net of tax		(2,562	)		3,254			14,191

Pension adjustments:
Amortization of pension costs		12,146			10,857			11,219
Experience gain (loss)		(26,106	)		(23,086	)		16,811

Pension adjustments		(13,960	)		(12,229	)		28,030

Less applicable taxes		4,887			4,279			(9,811	)

Pension adjustments, net of tax		(9,073	)		(7,950	)		18,219


Other comprehensive income (loss)		526,824			342,275			851,234


Comprehensive income (loss)	$	1,023,985		$	841,141		$	1,234,408

See accompanying Notes to Consolidated Financial Statements.

TORCHMARK CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Amounts in thousands except per share data)


	Preferred Stock		Common Stock*			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings*			Treasury Stock			Total Shareholders’ Equity

Year Ended December 31, 2009
Balance at January 1, 2009	$	0	$	128,812		$	446,065		$	(1,170,417	)	$	2,576,944		$	(67,566	)	$	1,913,838
Comprehensive income (loss)										851,234			383,174						1,234,408
Common dividends declared ($0.38 a share)													(47,182	)					(47,182	)
Acquisition of treasury stock																(47,564	)		(47,564	)
Stock-based compensation							5,419									4,441			9,860
Exercise of stock options							253						(435	)		4,865			4,683
Retirement of treasury stock				(3,000	)		(10,376	)					(56,382	)		69,758			0

Balance at December 31, 2009		0		125,812			441,361			(319,183	)		2,856,119			(36,066	)		3,068,043

Year Ended December 31, 2010
Comprehensive income (loss)										342,275			498,866						841,141
Common dividends declared ($.41 a share)													(49,015	)					(49,015	)
Acquisition of treasury stock																(246,006	)		(246,006	)
Stock-based compensation							8,393									3,451			11,844
Exercise of stock options							4,205						(2,329	)		39,446			41,322
Retirement of treasury stock				(6,000	)		(21,351	)					(179,205	)		206,556			0

Balance at December 31, 2010		0		119,812			432,608			23,092			3,124,436			(32,619	)		3,667,329

Year Ended December 31, 2011
Comprehensive income (loss)										526,824			497,161						1,023,985
Common dividends declared ($.46 a share)													(49,815	)					(49,815	)
Acquisition of treasury stock																(972,556	)		(972,556	)
Stock-based compensation							7,631									7,323			14,954
Exercise of stock options							13,121						(29,328	)		191,941			175,734
Retirement of treasury stock				(7,500	)		(28,029	)					(277,743	)		313,272			0

Balance at December 31, 2011	$	0	$	112,312		$	425,331		$	549,916		$	3,264,711		$	(492,639	)	$	3,859,631

Amounts have been retroactively adjusted for stock split described in Note 1.

See accompanying Notes to Consolidated Financial Statements.

TORCHMARK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)


	Year Ended December 31,
	2011			2010			2009
Net income	$	497,161		$	498,866		$	383,174
Adjustments to reconcile net income to cash provided from operations:
Increase in future policy benefits		431,362			544,086			533,466
Increase (decrease) in other policy benefits		(2,776	)		1,110			(18,172	)
Deferral of policy acquisition costs		(441,825	)		(442,294	)		(466,614	)
Amortization of deferred policy acquisition costs		364,583			376,988			369,253
Change in current and deferred income taxes		30,899			68,326			96,325
Realized (gains) losses on sale of investments and properties		(25,904	)		(40,190	)		141,659
Change in other receivables		(22,565	)		(24,716	)		(43,471	)
Contributions to benefit plans		(15,453	)		(34,755	)		(14,000	)
Loss on disposal of subsidiary		455			35,013			0
Other, net		43,527			46,159			(5,507	)

Cash provided from operations		859,464			1,028,593			976,113

Cash used for investment activities:
Investments sold or matured:
Fixed maturities available for sale—sold		224,335			325,950			900,417
Fixed maturities available for sale—matured, called, and repaid		410,356			638,860			760,858
Equity securities		28,700			0			1,138
Other long-term investments		18,937			5,767			7,167

Total investments sold or matured		682,328			970,577			1,669,580
Acquisition of investments:
Fixed maturities—available for sale		(1,104,231	)		(1,908,109	)		(2,311,455	)
Equity securities		(28,772	)		0			0
Other long-term investments		(6,246	)		(905	)		(43	)

Total investments acquired		(1,139,249	)		(1,909,014	)		(2,311,498	)
Net increase in policy loans		(22,790	)		(27,793	)		(23,652	)
Net (increase) decrease in short-term investments		195,435			128,727			(226,645	)
Net change in payable or receivable for securities		2,664			(754	)		(13,829	)
Additions to properties		(5,386	)		(9,181	)		(6,499	)
Sales of properties		3,089			77			0
Investments in low-income housing interests		(49,812	)		(53,170	)		(24,556	)
Proceeds from sale of subsidiary		21,588			342,890			0

Cash used for investment activities		(312,133	)		(557,641	)		(937,099	)

Cash provided from (used for) financing activities:
Issuance of common stock		162,613			37,863			4,430
Cash dividends paid to shareholders		(49,125	)		(50,061	)		(46,615	)
Issuance of 9¹/₄% Senior Notes		0			0			296,308
Acquisition of 9¹/₄% Senior Notes		0			(8,913	)		0
Repayment of 8¹/₄% Senior Debentures		0			0			(99,451	)
Net borrowing (repayment) of commercial paper		25,967			(34,432	)		(70,928	)
Excess tax benefit from stock option exercises		13,121			3,455			253
Acquisition of treasury stock		(972,556	)		(246,006	)		(47,564	)
Net receipts (payments) from deposit product operations		(4,505	)		(31,527	)		112,005

Cash provided from (used for) financing activities		(824,485	)		(329,621	)		148,438

Effect of foreign exchange rate changes on cash		(4,412	)		(7,570	)		(1,934	)


Increase (decrease) in cash		(281,566	)		133,761			185,518
Cash at beginning of year (includes cash of $0, $847 thousand and $12.3 million, at January 1, 2011, 2010 and 2009, respectively, in subsidiary held for sale)		365,679			231,918			46,400

Cash at end of year (includes cash of $0, $0, and $847 thousand at December 31, 2011, 2010, and 2009, respectively, in subsidiary held for sale)	$	84,113		$	365,679		$	231,918

See accompanying Notes to Consolidated Financial Statements.

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands except per share data)

Note 1—Significant Accounting Policies

Business: Torchmark Corporation (Torchmark or alternatively, the Company) through its subsidiaries provides a variety of life and health insurance products and annuities to a broad base of customers.

Basis of Presentation: The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP), under guidance issued by the Financial Accounting Standards Board (FASB). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation: The consolidated financial statements include the results of Torchmark and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Torchmark accounts for its variable interest entities under accounting guidance which clarifies the definition of a variable interest and the instructions for consolidating variable interest entities (VIE’s). Only primary beneficiaries are required or allowed to consolidate VIE’s. Therefore, a company may have voting control of a VIE, but if it is not the primary beneficiary of the VIE, it is not permitted to consolidate the VIE. The trust that is liable for Torchmark’s Trust Preferred Securities meets the definition of a VIE. However, Torchmark is not the primary beneficiary of this entity because its interest is not variable. Therefore, Torchmark is not permitted to consolidate its interest, even though it owns 100% of the voting equity of the trust and guarantees its performance. For this reason, Torchmark reports its 7.1% Junior Subordinated Debentures due to the trust as “Due to affiliates” each period at its carrying value. However, Torchmark views the Trust Preferred Securities as it does any other debt offering and consolidates the trust in its segment analysis because GAAP requires that the segment analysis be reported as management views its operations and financial condition.

Additionally, as further described under the caption Low-Income Housing Tax Credit Interests below in this note, Torchmark holds passive interests in limited partnerships which provide investment returns through the provision of tax benefits (principally from the transfer of Federal or state tax credits related to federal low-income housing). These interests are also considered to be VIEs. They are not consolidated because the Company has no power to control the activities that most significantly affect the economic performance of these entities and therefore the Company is not the primary beneficiary of any of these interests. Torchmark’s involvement is limited to its limited partnership interest in the entities. Torchmark has not provided any other financial support to the entities beyond its commitments to fund its limited partnership interests, and there are no arrangements or agreements with any of the interests to provide other financial support. The maximum loss exposure relative to these interests is limited to their carrying value.

When a component of Torchmark’s business is sold or expected to be sold during the ensuing year, Torchmark reports the assets and liabilities of the component as assets and liabilities of subsidiaries held for sale. Assets or liabilities of subsidiaries held for sale are segregated and are recorded in the Consolidated Balance Sheets at the lower of the carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Torchmark reports the results of operations of a business as discontinued operations when the component is sold or expected to be sold, the operations and cash flows of the business have been or will be eliminated from the ongoing operations as a result of the disposal transaction, and Torchmark will not have any significant continuing involvement in the operations of the business after the disposal transaction. The results of discontinued operations are reported in discontinued operations in the Consolidated Statements of Operations for current and prior periods commencing in the period in which the business is either disposed of or is accounted for as a disposal group, including any gain or loss recognized on the sale or adjustment of the carrying amount to fair value less cost to sell. Major components of the income from

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 1—Significant Accounting Policies (continued)

discontinued operations are separately disclosed in Note 3 — Discontinued Operations in the Notes to the Consolidated Financial Statements. Because the business has been sold or classified as held for sale and its operations are discontinued, the financial results of the business are excluded from the Notes to the Consolidated Financial Statements, other than in Note 3, the Consolidated Statements of Cash Flows, and Note 2 — Statutory Accounting.

Investments: Torchmark classifies all of its fixed-maturity investments, which include bonds and redeemable preferred stocks, as available for sale. Investments classified as available for sale are carried at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated other comprehensive income. Investments in equity securities, which include common and nonredeemable preferred stocks, are reported at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated other comprehensive income. Policy loans are carried at unpaid principal balances. Mortgage loans, included in “Other long-term investments,” are carried at amortized cost. Investments in real estate, included in “Other long-term investments,” are reported at cost less allowances for depreciation. Depreciation is calculated on the straight-line method. Short-term investments include investments in interest-bearing time deposits with original maturities of twelve months or less.

Gains and losses realized on the disposition of investments are determined on a specific identification basis. Income attributable to investments is included in Torchmark’s net investment income. Net investment income for the years ended December 31, 2011, 2010, and 2009 included $552 million, $522 million, and $487 million, respectively, which was allocable to policyholder reserves or accounts. Realized investment gains and losses are not allocated to insurance policyholders’ liabilities.

Fair Value Measurements: Fair values for cash, short-term investments, short-term debt, receivables and payables approximate carrying value. Fair values for long-term debt investments, equity securities, and certain other assets are determined in accordance with specific accounting guidance. Fair values are based on quoted market prices, where available. Otherwise, fair values are based on quoted market prices of comparable instruments in active markets, quotes in inactive markets, or other observable criteria. For specific information regarding Torchmark’s measurements and procedures in valuing financial instruments, please see Note 4—Investments under the caption Fair value measurements. The fair values of Torchmark’s long-term debt issues, along with the trust preferred securities, are based on quoted market prices. Mortgage loans are valued at discounted cash flows.

Impairment of Investments: Torchmark evaluates securities for other-than-temporary impairment as described in Note 4—Investments under the caption Other-than-temporary-impairments. If a security is determined to be other-than-temporarily impaired, the cost basis of the security is written down to fair value and is treated as a realized loss. The written-down security will be amortized and revenue recognized in accordance with estimated future cash flows.

Current accounting guidance is such that if an entity intends to sell or if it is more likely than not that it will be required to sell an impaired security prior to recovery of its cost basis, the security is to be considered other-than-temporarily impaired and the full amount of impairment must be charged to earnings. Otherwise, losses on fixed maturities which are other-than-temporarily impaired are separated into two categories, the portion of loss which is considered credit loss and the portion of loss which is due to other factors. The credit loss portion is charged to earnings while the loss due to other factors is charged to other comprehensive income.

Cash: Cash consists of balances on hand and on deposit in banks and financial institutions. Overdrafts arising from the overnight investment of funds offset cash balances on hand and on deposit.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 1—Significant Accounting Policies (continued)

Recognition of Premium Revenue and Related Expenses: Premium income for traditional long-duration life and health insurance products is recognized when due from the policyholder. Premiums for short-duration health contracts are recognized as revenue over the contract period in proportion to the insurance protection provided. Profits for limited-payment life insurance contracts are recognized over the contract period. Premiums for universal life-type and annuity contracts are added to the policy account value, and revenues for such products are recognized as charges to the policy account value for mortality, administration, and surrenders (retrospective deposit method). Life premium includes policy charges of $24 million, $26 million, and $28 million for the years ended December 31, 2011, 2010, and 2009, respectively. Other premium consists of annuity policy charges in each year. Profits are also earned to the extent that investment income exceeds policy liability interest requirements. The related benefits and expenses are matched with revenues by means of the provision of future policy benefits and the amortization of deferred acquisition costs in a manner which recognizes profits as they are earned over the same period.

Future Policy Benefits: The liability for future policy benefits for universal life-type products is represented by policy account value. The liability for future policy benefits for all other life and health products, approximately 81% of total future policy benefits, is provided on the net level premium method based on estimated investment yields, mortality, morbidity, persistency and other assumptions which were considered appropriate at the time the policies were issued. Assumptions used are based on Torchmark’s previous experience with similar products. Once established, assumptions for these products are generally not changed. An additional provision is made on most products to allow for possible adverse deviation from the assumptions. These estimates are periodically reviewed and compared with actual experience. If it is determined that existing contract liabilities, together with the present value of future gross premiums, will not be sufficient to cover the present value of future benefits and to recover unamortized acquisition costs, then a premium deficiency exists. Such a deficiency would be recognized immediately by a charge to earnings and either a reduction of unamortized acquisition costs or an increase in the liability for future policy benefits. From that point forward, the liability for future policy benefits would be based on the revised assumptions.

Deferred Acquisition Costs: Certain costs of acquiring new insurance business are deferred and recorded as an asset. These costs are essential to the acquisition of new insurance business and are directly related to the successful issuance of an insurance contract including sales commissions, policy issue costs, and underwriting costs for policies that are successfully issued. Deferred acquisition costs are amortized in a systematic manner which matches these costs with the associated revenues. The method of amortization has not changed due to the adoption of the new guidance described under the caption Adoption of New Accounting Standard following in this Note. Policies other than universal life-type policies are amortized with interest over the estimated premium-paying period of the policies in a manner which charges each year’s operations in proportion to the receipt of premium income. Limited-payment contracts are amortized over the contract period. Universal life-type policies are amortized with interest in proportion to estimated gross profits. The assumptions used to amortize acquisition costs with regard to interest, mortality, morbidity, and persistency are consistent with those used to estimate the liability for future policy benefits. For interest-sensitive and deposit-balance type products, these assumptions are reviewed on a regular basis and are revised if actual experience differs significantly from original expectations. For all other products, amortization assumptions are generally not revised once established. Deferred acquisition costs are subject to periodic recoverability and loss recognition testing to determine if there is a premium deficiency. These tests ensure that the present value of future contract-related cash flows will support the capitalized deferred acquisition cost asset. These cash flows consist primarily of premium income, less benefits and expenses taking inflation into account. The present value of these cash flows, less the benefit reserve, is then compared with the unamortized deferred acquisition cost balance. In the event the estimated present value of net cash flows is less, the deficiency would be recognized by a charge to earnings and either a reduction of unamortized acquisition costs or an increase in the liability for future benefits, as described under the caption Future Policy Benefits.

Advertising Costs: Costs related to advertising are generally charged to expense as incurred. However, certain direct response advertising costs are capitalized when there is a reliable and demonstrated relationship between total costs and future benefits that is a direct result of incurring these costs. Torchmark’s Direct Response advertising costs consist primarily of the production and distribution costs of direct mail advertising materials, and when capitalized are included as a component of deferred acquisition costs. They are amortized in the same manner as other deferred acquisition costs. Direct response advertising costs charged to earnings and included in other operating expense were $16 million, $12 million, and $10 million in 2011, 2010, and 2009, respectively. Capitalized advertising costs were $1.0 billion at December 31, 2011 and $972 million at December 31, 2010.

The adoption of the new accounting guidance described below changed the method by which Torchmark reports direct response advertising costs. Prior to the adoption, the Company capitalized all such advertising costs as permitted under previous guidance.

Adoption of New Accounting Standard: Torchmark has adopted the new accounting guidance under Accounting Standard Update 2010-26 (ASU 2010-26), issued by the FASB concerning policy acquisition costs. While the guidance was not effective until January 1, 2012, the Company elected to retrospectively adopt the new guidance as permitted by ASU 2010-26. Retrospective adoption means that the deferred acquisition cost asset has been adjusted to a level as if the new guidance had been in effect in prior periods presented, with an adjustment to the opening balance of retained earnings for the cumulative effect of the change in accounting guidance. This new guidance amends the previous accounting for costs associated with acquiring or renewing insurance contracts in order to address the diversity in practice surrounding the capitalization and deferral of these costs. As a result of this new standard, certain costs that were previously capitalized (deferred) and amortized as deferred acquisition costs are no longer allowed to be deferred and are expensed as incurred. The new guidance limits the deferral of costs to those direct incremental costs related to the successful issuance of an insurance contract, and includes primarily sales commissions, policy issue, and underwriting costs for policies that are successfully issued. Previously, the Company was allowed to defer any cost that varied with and related to the production of new business. For Torchmark, the costs that are no longer deferrable primarily relate to agent distribution systems, and include such costs as training, recruiting, office space, and certain management and underwriting expenses.

The limitations on acquisition cost deferrals resulting from the retrospective adoption have resulted in an increase in commissions and expenses from those previously reported. However, as a result of the retrospective writedown of the deferred acquisition cost asset, the amortization of previously deferred costs decreased, partially offsetting the impact of the increased expenses. The cumulative effect of the retrospective adoption of the standard resulted in a decrease in shareholders’ equity of $309 million as of January 1, 2009. A summary of the impact on previously reported financial statement balances due to the adoption is as follows:


	For the years ended December 31,
	2011				2010				2009
	Previously Reported		As Adjusted		Previously Reported		As Adjusted		Previously Reported		As Adjusted
Amortization of deferred acquisition costs	$	424,781	$	364,583	$	418,890	$	362,390	$	415,986	$	355,986
Commissions, premium taxes, and non-deferred acquisition expenses*		124,134		216,216		125,330		209,827		128,620		222,126
Income taxes		237,326		226,166		256,274		246,475		191,024		179,297
Income from continuing operations		518,340		497,616		522,293		504,095		386,052		364,273
Net income		517,885		497,161		517,064		498,866		404,953		383,174
Basic net income per share:
Continuing operations	$	4.79	$	4.60	$	4.28	$	4.13	$	3.10	$	2.93
Net income		4.78		4.59		4.24		4.09		3.25		3.08
Diluted net income per share:
Continuing operations		4.72		4.53		4.24		4.09		3.10		2.93
Net income		4.72		4.53		4.20		4.05		3.25		3.08


	As of December 31,
	2011				2010
	Previously Reported		As Adjusted		Previously Reported		As Adjusted
Deferred acquisition costs	$	3,484,851	$	2,916,732	$	3,406,335	$	2,869,546
Current and deferred income taxes payable		1,518,695		1,319,853		1,209,433		1,021,556
Accumulated other comprehensive income		549,423		549,916		22,958		23,092
Retained earnings		3,634,481		3,264,711		3,473,482		3,124,436
Shareholders’ equity		4,228,908		3,859,631		4,016,241		3,667,329

Adoption resulted in the addition of non-deferred acquisition expenses of $92 million, $84 million, and $94 million in 2011, 2010, and 2009, respectively.

The adoption of this guidance causes a delay in the recognition of underwriting profit on newly issued business, but not the ultimate profitability of that business. The adoption had no impact on Torchmark’s cash flows, liquidity, or the statutory earnings of its insurance subsidiaries.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 1—Significant Accounting Policies (continued)

Policy Claims and Other Benefits Payable: Torchmark establishes a liability for known policy benefits payable and an estimate of claims that have been incurred but not yet reported to the Company. The estimate of unreported claims is based on prior experience. Torchmark makes an estimate after careful evaluation of all information available to the Company. However, there is no certainty the stated liability for claims and other benefits, including the estimate of unsubmitted claims, will be Torchmark’s ultimate obligation.

Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement book values and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. More information concerning income taxes is provided in Note 8—Income Taxes.

Property and Equipment: Property and equipment, included in “Other assets,” is reported at cost less allowances for depreciation. Depreciation is recorded primarily on the straight line method over the estimated useful lives of these assets which range from two to ten years for equipment and five to forty years for buildings and improvements. Ordinary maintenance and repairs are charged to income as incurred. Impairments, if any, are recorded when, based on events and circumstances, it becomes evident that the fair value of the asset is less than its carrying amount. Original cost of property and equipment was $119 million at both December 31, 2011 and 2010. Accumulated depreciation was $71 million at year end 2011 and $65 million at the end of 2010. Depreciation expense was $6.8 million in 2011, $6.0 million in 2010, and $4.6 million in 2009.

Asset Retirements: Certain of Torchmark’s subsidiaries own and occupy buildings containing asbestos. These facilities are subject to regulations which could cause the Company to be required to remove and dispose of all or part of the asbestos upon the occurrence of certain events. Otherwise, the subsidiaries are under no obligation under the regulations. At this time, no such events under these regulations have occurred. For this reason, the Company has not recorded a liability for this potential obligation, as the time at which any obligation could be settled is not known. Therefore, there is insufficient information to estimate a fair value.

Low-Income Housing Tax Credit Interests: As of December 31, 2011, Torchmark had $293 million invested in limited partnerships that provide low-income housing tax credits and other related Federal income tax and state premium tax benefits to Torchmark. The carrying value of Torchmark’s investment in these entities was $283 million at December 31, 2010. As of December 31, 2011, Torchmark was obligated under future commitments of $109 million, which amount is included in the above carrying value. Interests for which the return has been guaranteed by unrelated third-parties are accounted for using the effective-yield method. The remaining interests are accounted for using the amortized-cost method.

For 2011 and 2010, the Federal income benefits accrued during the year, net of the amortization associated with guaranteed interests, were recorded in “Income taxes.” Amortization associated with non-guaranteed interests and interests providing for state premium tax benefits was reflected as a component of “Net investment income.” For years prior to 2010, the Federal income tax benefits accrued during the year, net of the amortization associated with all interests, were recorded in “Income taxes.” All state premium tax benefits, net of the related amortization, were recorded in “Net investment income.” At December 31, 2011, $281 million associated with the Federal interests was included in “Other assets” with the remaining $12 million state-related interests included in “Other invested assets.” At December 31, 2010, the comparable amounts were $269 million and $14 million, respectively. Any unpaid commitments to invest are recorded in “Other liabilities.” In the segment analysis, the amortization associated with the non-guaranteed interests is reflected as a component of “Income tax expenses,” and not “Net investment income,” consistent with the treatment of the guaranteed interests. Management views this presentation as a more accurate matching of costs with the associated revenues with respect to the low-income housing interests.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 1—Significant Accounting Policies (continued)

Goodwill: The excess cost of business acquired over the fair value of their net assets is reported as goodwill. Goodwill is subject to annual impairment testing based on certain procedures outlined by GAAP. The procedures involve measuring the carrying value of each reporting unit of Torchmark’s segments, including the goodwill of that unit, against the estimated fair value of the corresponding unit. If the carrying value of a unit including goodwill exceeds its estimated fair value, then the goodwill in that unit could potentially be impaired. In that event, further testing is required under the accounting guidance to determine the amount of impairment, if any. If there is an impairment in the goodwill of any reporting unit, it is written down and charged to earnings in the period of test.

Torchmark has tested its goodwill annually in each of the years 2009 through 2011. These tests involved assigning carrying value by allocating the Company’s net assets to each of the reporting units of Torchmark’s segments, including the portion of goodwill assigned to the unit. The fair value of each reporting unit is determined using discounted expected cash flows associated with that unit. Judgment and assumptions are used in developing the projected cash flows for the reporting units, and such estimates are subject to change. The Company also exercises judgment in the determination of the discount rate, which management believes to be appropriate for the risk associated with the cash flow expectations. The fair value of each reporting unit is then measured against that reporting unit’s corresponding carrying value. Because the estimated fair value exceeded the carrying value, including goodwill, of each reporting unit in each period, Torchmark’s goodwill was not impaired in any of those periods.

Treasury Stock: Torchmark accounts for purchases of treasury stock on the cost method. Issuance of treasury stock is accounted for using the weighted-average cost method.

Settlements: During 2011, Torchmark settled a state administrative matter involving issues arising over a period of many years. The settlement resulted in a pre-tax charge of $6.9 million ($4.5 million after tax). Additionally in 2011, the Company accrued an estimated liability for settlement of an insurance litigation matter expected to settle in 2012. The liability for this litigation, which arose many years ago, was estimated to be $12.0 million pretax ($7.8 million after tax). Please refer to Note 15—Commitments and Contingencies in the Notes to Consolidated Financial Statements for a discussion of the litigation settlement. In 2009, Torchmark recorded a $2.9 million tax settlement primarily resulting from the favorable settlements of U.S. Federal income tax issues that related to prior tax years. More information on this tax settlement is provided in Note 8—Income Taxes. Management removes items that are related to prior periods when evaluating the operating results of current periods. Therefore, these items are excluded in its presentation of segment results as disclosed in Note 14—Business Segments, because accounting guidance requires that operating segment results be presented as management views its business.

Postretirement Benefits: Torchmark accounts for its postretirement defined benefit plans by recognizing the funded status of those plans on its Consolidated Balance Sheets in accordance with accounting guidance. Periodic gains and losses attributable to changes in plan assets and liabilities that are not recognized as components of net periodic benefit costs are recognized as components of other comprehensive income, net of tax. More information concerning the accounting and disclosures for postretirement benefits is found in Note 9—Postretirement Benefits.

Stock Compensation: Torchmark accounts for stock-based compensation by recognizing an expense in the financial statements based on the “fair value method.” The fair value method requires that a fair value be assigned to a stock option or other stock grant on its grant date and that this value be amortized over the grantees’ service period.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 1—Significant Accounting Policies (continued)

The fair value method requires the use of an option valuation model to value employee stock options. Torchmark has elected to use the Black-Scholes valuation model for option expensing. A summary of assumptions for options granted in each of the three years 2009 through 2011 is as follows:


	2011			2010			2009
Volatility factor		42.3	%		40.3	%		29.6	%
Dividend yield		1.0	%		1.3	%		2.4	%
Expected term (in years)		4.66			4.74			4.72
Risk-free rate		2.0	%		2.5	%		2.6	%

The expected term is generally derived from Company experience. However, expected terms of grants made under the Torchmark Corporation 2005 Incentive Plan (2005 Plan) and the 2007 Long-Term Compensation Plan (2007 Plan), involving grants made in the years 2005 through 2010, were determined based on the simplified method as permitted by Staff Accounting Bulletins 107 and 110. This method was used because the 2005 and 2007 Plans limited grants to a maximum contract term of seven years, and Torchmark had no previous experience with seven-year contract terms. Prior to 2005, substantially all grants contained ten-year terms. Because a large portion of these grants vest over a three-year period, the Company did not have sufficient exercise history during 2010 or previous years to determine an appropriate expected term on these grants. Beginning in 2011, all grants with seven-year terms are based on Company experience. The Torchmark Corporation 2011 Incentive Plan replaced the previous plans and allows for option grants with a ten-year contractual term which vest over five years in addition to seven-year grants which vest over three years as permitted by the previous plans. The Company has no historical experience with five-year vesting, and will therefore use the simplified method to determine the expected term for these grants until such experience is developed. Volatility and risk-free interest rates are assumed over a period of time consistent with the expected term of the option. Volatility is measured on a historical basis. Monthly data points are utilized to derive volatility for periods greater than three years. Expected dividend yield is based on current dividend yield held constant over the expected term. Once the fair value of an option has been determined, it is amortized on a straight-line basis over the employee’s service period for that grant (from the grant date to the date the grant is fully vested).

Torchmark management views all stock-based compensation expense as a corporate or Parent Company expense and, therefore, presents it as such in its segment analysis (See Note 14—Business Segments). It is included in “Other operating expense” in the Consolidated Statements of Operations.

Stock Split: Torchmark declared a three-for-two stock split paid in the form of a 50% stock dividend on all of the Company’s outstanding common stock. The record date for the split was the close of business on June 1, 2011. On July 1, 2011, the payment date, holders of Torchmark common stock as of the record date received one additional share of stock for every two shares held. The Company paid $123 thousand in cash to acquire 2,841 fractional shares as a result of the split. All share and per share amounts have been adjusted to reflect this split for all periods presented in these consolidated financial statements. “Common stock” and “Retained earnings” presented for all prior periods in the accompanying Consolidated Balance Sheet and Consolidated Statements of Shareholders’ Equity have also been retroactively adjusted to reflect this split.

Earnings Per Share: Torchmark presents basic and diluted earnings per share (EPS) on the face of the Consolidated Statements of Operations. Basic EPS is computed by dividing income available to common shareholders by the weighted average common shares outstanding for the period. Diluted EPS is calculated by adding to shares outstanding the additional net effect of potentially dilutive securities or contracts, such as stock options, which could be exercised or converted into common shares. For more information on earnings per share, see Note 12—Shareholders’ Equity.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 2—Statutory Accounting

Life insurance subsidiaries of Torchmark are required to file statutory financial statements with state insurance regulatory authorities. Accounting principles used to prepare these statutory financial statements differ from GAAP. Consolidated net income and shareholders’ equity (capital and surplus) on a statutory basis for the insurance subsidiaries were as follows:


	Net Income Year Ended December 31,						Shareholders’ Equity At December 31,
	2011		2010		2009		2011		2010
Life insurance subsidiaries	$	424,738	$	499,440	$	274,734	$	1,273,117	$	1,607,811

The excess, if any, of shareholder’s equity of the insurance subsidiaries on a GAAP basis over that determined on a statutory basis is not available for distribution to Torchmark without regulatory approval. More information on the restrictions on the payment of dividends can be found in Note 12—Shareholders’ Equity.

Torchmark’s statutory financial statements are presented on the basis of accounting practices prescribed by the insurance department of the state of domicile of each insurance subsidiary. All states have adopted the National Association of Insurance Commissioners’ (NAIC) statutory accounting practices (NAIC SAP) as the basis for statutory accounting. However, certain states have retained the prescribed practices of their respective insurance code or administrative code which can differ from NAIC SAP. There are no significant differences between NAIC SAP and the accounting practices prescribed by the states of domicile for Torchmark’s life insurance companies that affect statutory surplus.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 3—Discontinued Operations

During the third quarter of 2010, Torchmark’s subsidiary, Liberty, entered into an agreement to sell its wholly-owned subsidiary, United Investors Life Insurance Company (United Investors), to an unaffiliated insurance carrier. The sale was completed as of December 31, 2010. United Investors marketed primarily term and interest-sensitive life insurance, fixed annuities, and, prior to 2009, variable annuities. Consideration for the sale consisted of $343 million in cash at the closing, as well as post-closing proceeds receivable from the buyer of approximately $21 million which was received in early 2011. The transaction resulted in a pretax loss of approximately $38 million ($35 million after tax), which has been reported as a realized loss on the disposal of a discontinued operation in 2010. Due to the sale, Torchmark’s consolidated financial statements are presented to reflect the transactions as discontinued operations.

An analysis of income from discontinued operations is as follows:


	Twelve months ended December 31,
	2010			2009
Premium income	$	73,675		$	77,094
Investment income		43,787			42,375
Realized investment gains (losses)		2,850			(12,167	)
Other income		103			22

Total revenue*		120,415			107,324

Policyholder benefits		56,374			59,470
Amortization of deferred acquisition costs		14,599			13,267
Other expense		4,960			6,470

Total benefits and expense		75,933			79,207


Pre tax income from discontinued operations		44,482			28,117
Income tax		(14,698	)		(9,216	)

Income from discontinued operations	$	29,784		$	18,901

Revenues and profitability in the indicated segment were as follows:


	Twelve Months Ended December 31,
	2010			2009
Revenues:
Life	$	65,726		$	67,917
Annuity		7,949			9,177
Investment		43,787			42,375
Other		103			22

Total*	$	117,565		$	119,491

Segment profitability (loss):
Life	$	22,692		$	19,477
Annuity		(931	)		3,084
Investment		22,490			21,660
Other		(2,619	)		(3,937	)

Total	$	41,632		$	40,284

Segment revenues differ from discontinued revenues by the amount of realized investment gains/losses, which Torchmark excludes from its consideration of ongoing operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 4—Investments

Portfolio Composition:

A summary of fixed maturities available for sale and equity securities by cost or amortized cost and estimated fair value at December 31, 2011 and 2010 is as follows:


	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amount per the Balance Sheet		% of Total Fixed Maturities*

2011:
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	65,283	$	1,756	$	(4	)	$	67,035	$	67,035		1	%
States, municipalities, and political subdivisions		1,213,082		118,636		(1,896	)		1,329,822		1,329,822		11
Foreign governments		21,832		1,327		0			23,159		23,159		0
Corporates		8,357,809		1,051,019		(137,908	)		9,270,920		9,270,920		78
Collateralized debt obligations		60,437		0		(30,117	)		30,320		30,320		0
Other asset-backed securities		42,862		3,210		(1,392	)		44,680		44,680		0
Redeemable preferred stocks		1,162,939		27,184		(67,854	)		1,122,269		1,122,269		10	%

Total fixed maturities		10,924,244		1,203,132		(239,171	)		11,888,205		11,888,205		100	%

Equity securities		14,875		2,244		(63	)		17,056		17,056

Total fixed maturities and equity securities	$	10,939,119	$	1,205,376	$	(239,234	)	$	11,905,261	$	11,905,261

At fair value

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 4—Investments (continued)


	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amount per the Balance Sheet		% of Total Fixed Maturities

2010:
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	78,387	$	1,347	$	(1,060	)	$	78,674	$	78,674		1	%
States, municipalities, and political subdivisions		1,212,185		10,752		(41,811	)		1,181,126		1,181,126		11
Foreign governments		22,352		679		0			23,031		23,031		0
Corporates		7,707,938		423,076		(210,149	)		7,920,865		7,920,865		75
Collateralized debt obligations		56,525		0		(34,069	)		22,456		22,456		0
Other asset-backed securities		46,406		3,010		(678	)		48,738		48,738		1
Redeemable preferred stocks		1,311,704		36,405		(79,965	)		1,268,144		1,268,144		12

Total fixed maturities		10,435,497		475,269		(367,732	)		10,543,034		10,543,034		100	%
Equity securities		14,875		2,348		(69	)		17,154		17,154

Total fixed maturities and equity securities	$	10,450,372	$	477,617	$	(367,801	)	$	10,560,188	$	10,560,188

A schedule of fixed maturities by contractual maturity at December 31, 2011 is shown below on an amortized cost basis and on a fair value basis. Actual maturities could differ from contractual maturities due to call or prepayment provisions.


	Amortized Cost		Fair Value
Fixed maturities available for sale:
Due in one year or less	$	64,222	$	64,895
Due from one to five years		527,836		564,584
Due from five to ten years		669,994		728,784
Due from ten to twenty years		2,439,335		2,649,607
Due after twenty years		7,114,402		7,799,590
Mortgage-backed and asset-backed securities		108,455		80,745

	$	10,924,244	$	11,888,205

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 4—Investments (continued)

Analysis of investment operations:


	Year Ended December 31,
	2011			2010			2009

Net investment income is summarized as follows:
Fixed maturities	$	683,101		$	662,202		$	609,566
Equity securities		1,558			1,183			1,287
Policy loans		29,293			27,248			25,394
Other long-term investments		2,439			3,064			6,482
Short-term investments		165			762			1,296

		716,556			694,459			644,025
Less investment expense		(23,528	)		(18,095	)		(11,485	)

Net investment income	$	693,028		$	676,364		$	632,540

An analysis of realized gains (losses) from investments is as follows:
Realized investment gains (losses):
Fixed maturities:
Sales and other	$	27,790		$	43,022		$	15,638
Writedowns		(20	)		(4,850	)		(143,166	)
Equity securities		0			1			(862	)
Loss on redemption of debt		0			(1,646	)		(1	)
Other		(1,866	)		813			(1,101	)

		25,904			37,340			(129,492	)
Applicable tax		(9,066	)		(13,070	)		44,147

Realized gains (losses) from investments, net of tax	$	16,838		$	24,270		$	(85,345	)

An analysis of the net change in unrealized investment gains (losses) is as follows:
Equity securities	$	(98	)	$	432		$	2,377
Fixed maturities available for sale		856,424			562,921			1,240,781

Net change in unrealized gains (losses) on securities	$	856,326		$	563,353		$	1,243,158

Additional information about securities sold is as follows:


	At December 31,
	2011			2010			2009
Fixed maturities:
Proceeds from sales	$	236,662	**	$	314,904	*	$	830,892	*
Gross realized gains		28,249			29,821			69,249
Gross realized losses		(24,323	)		(13,361	)		(56,499	)

Equities:
Proceeds from sales		0			1			1,138
Gross realized gains		0			1			0
Gross realized losses		0			0			(862	)

Proceeds from sales including discontined assets were $326 million in 2010 and $900 million in 2009.

Includes $12.3 million of unsettled trades

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 4—Investments (continued)

Fair value measurements: Torchmark measures the fair value of its financial assets based on a hierarchy consisting of three levels which indicate the quality of the fair value measurements as described below:

•

Level 1 – fair values are based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.

•

Level 2 – fair values are based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that can otherwise be corroborated by observable market data.

•

Level 3 – fair values are based on inputs that are considered unobservable where there is little, if any, market activity for the asset or liability as of the measurement date. In this circumstance, the Company has to rely on values derived by independent brokers or internally-developed assumptions. Unobservable inputs are developed based on the best information available to the Company which may include the Company’s own data or bid and ask prices in the dealer market.

The great majority of the Company’s fixed maturities are not actively traded and direct quotes are not generally available. Management therefore determines the fair values of these securities after consideration of data provided by third-party pricing services and independent broker/dealers. Over 99% of the fair value reported at December 31, 2011 was determined using data provided by third-party pricing services. Prices provided by third-party pricing services are not binding offers but are estimated exit values. They are based on observable market data inputs which can vary by security type. Such inputs include benchmark yields, available trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market data. As part of the Company’s controls over pricing, management reviews and analyzes all prices obtained to insure the reasonableness of the values, taking all available information into account. One very important control is the corroboration of prices obtained from third-party sources against other independent sources. When corroborated prices produce small variations, the close correlation indicates observable inputs, and the median value is used. When corroborated prices present greater variations, additional analysis is required to determine which value is the most appropriate. When only one price is available, management evaluates observable inputs and performs additional analysis to confirm that the price is appropriate. All fair value measurements based on prices determined with observable market data are reported as Level 1 or Level 2 measurements.

When third-party vendor prices are not available, the Company attempts to obtain at least three quotes from broker/dealers for each security. When at least three quotes are obtained, and the standard deviation of such quotes is less than 3%, (suggesting that the independent quotes were likely derived using similar observable inputs), the Company uses the median quote and classifies the measurement as Level 2. At December 31, 2011 and 2010, there were no assets valued as Level 2 in this manner with broker quotes.

When the standard deviation is 3% or greater, or the Company cannot obtain three quotes, then additional information and management judgment are required to establish the fair value. The measurement is then classified as Level 3. The Company uses information and valuation techniques deemed appropriate for determining the point within the range of reasonable fair value estimates that is most representative of fair value under current market conditions. As of December 31, 2011 and 2010, fair value measurements classified as Level 3 represented 0.4% and 1.0%, respectively, of total fixed maturities and equity securities.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 4—Investments (continued)

The following tables represent the fair value of assets measured on a recurring basis at December 31, 2011 and 2010:



	Fair Value Measurements at December 31, 2011 Using:
Description	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Fixed maturities available for sale:
Bonds:		`
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	0		$	67,035		$	0		$	67,035
States, municipalities, and political subdivisions		0			1,329,822			0			1,329,822
Foreign governments		0			23,159			0			23,159
Corporates		28,092			9,231,578			11,250			9,270,920
Collateralized debt obligations		0			0			30,320			30,320
Other asset-backed securities		0			37,558			7,122			44,680
Redeemable preferred stocks		217,613			904,656			0			1,122,269

Total fixed maturities		245,705			11,593,808			48,692			11,888,205
Equity securities		16,346			0			710			17,056

Total fixed maturities and equity securities	$	262,051		$	11,593,808		$	49,402		$	11,905,261

Percentage of total		2.2	%		97.4	%		0.4	%		100.0	%


Description	Fair Value Measurements at December 31, 2010 Using:
Description	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	0		$	78,674		$	0		$	78,674
States, municipalities and political subdivisions		0			1,181,126			0			1,181,126
Foreign governments		0			23,031			0			23,031
Corporates		15,347			7,831,845			73,673			7,920,865
Collateralized debt obligations		0			0			22,456			22,456
Other asset-backed securities		0			40,696			8,042			48,738
Redeemable preferred stocks		270,189			997,955			0			1,268,144

Total fixed maturities		285,536			10,153,327			104,171			10,543,034

Equity securities		16,484			0			670			17,154

Total fixed maturities and equity securities	$	302,020		$	10,153,327		$	104,841		$	10,560,188

Percent of total		2.9	%		96.1	%		1.0	%		100.0	%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 4—Investments (continued)

The following table represents changes in assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).


	Analysis of Changes in Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Asset- backed securities			Collateralized debt Obligations			Corporates*			Other			Total
Balance at January 1, 2009	$	23,077		$	14,158		$	164,881		$	1,246		$	203,362
Total gains or losses:
Included in realized gains/losses		0			(83,458	)		(2,502	)		0			(85,960	)
Included in other comprehensive income		1,717			80,674			(2,728	)		12			79,675
Sales		0			125			(6,833	)		0			(6,708	)
Amortization		(183	)		1,014			2,366			(5	)		3,192
Other **		0			5,524			213			148			5,885
Transfers in to Level 3		0			0			48,995			4,435			53,430
Transfers out of Level 3		(16,630	)		0			(132,628	)		0			(149,258	)

Balance at December 31, 2009		7,981			18,037			71,764			5,836			103,618
Total gains or losses:
Included in realized gains/losses		0			(1,712	)		1,504			708			500
Included in other comprehensive income		255			2,445			14,711			(534	)		16,877
Sales		0			0			(5,862	)		(2,331	)		(8,193	)
Amortization		(194	)		2,333			2,536			(1	)		4,674
Other **		0			1,353			0			0			1,353
Transfers out of Level 3		0			0			(10,980	)		(3,008	)		(13,988	)

Balance at December 31, 2010		8,042			22,456			73,673			670		$	104,841
Total gains or losses:
Included in realized gains/losses		0			0			(12,542	)		0			(12,542	)
Included in other comprehensive income		(714	)		3,952			14,578			40			17,856
Sales		0			0			(13,875	)		0			(13,875	)
Amortization		(206	)		2,470			1,302			0			3,566
Other **		0			1,442			0			0			1,442
Transfers out of Level 3		0			0			(51,886	)		0			(51,886	)

Balance at December 31, 2011	$	7,122		$	30,320		$	11,250		$	710		$	49,402

Includes redeemable preferred stocks

Includes capitalized interest and foreign exchange adjustments.

The collateral underlying collateralized debt obligations for which fair values are reported as Level 3 consists primarily of trust preferred securities issued by banks and insurance companies. None of the collateral is subprime or Alt-A mortgages (loans for which the typical documentation was not provided by the borrower).

The following table presents transfers in and out of each of the valuation levels of fair values.


	2011								2010								2009
	In		Out			Net			In		Out			Net			In		Out			Net
Level 1	$	0	$	0		$	0		$	54	$	(4,848	)	$	(4,794	)	$	0	$	0		$	0
Level 2		51,886		0			51,886			18,836		(54	)		18,782			149,258		(53,430	)		95,828
Level 3		0		(51,886	)		(51,886	)		0		(13,988	)		(13,988	)		53,430		(149,258	)		(95,828	)

Transfers into Level 2 from Level 3 result from the availability of observable market data when a security is valued at the end of a period. Transfers into Level 3 occur when there is a lack of observable market information. Transfers into Level 1 from Level 2 occur when direct quotes are available; transfers from Level 1 into Level 2 result when only observable market data and no direct quotes are available.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 4—Investments (continued)

Other-than-temporary impairments: Torchmark’s portfolio of fixed maturities fluctuates in value due to changes in interest rates in the financial markets as well as other factors. Fluctuations caused by market interest rate changes have little bearing on whether or not the investment will be ultimately recoverable. Therefore, Torchmark considers these declines in value resulting from changes in market interest rates to be temporary. In certain circumstances, however, Torchmark determines that the decline in the value of a security is other-than-temporary and writes the book value of the security down to its fair value, realizing an investment loss. The evaluation of Torchmark’s securities for other-than-temporary impairments is a process that is undertaken not less frequently than quarterly and is overseen by a team of investment and accounting professionals. Each security which is impaired because the fair value is less than the cost or amortized cost is identified and evaluated. The determination that an impairment is other-than-temporary is highly subjective and involves the careful consideration of many factors. Among the factors considered are:

•

The length of time and extent to which the security has been impaired

•

The reason(s) for the impairment

•

The financial condition of the issuer and the near-term prospects for recovery in fair value of the security

•

The Company’s ability and intent to hold the security until anticipated recovery

•

Expected future cash flows

The relative weight given to each of these factors can change over time as facts and circumstances change. In many cases, management believes it is appropriate to give relatively more weight to prospective factors than to retrospective factors. Prospective factors that are given more weight include prospects for recovery, the Company’s ability and intent to hold the security until anticipated recovery, and expected future cash flows.

Among the facts and information considered in the process are:

•

Default on a required payment

•

Issuer bankruptcy filings

•

Financial statements of the issuer

•

Changes in credit ratings of the issuer

•

The value of underlying collateral

•

News and information included in press releases issued by the issuer

•

News and information reported in the media concerning the issuer

•

News and information published by or otherwise provided by credit analysts

•

Recent cash flows

While all available information is taken into account, it is difficult to predict the ultimately recoverable amount of a distressed or impaired security.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 4—Investments (continued)

Torchmark has determined that certain of its holdings in fixed maturity investments were other-than-temporarily impaired during the three years ended December 31, 2011. Included in the impairments were collateralized debt obligations in which the impairment was bifurcated in accordance with accounting guidance. As a result of this guidance, the portion of an impairment considered to be a credit loss is other-than-temporarily impaired and the amount of the credit loss is charged to net income. Any portion of the impairment considered to be temporary is charged to other comprehensive income. The credit loss portion of an impairment is determined as the difference between the security’s amortized cost and the present value of expected future cash flows discounted at the securities’ original effective yield rate. The temporary portion is the difference between this present value of expected future cash flows and fair value (as discounted by a market yield). The expected cash flows are determined using judgment and the best information available to the Company. Inputs used to derive expected cash flows include expected default rates, current levels of subordination, and loan-to-collateral value ratios. Management believes that the present value of future cash flows at the original effective yield is a better measure of valuation, because fair value is based on limited observable market data, and the market for these securities is neither active nor orderly. The following table presents the writedowns recorded due to these impairments in accordance with accounting guidance and whether the writedown was charged to earnings or other comprehensive income.

Writedowns for Other-Than-Temporary Impairments


	2011				2010				2009
	Net Income		Other Comprehensive Income		Net Income		Other Comprehensive Income		Net Income		Other Comprehensive Income
Collateralized debt obligations	$	0	$	0	$	1,712	$	0		$ 83,457	$	20,766
Corporate bonds		20		0		3,138		0		59,709		0

Total pre-tax	$	20	$	0	$	4,850	$	0		$143,166	$	20,766

After tax	$	13	$	0	$	3,152	$	0		$ 94,234	$	13,498

As of year end 2011, previously written down securities remaining in the portfolio were carried at a fair value of $22.6 million. Otherwise, as of December 31, 2011, Torchmark has no information available to cause it to believe that any of its investments are other-than-temporarily impaired. Torchmark has the ability and intent to hold these investments to recovery, and does not intend to sell nor expects to be required to sell its other impaired securities.

Bifurcated credit losses result when there is an other-than-temporary impairment for which a portion of the loss is recognized in other comprehensive income. Torchmark’s balances related to bifurcated credit loss positions included in other comprehensive income were $22 million at December 31, 2011, December 31, 2010, and December 31, 2009. There was no change in this balance since December 31, 2009, the year the balance initially arose.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 4—Investments (continued)

Unrealized gain/loss analysis. As conditions in financial markets have improved since early 2009, unrealized gains in the portfolio have occurred and losses have declined. Net unrealized losses on fixed maturities of $455 million at December 31, 2009 became net unrealized gains of $108 million at December 31, 2010. During 2011, net unrealized gains rose to $964 million at December 31, 2011. At December 31, 2011, investments in securities in the financial sector were in a $14 million unrealized gain position compared with an unrealized loss position of $115 million at December 31, 2010. Investments in securities in the other sectors had net unrealized gains of $950 million in 2011 and $223 million in 2010. The following tables disclose gross unrealized investment losses by class of investment at December 31, 2011 and December 31, 2010. Torchmark considers these investments to be only temporarily impaired.

ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES

At December 31, 2011


	Less than Twelve Months					Twelve Months or Longer					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	279	$	(3	)	$	34	$	(1	)	$	313	$	(4	)
States, municipalities and political subdivisions		0		0			17,609		(1,896	)		17,609		(1,896	)
Foreign governments		0		0			0		0			0		0
Corporates		585,265		(38,249	)		612,338		(99,659	)		1,197,603		(137,908	)
Collateralized debt obligations		0		0			30,320		(30,117	)		30,320		(30,117	)
Other asset-backed securities		0		0			7,122		(1,392	)		7,122		(1,392	)
Redeemable preferred stocks		205,449		(14,250	)		367,450		(53,604	)		572,899		(67,854	)

Total fixed maturities		790,993		(52,502	)		1,034,873		(186,669	)		1,825,866		(239,171	)

Equity securities		386		(63	)		0		0			386		(63	)

Total fixed maturities and equity securities	$	791,379	$	(52,565	)	$	1,034,873	$	(186,669	)	$	1,826,252	$	(239,234	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 4—Investments (continued)

ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES

At December 31, 2010


	Less than Twelve Months					Twelve Months or Longer					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and government-sponsored enterprises	$	56,905	$	(1,060	)	$	0	$	0		$	56,905	$	(1,060	)
States, municipalities and political subdivisions		685,754		(26,734	)		66,591		(15,077	)		752,345		(41,811	)
Foreign governments		0		0			0		0			0		0
Corporates		1,284,966		(39,331	)		862,820		(170,818	)		2,147,786		(210,149	)
Collateralized debt obligations		0		0			22,331		(34,069	)		22,331		(34,069	)
Other asset-backed securities		0		0			8,042		(678	)		8,042		(678	)
Redeemable preferred stocks		199,362		(3,339	)		646,454		(76,626	)		845,816		(79,965	)

Total fixed maturities		2,226,987		(70,464	)		1,606,238		(297,268	)		3,833,225		(367,732	)

Equity securities		0		0			30		(69	)		30		(69	)

Total fixed maturities and equity securities	$	2,226,987	$	(70,464	)	$	1,606,268	$	(297,337	)	$	3,833,255	$	(367,801	)

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


	Less than Twelve Months		Twelve Months or Longer		Total


Number of issues (Cusip numbers) held:
As of December 31, 2011		117		93		210
As of December 31, 2010		234		133		367

Torchmark’s entire fixed-maturity and equity portfolio consisted of 1,373 issues at December 31, 2011 and 1,430 issues at December 31, 2010. The weighted-average quality rating of all unrealized loss positions as of December 31, 2011 was BBB-, compared with BBB+ a year earlier. The weighted-average quality ratings are based on amortized cost.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 4—Investments (continued)

Other investment information:

Other long-term investments consist of the following:


	December 31,
	2011		2010
Mortgage loans, at cost	$	551	$	14,481
Investment real estate, at depreciated cost		3,165		2,154
Low-income housing interests		12,188		14,482
Collateral loans		7,598		8,913
Other		2,665		2,955

Total	$	26,167	$	42,985

The estimated fair value of mortgage loans, based on discounted cash flows, was approximately $0.6 million at December 31, 2011 and $14.3 million at December 31, 2010. Accumulated depreciation on investment real estate was $1.8 million at both December 31, 2011 and 2010.

Torchmark had $125 thousand in fixed maturities at book value ($130 thousand at fair value) that were non-income producing during the twelve months ended December 31, 2011. Torchmark had $3.0 million in investment real estate at December 31, 2011 which was non-income producing during the previous twelve months. Torchmark did not have any other invested assets that were non-income producing during the twelve months ended December 31, 2011.

Note 5—Deferred Acquisition Costs

An analysis of deferred acquisition costs is as follows:


	2011			2010			2009
Balance at beginning of year	$	2,869,546		$	2,810,507		$	2,753,395
Additions:
Deferred during period:
Commissions		283,961			291,562			303,791
Other expenses		157,864			149,351			161,409

Total deferred		441,825			440,913			465,200
Foreign exchange adjustment		0			5,055			10,663

Total additions		441,825			445,968			475,863

Deductions:
Amortized during period		(364,583	)		(362,390	)		(355,986	)
Foreign exchange adjustment		(1,765	)		0			0
Adjustment attributable to unrealized investment gains⁽¹⁾		(28,291	)		(24,539	)		(62,765	)

Total deductions		(394,639	)		(386,929	)		(418,751	)

Balance at end of year	$	2,916,732		$	2,869,546		$	2,810,507

(1)	Represents amounts pertaining to investments relating to universal life-type products.

In the event of lapses or early withdrawals in excess of those assumed, deferred acquisition costs may not be recoverable.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 6—Future Policy Benefit Reserves

A summary of the assumptions used in determining the liability for future policy benefits at December 31, 2011 is as follows:

Individual Life Insurance

Interest assumptions:


Years of Issue	Interest Rates		Percent of Liability
1917-2011		2.5% to 5.75%		11	%
1985-2011		6.0%		29
1986-1992		7.0% graded to 6.0%		7
1954-2000		8.0% graded to 6.0%		11
1951-1985		8.5% graded to 6.0%		4
1984-2011		6.75%		4
2011-2011		5.75% graded to 6.75%		1
2000-2011		7.0%		19
1984-2011		Interest Sensitive		14

				100	%

Mortality assumptions:

For individual life, the mortality tables used are various statutory mortality tables and modifications of:


1950-54		Select and Ultimate Table
1954-58		Industrial Experience Table
1955-60		Ordinary Experience Table
1965-70		Select and Ultimate Table
1955-60		Inter-Company Table
1970		United States Life Table
1975-80		Select and Ultimate Table
X-18		Ultimate Table
2001		Valuation Basic Table

Withdrawal assumptions:

Withdrawal assumptions are based on Torchmark’s experience.

Individual Health Insurance

Interest assumptions:


Years of Issue	Interest Rates		Percent of Liability
1955-2011		2.5% to 5.75%		2	%
1993-2011		6.0%		60
1986-1992		7.0% graded to 6.0%		26
1955-2000		8.0% graded to 6.0%		6
1951-1986		8.5% graded to 6.0%		1
2008-2010		6.75%		1
2001-2007		7.0%		4

				100	%

Morbidity assumptions:

For individual health, the morbidity assumptions are based on either Torchmark’s experience or the assumptions used in calculating statutory reserves.

Termination assumptions:

Termination assumptions are based on Torchmark’s experience.

Overall Interest Assumptions:

The overall average interest assumption for determining the liability for future life and health insurance benefits in 2011 was 5.9%.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 7—Liability for Unpaid Health Claims

Activity in the liability for unpaid health claims is summarized as follows:


	Year Ended December 31,
	2011			2010			2009
Balance at beginning of year	$	100,598		$	104,346		$	119,855
Incurred related to:
Current year		628,137			661,740			674,710
Prior years		(10,644	)		(19,424	)		(19,487	)

Total incurred		617,493			642,316			655,223
Paid related to:
Current year		538,910			577,875			583,127
Prior years		75,664			68,189			87,605

Total paid		614,574			646,064			670,732

Balance at end of year	$	103,517		$	100,598		$	104,346

At the end of each period, the liability for unpaid health claims includes an estimate of claims incurred but not yet reported to the Company. Such estimates are updated regularly based upon the Company’s most recent claims data with recognition of emerging experience trends. Because of the nature of the Company’s health business, the payment lags are relatively short and most claims are fully paid within a year from the time incurred. Fluctuations in claims experience can lead to either over- or under-estimation of the liability for any given year. The difference between the estimate made at the end of the prior period and the actual experience during the period is reflected above under the caption “Incurred related to: Prior years.”

Claims paid in each of the years 2009 through 2011 were settled for amounts less than anticipated when estimated at the previous year end. The most significant components of these favorable variances were in Torchmark’s UA Independent, Liberty National Branch, and Medicare Part D distribution channels. The Company’s estimates at each point have reflected the emerging data and trends. In the Medicare Part D channel, the Company is required to estimate claim discounts that will be received from drug manufacturers. In each of the years 2009 through 2011, the discounts from the drug manufacturers received in the current year but related to prior year claims were higher than anticipated when the claim liability was determined.

The liability for unpaid health claims is included with “Policy claims and other benefits payable” on the Consolidated Balance Sheets.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 8—Income Taxes

Torchmark and its subsidiaries file a life-nonlife consolidated Federal income tax return.

The components of income taxes were as follows:


	Year Ended December 31,
	2011			2010			2009
Income tax expense from continuing operations	$	226,166		$	246,475		$	179,297
Income tax expense from discontinued operations		(467	)		11,830			9,216
Shareholders’ equity:
Other comprehensive income (loss)		284,355			184,305			458,358
Tax basis compensation expense (from the exercise of stock options and vesting of restricted stock awards) in excess of amounts recognized for financial reporting purposes		(13,121	)		(3,455	)		(253	)

	$	496,933		$	439,155		$	646,618

Income tax expense from continuing operations consists of:


	Year Ended December 31,
	2011		2010		2009
Current income tax expense	$	169,500	$	147,346	$	147,917
Deferred income tax expense		56,666		99,129		31,380

	$	226,166	$	246,475	$	179,297

In each of the years 2009 through 2011, deferred income tax expense was incurred because of certain differences between net income before income taxes as reported on the Consolidated Statements of Operations and taxable income as reported on Torchmark’s income tax returns. As explained in Note 1—Significant Accounting Policies, these differences caused the financial statement book values of some assets and liabilities to be different from their respective tax bases.

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


	Year Ended December 31,
	2011			%			2010			%			2009			%
Expected income taxes	$	253,324			35.0	%	$	262,700			35.0	%	$	190,250			35.0	%

Increase (reduction) in income taxes resulting from:
Tax-exempt investment income		(3,468	)		(.5	)		(3,371	)		(.5	)		(3,483	)		(.6	)
Tax settlements		0			0			0			0			(3,101	)		(.6	)
Low income housing investments		(24,258	)		(3.4	)		(12,900	)		(1.7	)		(6,038	)		(1.1	)
Other		568			.1			46			0			1,669			.3

Income tax expense	$	226,166			31.2	%	$	246,475			32.8	%	$	179,297			33.0	%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 8—Income Taxes (continued)

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:


	December 31,
	2011		2010
Deferred tax assets:
Fixed maturity investments	$	35,670	$	50,126
Carryover of tax losses		7,429		12,293
Unrealized losses		0		2,023
Other assets		5,509		1,352

Total gross deferred tax assets		48,608		65,794

Deferred tax liabilities:
Unrealized gains		276,591		0
Employee and agent compensation		57,136		55,781
Deferred acquisition costs		712,974		689,684
Future policy benefits, unearned and advance premiums, and policy claims		355,825		338,771

Total gross deferred tax liabilities		1,402,526		1,084,236

Net deferred tax liability	$	1,353,918	$	1,018,442

Torchmark’s Federal income tax returns are routinely audited by the Internal Revenue Service (IRS). The IRS completed its examination of the Company’s 2005, 2006, and 2007 tax years during 2009. The Company recorded a $2.5 million tax benefit to reflect the results of the examination, including a reduction in its liability for uncertain tax positions relating to these years. The statutes of limitation for the assessments of additional tax are closed for all tax years prior to 2008. Management believes that adequate provision has been made in the financial statements for any potential assessments that may result from future tax examinations and other tax-related matters for all open tax years.

Torchmark has net operating loss carryforwards of approximately $21 million at December 31, 2011 which will begin to expire in 2025 if not otherwise used to offset future taxable income. A valuation allowance is to be provided when it is more likely than not that deferred tax assets will not be realized by the Company. No valuation allowance has been recorded relating to Torchmark’s deferred tax assets since, in management’s judgment, Torchmark will more likely than not have sufficient taxable income in future periods to fully realize its existing deferred tax assets.

Torchmark’s tax liability is adjusted to include the provision for uncertain tax positions taken or expected to be taken in a tax return. A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding effects of accrued interest, net of Federal tax benefits) for the years 2009 through 2011 is as follows:


	2011			2010			2009
Balance at January 1,	$	875		$	3,960		$	8,481
Increase based on tax positions taken in current period		0			245			73
Increase related to tax positions taken in prior periods		0			280			0
Decrease related to tax positions taken in prior periods		(875	)		(3,610	)		(4,594	)
Decrease due to settlements		0			0			0

Balance at December 31,	$	0		$	875		$	3,960

Torchmark’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company recognized interest income of $0, $124 thousand, and $1.7 million, net of Federal income tax benefits, in its Consolidated Statements of Operations for 2011, 2010, and 2009, respectively. The Company had an accrued interest receivable of $2.7 million and $4.1 million, net of Federal income tax expense, as of 2011 and 2010, respectively. The Company had no accrued penalties at December 31, 2011 or 2010.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 9—Postretirement Benefits

Pension Plans: Torchmark has noncontributory retirement benefit plans and contributory savings plans which cover substantially all employees. There are also two nonqualified, noncontributory supplemental benefit pension plans which cover a limited number of employees. The total cost of these retirement plans charged to operations was as follows:


Year Ended December 31,	Defined Contribution Plans		Defined Benefit Pension Plans
2011	$	3,552	$	20,952
2010		3,617		18,948
2009		3,511		17,912

Torchmark accrues expense for the defined contribution plans based on a percentage of the employees’ contributions. The plans are funded by the employee contributions and a Torchmark contribution equal to the amount of accrued expense. Plan contributions are both mandatory and discretionary, depending on the terms of the plan.

Cost for the defined benefit pension plans has been calculated on the projected unit credit actuarial cost method. All plan measurements for the defined benefit plans are as of December 31 of the respective year. The defined benefit pension plans covering the majority of employees are funded. Contributions are made to funded pension plans subject to minimums required by regulation and maximums allowed for tax purposes. Defined benefit plan contributions were $8.6 million in 2011, $13 million in 2010, and $15 million in 2009. Torchmark estimates as of December 31, 2011 that it will contribute an amount not to exceed $20 million to these plans in 2012. The actual amount of contribution may be different from this estimate.

Torchmark has a Supplemental Executive Retirement Plan (SERP), which provides to a limited number of executives an additional supplemental defined pension benefit. The supplemental benefit is based on the participant’s qualified plan benefit without consideration to the regulatory limits on compensation and benefit payments applicable to qualified plans, except that eligible compensation is capped at $1 million. The SERP is unfunded. However, life insurance policies on the lives of plan participants have been established for this plan with an unaffiliated insurance carrier. The premiums for this coverage paid in 2011 was $3.9 million and in 2010 was $1.7 million. The cash value of these policies at December 31, 2011 was $16 million and was $12 million a year earlier. Additionally, a Rabbi Trust was established for this plan in 2010 in the amount of $21 million to support the liability for this plan. An additional deposit of $5 million was added to this trust in 2011 and an investment account was established. As of December 31, 2011, the combined value of the insurance policies and the trust investments was $43 million. Because this plan is unqualified, the Rabbi Trust and the policyholder value of these policies are not included as defined benefit plan assets but as assets of the Company. The liability for this SERP at December 31, 2011 was $47 million and was $38 million a year earlier.

The other supplemental benefit pension plan is limited to a very select group of employees and was closed as of December 31, 1994. It provides the full benefits that an employee would have otherwise received from a defined benefit plan in the absence of the limitation on benefits payable under a qualified plan. This plan is unfunded. Liability for this closed plan was $3 million at December 31, 2011 and $4 million at December 31, 2010. Pension cost for both supplemental defined benefit plans is determined in the same manner as for the qualified defined benefit plans.

Plan assets in the funded plans consist primarily of investments in marketable fixed maturities and equity securities and are valued at fair value. Torchmark measures the fair value of its financial assets, including the assets in its benefit plans, in accordance with accounting guidance which establishes a hierarchy for asset values and provides a methodology for the measurement of value. Please refer to Note 4—Investments under the caption Fair Value Measurements for a complete discussion of valuation procedures. The following table presents the assets of Torchmark’s defined benefit pension plans for the years ended December 31, 2011 and 2010.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 9—Postretirement Benefits (continued)

Pension Assets by Component at December 31, 2011


	Fair Value Determined by:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Amount		% to Total
Equity securities:
Consumer, Non-Cyclical	$	14,866					$	14,866		6	%
Financial		24,255						24,255		9
Industrial		11,491						11,491		5
Technology		13,184						13,184		5
General merchandise stores		8,119						8,119		3
Other		7,544						7,544		3

Total equity securities		79,459						79,459		31

Corporate bonds		6,661	$	153,098				159,759		62
Other bonds				348				348		0
Guaranteed annuity contract				12,745				12,745		5
Short-term investments		3,767						3,767		1
Other		1,989						1,989		1

Grand Total	$	91,876	$	166,191	$	0	$	258,067		100	%



Pension Assets by Component at December 31, 2010
	Fair Value Determined by:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Amount		% to Total
Equity securities:
Consumer, Non-Cyclical	$	14,932					$	14,932		6	%
Financial		29,692						29,692		13
Industrial		11,303						11,303		5
Technology		10,643						10,643		4
Other		1,339						1,339		1

Total equity securities		67,909						67,909		29

Corporate bonds		9,637	$	122,946	$	3,184		135,767		57
Other bonds				772				772		0
Guaranteed annuity contract				10,959				10,959		5
Short-term investments		19,484						19,484		8
Other		2,002						2,002		1

Grand Total	$	99,032	$	134,677	$	3,184	$	236,893		100	%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 9—Postretirement Benefits (continued)

Torchmark’s investment objectives for its plan assets include preservation of capital, preservation of purchasing power, and long-term growth. Torchmark seeks to preserve capital through investments made in high quality securities with adequate diversification by issuer and industry sector to minimize risk. The portfolio is monitored continuously for changes in quality and diversification mix. The preservation of purchasing power is intended to be accomplished through asset growth, exclusive of contributions and withdrawals, in excess of the rate of inflation. Torchmark intends to maintain investments that when combined with future plan contributions will produce adequate long-term growth to provide for all plan obligations. The Company’s expectation for the portfolio is to achieve a compound total rate of return of 3% in excess of the inflation rate, to be reviewed on a three-year basis. It is also Torchmark’s objective that the portfolio’s investment return will meet or exceed the return of a balanced market index.

The majority of the securities in the portfolio are highly marketable so that there will be adequate liquidity to meet projected payments. There are no specific policies calling for asset durations to match those of benefit obligations.

Allowed investments are limited to equities, fixed maturities, and short-term investments (invested cash). There is also a guaranteed annuity contract to fund the obligations of the American Income Pension Plan. The assets are to be invested in a mix of equity and fixed income investments that best serve the objectives of the pension plan. Factors to be considered in determining the asset mix include funded status, annual pension expense, annual pension contributions, and balance sheet liability. Equities include common and preferred stocks, securities convertible into equities, mutual funds that invest in equities, and other equity-related investments. Equities must be listed on major exchanges and adequate market liquidity is required. Fixed maturities consist of marketable debt securities rated investment grade at purchase by a major rating agency. Short-term investments include fixed maturities with maturities less than one year and invested cash. Short-term investments in commercial paper must be rated at least A-2 by Standard & Poor’s with the issuer rated investment grade. Invested cash is limited to banks rated A or higher. Investments outside of the aforementioned list are not permitted, except by prior approval of the Plan’s Trustees. At December 31, 2011, there were no restricted investments contained in the portfolio. Plan contributions have been invested primarily in fixed maturities during the three years ending December 31, 2011.

The investment portfolio is to be well diversified to avoid undue exposure to a single sector, industry, business, or security. The equity and fixed-maturity portfolios are not permitted to invest in any single issuer that would exceed 10% of total plan assets at the time of purchase. Torchmark does not employ any other special risk management techniques, such as derivatives, in managing the pension investment portfolio.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 9—Postretirement Benefits (continued)

The following table discloses the assumptions used to determine Torchmark’s pension liabilities and costs for the appropriate periods. The discount and compensation increase rates are used to determine current year projected benefit obligations and subsequent year pension expense. The long-term rate of return is used to determine current year expense. Differences between assumptions and actual experience are included in actuarial gain or loss.

Weighted Average Pension Plan Assumptions


For Benefit Obligations at December 31:
	2011			2010
Discount Rate		5.09	%		5.77	%
Rate of Compensation Increase		4.04			4.00

For Periodic Benefit Cost for the Year:	2011			2010			2009
Discount Rate		5.77	%		6.31	%		6.31	%
Expected Long-Term Returns		7.24			7.24			7.95
Rate of Compensation Increase		4.00			3.79			3.84

The discount rate is determined based on the expected duration of plan liabilities. A yield is then derived based on the current market yield of a hypothetical portfolio of higher-quality corporate bonds which match the liability duration. The rate of compensation increase is projected based on Company experience, modified as appropriate for future expectations. The expected long-term rate of return on plan assets is management’s best estimate of the average rate of earnings expected to be received on the assets invested in the plan over the benefit period. In determining this assumption, consideration is given to the historical rate of return earned on the assets, the projected returns over future periods, and the spread between the long-term rate of return on plan assets and the discount rate used to compute benefit obligations.

Net periodic pension cost for the defined benefit plans by expense component was as follows:


	Year Ended December 31,
	2011			2010			2009
Service cost—benefits earned during the period	$	9,277		$	8,174		$	7,571
Interest cost on projected benefit obligation		16,106			15,392			14,490
Expected return on assets		(16,068	)		(15,025	)		(15,577	)
Net amortization		11,637			10,407			11,428

Net periodic pension cost	$	20,952		$	18,948		$	17,912

An analysis of the impact on other comprehensive income (loss) concerning pensions is as follows:


	2011			2010			2009
Balance at January 1	$	(105,903	)	$	(93,674	)	$	(121,704	)

Amortization of:
Prior service cost		2,080			2,098			2,060
Net actuarial (gain) loss		10,071			8,766			9,166
Transition obligation		(5	)		(7	)		(7	)

Total amortization		12,146			10,857			11,219

Experience gain(loss)		(24,653	)		(23,086	)		16,811


Balance at December 31	$	(118,410	)	$	(105,903	)	$	(93,674	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 9—Postretirement Benefits (continued)

The following table presents a reconciliation from the beginning to the end of the year of the projected benefit obligation and plan assets. This table also presents the amounts previously recognized as a component of accumulated other comprehensive income.


	Pension Benefits For the year ended December 31,
	2011			2010
Changes in benefit obligation:
Obligation at beginning of year	$	285,560		$	242,159
Service cost		9,277			8,174
Interest cost		16,106			15,392
Actuarial loss (gain)		34,515			34,029
Benefits paid		(13,849	)		(14,194	)

Obligation at end of year		331,609			285,560

Changes in plan assets:
Fair value at beginning of year		236,893			211,877
Return on assets		26,439			26,576
Contributions		8,584			12,634
Benefits paid		(13,849	)		(14,194	)

Fair value at end of year		258,067			236,893


Funded status at year end	$	(73,542	)	$	(48,667	)


Amounts recognized in accumulated other comprehensive income consist of:
Net loss (gain)	$	111,964		$	97,382
Prior service cost		6,446			8,526
Transition obligation		0			(5	)

Net amounts recognized at year end	$	118,410		$	105,903

The portion of other comprehensive income that is expected to be reflected in pension expense in 2012 is as follows:


Amortization of prior service cost	$	2,063
Amortization of net loss (gain)		12,175
Amortization of transition obligation		0

Total	$	14,238

The accumulated benefit obligation (ABO) for Torchmark’s funded defined benefit pension plans was $263 million and $228 million at December 31, 2011 and 2010, respectively. In the unfunded plans, the ABO was $39 million and $32 million at December 31, 2011 and 2010, respectively.

Torchmark has estimated its expected pension benefits to be paid over the next ten years as of December 31, 2011. These estimates use the same assumptions that measure the benefit obligation at December 31, 2011, taking estimated future employee service into account. Those estimated benefits are as follows:


For the year(s)
2012	$	13,921
2013		14,890
2014		15,755
2015		16,689
2016		17,692
2017-2020		105,596

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 9—Postretirement Benefits (continued)

Postretirement Benefit Plans Other Than Pensions: Torchmark provides a small postretirement life insurance benefit for most retired employees, and also provides additional postretirement life insurance benefits for certain key employees. The majority of the life insurance benefits are accrued over the working lives of active employees. Otherwise, Torchmark does not provide postretirement benefits other than pensions and the life insurance benefits described above.

Torchmark’s post-retirement defined benefit plans other than pensions are not funded. Liabilities for these plans are measured as of December 31 for the appropriate year.

The components of net periodic postretirement benefit cost for plans other than pensions are as follows:


	Year Ended December 31,
	2011			2010			2009
Service cost	$	919		$	728		$	641
Interest cost on benefit obligation		999			970			947
Expected return on plan assets		0			0			0
Amortization of prior service cost		0			0			0
Recognition of net actuarial (gain) loss		(815	)		(583	)		283

Net periodic postretirement benefit cost	$	1,103		$	1,115		$	1,871

The following table presents a reconciliation of the benefit obligation and plan assets from the beginning to the end of the year. As these plans are unfunded, funded status is equivalent to the accrued benefit liability.


	Benefits Other Than Pensions For the year ended December 31,
	2011			2010
Changes in benefit obligation:
Obligation at beginning of year	$	16,889		$	16,340
Service cost		919			728
Interest cost		999			970
Actuarial loss (gain)		638			(583	)
Benefits paid		(437	)		(566	)

Obligation at end of year		19,008			16,889

Changes in plan assets:
Fair value at beginning of year		0			0
Return on assets		0			0
Contributions		437			566
Benefits paid		(437	)		(566	)

Fair value at end of year		0			0

Funded status at year end	$	(19,008	)	$	(16,889	)


Amounts recognized in accumulated other comprehensive income:
Net loss*	$	1,453		$	0

Net amounts recognized at year end	$	1,453		$	0

The net loss for benefit plans other than pensions reduces other comprehensive income.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 9—Postretirement Benefits (continued)

The table below presents the assumptions used to determine the liabilities and costs of Torchmark’s post-retirement benefit plans other than pensions.

Weighted Average Assumptions for Post-Retirement

Benefit Plans Other Than Pensions


For Benefit Obligations at December 31:
	2011			2010
Discount Rate		5.09	%		5.77	%
Rate of Compensation Increase		3.50			4.50

For Periodic Benefit Cost for the Year:
	2011			2010			2009
Discount Rate		5.77	%		6.60	%		6.60	%
Rate of Compensation Increase		4.50			4.50			4.50

Note 10—Supplemental Disclosures of Cash Flow Information

The following table summarizes Torchmark’s noncash transactions, which are not reflected on the Consolidated Statements of Cash Flows:


	Year Ended December 31,
	2011		2010		2009
Stock-based compensation not involving cash	$	14,954	$	11,848	$	9,860
Commitments for low-income housing interests		36,722		137,817		50,789
Capitalized investment income		5,321		6,517		7,345

The following table summarizes certain amounts paid during the period:


	Year Ended December 31,
	2011		2010		2009
Interest paid	$	75,653	$	76,911	$	71,288
Income taxes paid		188,510		195,172		87,376

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 11—Debt

The following table presents information about the terms and outstanding balances of Torchmark’s debt.

Selected Information about Debt Issues


						As of December 31,
						2011								2010
Instrument	Annual Percentage Rate			Issue Date	Periodic Interest Payments Due	Outstanding Principle (Par Value)		Outstanding Principle (Book Value)			Outstanding Principle (Fair Value)			Outstanding Principle (Book Value)
Notes, due 5/15/23⁽¹⁾⁽²⁾		7.875	%	5/93	5/15 & 11/15	$	165,612	$	163,344		$	195,654		$	163,227
Notes, due 8/1/13⁽¹⁾⁽²⁾		7.375	%	7/93	2/1 & 8/1		94,050		93,823			100,302			93,700
Senior Notes, due 6/15/16⁽¹⁾⁽⁸⁾		6.375	%	6/06	6/15 & 12/15		250,000		247,875			275,910			247,477
Senior Notes, due 6/15/19⁽¹⁾⁽⁸⁾		9.250	%	6/09	6/15 & 12/15		292,647		289,661			375,276			289,397
Issue Expenses⁽³⁾							0		(4,132	)		0			(4,158	)

Subtotal long-term debt							802,309		790,571			947,142			789,643

Junior Subordinated
Debentures due 6/1/46⁽⁴⁾⁽⁵⁾		7.100	%	6/06	quarterly⁽⁶⁾		123,711		123,711			122,208	⁽⁷⁾		123,711

Total funded debt							926,020		914,282			1,069,350			913,354

Commercial Paper⁽⁹⁾							225,000		224,842			224,842			198,875

						$	1,151,020	$	1,139,124		$	1,294,192		$	1,112,229

(1)	All securities other than the Junior Subordinated Debentures have equal priority with one another.

(2)	Not callable.

(3)	Unamortized issue expenses related to Trust Preferred Securities.

(4)	Junior Subordinated Debentures are classified as “Due to affiliates” and are junior to other securities in priority of payment.

(5)	Callable anytime

(6)	Quarterly payments on the first day of March, June, Sept., and Dec.

(7)	Fair value of Trust Preferred Securities.

(8)	Callable subject to “make-whole” premium.

(9)	Classified as short-term debt.

The amount of debt that becomes due during each of the next five years is: 2012—$225 million; 2013—$94 million; 2014—$0; 2015—$0; 2016—$250 million and thereafter—$582 million.

Funded debt: During 2006, Torchmark established Torchmark Capital Trust III (Trust III) to facilitate the public offering of 4.8 million shares of $25 par value Trust Preferred Securities. Trust III completed the offering for total proceeds of $120 million. It then exchanged $3.7 million of its common stock and the $120 million of proceeds from the offering for $124 million of Torchmark Junior Subordinated Debentures, due June 1, 2046. Trust III pays quarterly dividends on the Trust Preferred Securities at an annual rate of 7.1%, and receives quarterly payments at the same annual rate from Torchmark on the Junior Subordinated Debentures. All payments due to be paid by Trust III on the Trust Preferred Securities are guaranteed by Torchmark (see Note 15). The securities are redeemable on June 1, 2046. They are callable by Trust III at any time.

Trust III is a variable interest entity in which Torchmark is not the primary beneficiary. Therefore, Torchmark is prohibited by accounting rules from consolidating Trust III even though it has 100% ownership, complete voting control, and has guaranteed the performance of Trust III. Accordingly,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 11—Debt (continued)

Torchmark carries its 7.1% Junior Subordinated Debentures due to Trust III as a liability under the caption “Due to Affiliates” on its Consolidated Balance Sheets. Expenses related to the offering reduce long-term debt and are amortized over the forty-year redemption period.

On June 30, 2009, Torchmark issued $300 million principal amount of 9.25% Senior Notes due June 15, 2019. Interest on the Notes is payable semi-annually commencing on December 15, 2009. Proceeds from the issuance of this debt, net of expenses, were $296 million. The Notes are redeemable by Torchmark in whole or in part at any time subject to a “make-whole” premium, whereby the Company would be required to pay the greater of the full principal amount of the Notes or otherwise the present value of the remaining repayment schedule of the Notes discounted at a rate of interest equivalent to the rate of a United States Treasury security of comparable term plus a spread of 75 basis points. Torchmark used a portion of the net proceeds from this offering to repay its $99 million 8¹/₄% Senior Debentures which matured on August 15, 2009 (plus accrued interest). Remaining funds were invested.

During 2010, Torchmark acquired $7.4 million par value of its 9¹/₄% Senior Notes ($7.3 million book value) at a cost of $8.9 million. This repurchase resulted in a pre-tax loss of $1.6 million ($1.1 million after tax).

Commercial Paper: In December, 2010, Torchmark entered into a credit facility with a group of lenders allowing unsecured borrowings and stand-by letters of credit up to $600 million. The facility includes a provision which allows Torchmark to increase the facility limit by $200 million if certain conditions are met. The Company also has the ability to request up to $250 million in letters of credit to be issued against the facility. The agreement is set to terminate on January 7, 2015. The credit facility is further designated as a back-up credit line for a commercial paper program, where Torchmark may borrow from either the credit line or issue commercial paper at any time, with total commercial paper outstanding not to exceed the facility limit less any letters of credit issued. Interest is charged at variable rates. At December 31, 2011, Torchmark had $225 million face amount ($225 million carrying amount) of commercial paper outstanding, $198 million of letters of credit issued, and no borrowings under the line of credit. During 2011, the short term borrowings under the facility averaged approximately $206 million, and were made at an average yield of .4%, compared with an average balance of $196 million and also at an average yield of .4% a year earlier. The facility does not have a ratings-based acceleration trigger which would require early payment. A facility fee is charged for the entire facility.There is also an issuance fee for letters of credit issued. Torchmark is subject to certain covenants for the agreements regarding capitalization and earnings, with which it was in compliance at December 31, 2011 and throughout the three-year period ended December 31, 2011. Borrowings on the credit facilities are reported as short-term debt on the Consolidated Balance Sheets.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 12—Shareholders’ Equity

Share Data: A summary of preferred and common share activity is as follows:


	Preferred Stock				Common Stock*
	Issued		Treasury Stock		Issued			Treasury Stock
2009:
Balance at January 1, 2009		0		0		128,812,123			(1,750,651	)
Grants of restricted stock									115,060
Issuance of common stock due to exercise of stock options									189,258
Treasury stock acquired									(3,104,700	)
Retirement of treasury stock						(3,000,000	)		3,000,000

Balance at December 31, 2009		0		0		125,812,123			(1,551,033	)
2010:
Grants of restricted stock									121,923
Forfeitures of restricted stock									(10,621	)
Issuance of common stock due to exercise of stock options									1,273,598
Treasury stock acquired									(6,781,364	)
Retirement of treasury stock						(6,000,000	)		6,000,000

Balance at December 31, 2010		0		0		119,812,123			(947,497	)
2011:
Grants of restricted stock									173,553
Forfeitures of restricted stock									(7,153	)
Issuance of common stock due to exercise of stock options									4,829,892
Treasury stock acquired									(23,281,453	)
Retirement of treasury stock						(7,500,000	)		7,500,000

Balance at December 31, 2011		0		0		112,312,123			(11,732,658	)

Retroactively adjusted for stock split described in Note 1

Acquisition of Common Shares: Torchmark shares are acquired from time to time through open market purchases under the Torchmark stock repurchase program when it is believed to be the best use of Torchmark’s excess cash flows. Torchmark suspended its share repurchase program temporarily from the first quarter of 2009 until the first quarter of 2010 because of uncertain economic conditions. Share repurchases under this program were 18.9 million shares at a cost of $788 million in 2011, 5.7 million shares at a cost of $204 million in 2010, and 3.1 million shares at a cost of $47 million in 2009. When stock options are exercised, proceeds from the exercises are generally used to repurchase approximately the number of shares available with those funds in order to reduce dilution. Shares repurchased for dilution purposes were 4.4 million shares at a cost of $185 million in 2011, 1.1 million shares at a cost of $42 million in 2010, and 30 thousand shares at a cost of $869 thousand in 2009.

Retirement of Treasury Stock: Torchmark retired 7.5 million shares of treasury stock in 2011, 6 million in 2010, and 3 million in 2009.

Restrictions: Restrictions exist on the flow of funds to Torchmark from its insurance subsidiaries. Statutory regulations require life insurance subsidiaries to maintain certain minimum amounts of capital and surplus. Dividends from insurance subsidiaries of Torchmark are limited to the greater of prior year statutory net income excluding realized capital gains on an annual noncumulative basis, or 10% of prior year surplus, in the absence of special regulatory approval. Additionally, insurance company distributions are generally not permitted in excess of statutory surplus. Subsidiaries are also subject to certain minimum capital requirements. In 2011, subsidiaries of Torchmark paid $769 million in dividends to the parent company, including $305 million available from the proceeds from the sale of United Investors. During 2012, a maximum amount of $470 million is expected to be available to Torchmark in dividends and transfers from subsidiaries without regulatory approval.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 12—Shareholders’ Equity (continued)

Earnings Per Share: A reconciliation of basic and diluted weighted-average shares outstanding used in the computation of basic and diluted earnings per share is as follows, retroactively adjusted for the three-for-two stock split:


	2011		2010		2009
Basic weighted average shares outstanding		108,278,113		122,009,228		124,550,384
Weighted average dilutive options outstanding		1,537,277		1,114,110		0

Diluted weighted average shares outstanding		109,815,390		123,123,338		124,550,384

Stock options to purchase 3.5 million shares, 10.3 million shares, and 14.1 million shares, during the years 2011, 2010, and 2009, respectively, are considered to be anti-dilutive and are excluded from the calculation of diluted earnings per share. Income available to common shareholders for basic earnings per share is equivalent to income available to common shareholders for diluted earnings per share.

Note 13—Stock-Based Compensation

All share and per share amounts within this note have been retroactively adjusted for the three-for-two stock split.

Certain employees, directors, and consultants have been granted fixed equity options to buy shares of Torchmark stock at the market value of the stock on the date of grant, under the provisions of the Torchmark stock option plans. The options are exercisable during the period commencing from the date they vest until expiring according to the terms of the grant. Options generally expire the earlier of employee termination or option contract term, which ranges from seven to eleven years. Employee and consultant stock options generally vest one-half in two years and one-half in three years. Director grants generally vest in six months. Stock options awarded in connection with compensation deferrals by certain directors and executives generally vest over a range of ten years. Beginning in 2011, with the approval by Shareholders of the Torchmark Corporation 2011 Incentive Plan, some employee grants vest one-fourth over two years and the remaining three-fourths vest one-fourth over each of the next three years. All employee options vest immediately upon retirement on or after the attainment of age 65. Torchmark generally issues shares for the exercise of stock options from treasury stock. The Company generally uses the proceeds from option exercises to buy shares of Torchmark common stock in the open market to reduce the dilution from option exercises.

An analysis of shares available for grant is as follows:


	Available for Grant
	2011			2010			2009
Balance at January 1		255,263			1,724,540			3,205,209
Approval of Torchmark Corporation 2011 Incentive Plan*		7,950,000
Cancellation of available shares from prior plans		(229,333	)		0			0
Expired and forfeited during year		0			26,269			37,500
Options granted during year		(1,338,013	)		(1,358,175	)		(1,393,275	)
Restricted stock granted under the Torchmark Corporation 2011 Incentive Plan (counted as 3.1 options per grant)*		(519,558	)
Restricted stock and restricted stock units granted during the year under previous plans		(19,017	)		(137,371	)		(124,894	)

Balance at December 31		6,099,342			255,263			1,724,540


* Plan allows for grant of restricted stock such that each stock grant reduces 3.1 options available for grant

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 13—Stock-Based Compensation (continued)

A summary of stock compensation activity for each of the years in the three years ended December 31, 2011 is presented below:


	2011		2010		2009
Stock-based compensation expense recognized*	$	14,954	$	11,848	$	9,860
Tax benefit recognized		5,234		4,147		3,451
Weighted-average grant-date fair value of options granted		15.48		10.35		3.67
Intrinsic value of options exercised		40,991		12,102		1,088
Cash received from options exercised		162,613		37,863		4,430
Actual tax benefit received from exercises		14,347		4,236		381

* No stock-based compensation expense was capitalized in any period.

An analysis of option activity for each of the three years ended December 31, 2011 is as follows:


	2011					2010					2009
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding-beginning of year		15,185,729		$	34.09		15,509,978		$	34.04		14,581,461		$	35.60
Granted		1,338,013			44.37		1,358,175			30.86		1,393,275			16.03
Exercised		(4,829,892	)		33.67		(1,273,598	)		29.73		(189,258	)		23.41
Expired and forfeited		(73,425	)		39.17		(408,826	)		35.05		(275,500	)		32.88
Adjustment due to 7/1/11 stock split		(32	)		32.96		0			0.00		0			0.00

Outstanding-end of year		11,620,393		$	35.42		15,185,729		$	34.09		15,509,978		$	34.04

Exercisable at end of year		8,265,818		$	36.28		11,830,076		$	36.10		12,384,363		$	34.98

A summary of restricted stock and restricted stock units granted during each of the years in the three year period ended December 31, 2011 is presented in the table below. Restricted stock holders are entitled to dividends on the stock and holders of restricted stock units are entitled to dividend equivalents. Executive grants vest over five years and director grants vest over six months.


	2011			2010			2009
Executives restricted stock:
Shares		167,250			112,500			113,250
Price per share	$	44.39		$	30.87		$	15.67
Aggregate value	$	7,424		$	3,473		$	1,774
Percent vested as of 12/31/11		0	%		20	%		40	%

Directors restricted stock:
Shares		6,303			9,423			1,810
Price per share	$	40.45		$	30.85		$	29.93
Aggregate value	$	255		$	291		$	54
Percent vested as of 12/31/11		100	%		100	%		100	%

Directors restricted stock units (including dividend equivalents):
Shares		13,063			15,443	*		9,831
Price per share	$	40.49		$	29.95		$	29.76
Aggregate value	$	529		$	463		$	293
Percent vested as of 12/31/11		100	%		100	%		100	%

* 2,013 shares at $29.84 per share were later forfeited in 2010.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 13—Stock-Based Compensation (continued)

An analysis of unvested restricted stock is as follows:


	Executives Restricted Stock			Directors Restricted Stock			Total

2009:
Balance at January 1, 2009		117,450			0			117,450
Grants		113,250			1,810			115,060
Restriction lapses		(27,450	)		(1,810	)		(29,260	)

Balance at December 31, 2009		203,250			0			203,250

2010:
Grants		112,500			9,423			121,923
Restriction lapses		(71,100	)		(9,423	)		(80,523	)
Forfeitures		(7,500	)		0			(7,500	)

Balance at December 31, 2010		237,150			0			237,150

2011:
Grants		167,250			6,303			173,553
Restriction lapses		(72,600	)		(6,303	)		(78,903	)
Forfeitures		(4,800	)		0			(4,800	)

Balance at December 31, 2011		327,000			0			327,000

Restricted stock units outstanding at each of the year ends 2011, 2010, and 2009, were 42,938, 29,872, and 14,426, respectively. Restricted stock units are only available to directors, and are not converted to shares until the director’s retirement, death, or disability. There were no unvested director restricted shares outstanding at the end of any of the years 2009 through 2011. Director restricted stock and restricted stock units are generally granted on the first working day of the year and vest in six months. Dividend equivalents are earned on restricted stock units only. They are granted in the form of additional restricted stock units and vest immediately upon grant.

Additional information about Torchmark’s stock-based compensation as of December 31, 2011 and 2010 is as follows:


	2011		2010
Outstanding options:
Weighted-average remaining contractual term (in years)		2.95		2.85
Aggregate intrinsic value	$	94,270	$	94,086

Exercisable options:
Weighted-average remaining contractual term (in years)		1.89		2.16
Aggregate intrinsic value	$	59,097	$	49,810

Unrecognized compensation*	$	30,299	$	17,077
Weighted average period of expected recognition (in years)*		1.68		1.33

Includes restricted stock

Additional information concerning Torchmark’s unvested options is as follows at December 31:


	2011		2010
Number of shares outstanding		3,354,575		3,355,653
Weighted-average exercise price (per share)	$	33.30		$27.01
Weighted-average remaining contractual term (in years)		5.55		5.28
Aggregate intrinsic value	$	35,173	$	44,276

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 13—Stock-Based Compensation (continued)

Torchmark expects that substantially all unvested options will vest.

The following table summarizes information about stock options outstanding at December 31, 2011.


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted- Average Remaining Contractual Life (Years)		Weighted- Average Exercise Price		Number Exercisable		Weighted- Average Exercise Price
$15.67 - $15.67		1,086,231		4.13	$	15.67		431,969	$	15.67
22.03 - 30.40		1,244,673		1.85		28.49		1,226,486		28.50
30.87 - 36.33		1,401,238		4.86		31.11		71,188		35.51
36.51 - 36.51		1,859,229		0.34		36.51		1,859,229		36.51
36.70 - 37.20		1,005,845		1.05		37.00		994,084		37.00
37.49 - 40.45		1,134,413		2.97		37.69		1,125,948		37.68
41.79 - 41.79		1,270,873		3.13		41.79		1,270,873		41.79
42.47 - 43.06		1,130,041		1.99		42.78		1,130,041		42.78
44.39 - 45.45		1,487,850		6.32		44.50		156,000		45.45

$15.67 - $45.45		11,620,393		2.95	$	35.42		8,265,818	$	36.28

No equity awards were cash settled during the three years ended December 31, 2011.

Note 14—Business Segments

Torchmark’s reportable segments are based on the insurance product lines it markets and administers: life insurance, health insurance, and annuities. These major product lines are set out as reportable segments because of the common characteristics of products within these categories, comparability of margins, and the similarity in regulatory environment and management techniques. There is also an investment segment which manages the investment portfolio, debt, and cash flow for the insurance segments and the corporate function. Torchmark’s chief operating decision maker evaluates the overall performance of the operations of the Company in accordance with these segments.

Life insurance products include traditional and interest-sensitive whole life insurance as well as term life insurance. Health products are generally guaranteed-renewable and include Medicare Supplement, Medicare Part D, cancer, accident, long-term care, and limited-benefit hospital and surgical coverages. Annuities include fixed-benefit contracts.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 14—Business Segments (continued)

Torchmark markets its insurance products through a number of distribution channels, each of which sells the products of one or more of Torchmark’s insurance segments. The tables below present segment premium revenue by each of Torchmark’s marketing groups.

Torchmark Corporation

Premium Income By Distribution Channel



	For the Year 2011
	Life				Health				Annuity				Total
Distribution Channel	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
United American Independent	$	22,846		1	$	306,490		33	$	608		100	$	329,944		12
Liberty National Exclusive		288,308		17		290,107		31						578,415		22
American Income Exclusive		607,914		35		80,119		9						688,033		26
Direct Response		593,650		35		57,067		6						650,717		25
Medicare Part D						196,710		21						196,710		7
Other		213,526		12										213,526		8

	$	1,726,244		100	$	930,493		100	$	608		100	$	2,657,345		100


	For the Year 2010
	Life				Health				Annuity				Total
Distribution Channel	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
United American Independent	$	25,534		1	$	314,524		32	$	638		100	$	340,696		13
Liberty National Exclusive		294,587		18		331,056		34						625,643		24
American Income Exclusive		560,649		34		79,059		8						639,708		24
Direct Response		566,604		34		54,328		5						620,932		23
Medicare Part D						208,970		21						208,970		8
Other		216,325		13										216,325		8

	$	1,663,699		100	$	987,937		100	$	638		100	$	2,652,274		100


	For the Year 2009
	Life				Health				Annuity				Total
Distribution Channel	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
United American Independent	$	28,498		2	$	326,442		32	$	541		100	$	355,481		14
Liberty National Exclusive		298,485		19		388,522		38						687,007		26
American Income Exclusive		507,899		32		75,097		7						582,996		22
Direct Response		536,878		33		46,555		5						583,433		22
Medicare Part D						183,586		18						183,586		7
Other		220,093		14										220,093		9

	$	1,591,853		100	$	1,020,202		100	$	541		100	$	2,612,596		100

Because of the nature of the life insurance industry, Torchmark has no individual or group which would be considered a major customer. Substantially all of Torchmark’s business is conducted in the United States, primarily in the Southeastern and Southwestern regions.

The measure of profitability established by the chief operating decision maker for insurance segments is underwriting margin before other income and administrative expenses, in accordance with the manner the segments are managed. It essentially represents gross profit margin on insurance products before insurance administrative expenses and consists of premium, less net policy obligations, acquisition expenses, and commissions. Interest credited to net policy liabilities (reserves less deferred acquisition costs) is reflected as a component of the Investment segment in order to match this cost to the investment earnings from the assets supporting the net policy liabilities.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 14—Business Segments (continued)

The measure of profitability for the Investment segment is excess investment income, which represents the income earned on the investment portfolio in excess of net policy requirements and financing costs associated with Torchmark’s debt. Other than the above-mentioned interest allocations and an intersegment commission, there are no other intersegment revenues or expenses. Expenses directly attributable to corporate operations are included in the “Corporate” category. Stock-based compensation expense is considered a corporate expense by Torchmark management and is included in this category. All other unallocated revenues and expenses on a pretax basis, including insurance administrative expense, are included in the “Other” segment category. The following tables set forth a reconciliation of Torchmark’s revenues and operations by segment to its major income statement line items.


	For the Year 2011
	Life			Health			Annuity			Investment			Other			Corporate			Adjustments			Consolidated
Revenue:
Premium	$	1,726,244		$	930,493		$	608											$	(1,027	)⁽¹⁾	$	2,656,318
Net investment income										$	707,041									(14,013	)⁽^2,5)		693,028
Other income													$	2,507						(356	)⁽⁴⁾		2,151

Total revenue		1,726,244			930,493			608			707,041			2,507						(15,396	)		3,351,497
Expenses:
Policy benefits		1,118,909			632,847			42,547												(1,027	)⁽¹⁾		1,793,276
Required interest on net reserves		(458,029	)		(36,729	)		(57,040	)		551,798												0
Amortization of acquisition costs		452,054			81,228			12,688			(181,387	)											364,583
Commissions, premium taxes, and non-deferred acquisition costs		152,347			64,157			68												(356	)⁽⁴⁾		216,216
Insurance administrative expense⁽³⁾														159,109						19,880	^(6,7,8)		178,989
Parent expense																$	7,693						7,693
Stock-based compensation expense																	14,954						14,954
Interest expense											77,644									264	⁽²⁾		77,908

Total expenses		1,265,281			741,503			(1,737	)		448,055			159,109			22,647			18,761			2,653,619

Sub total		460,963			188,990			2,345			258,986			(156,602	)		(22,647	)		(34,157	)		697,878
Non operating items																				19,880	^(6,7,8)		19,880
Amortization of low-income housing interests																				14,277	⁽⁵⁾		14,277

Measure of segment profitability (pretax)	$	460,963		$	188,990		$	2,345		$	258,986		$	(156,602	)	$	(22,647	)	$	0			732,035

Deduct applicable income taxes																							(238,335	)

Segment profits after tax																							493,700

Add back income taxes applicable to segment profitability																							238,335
Add (deduct) realized investment gains (losses)																							25,904
Deduct amortization of low-income housing⁽⁵⁾																							(14,277	)
Deduct state administrative settlement expense⁽⁶⁾																							(6,901	)
Deduct loss on sale of equipment⁽⁷⁾																							(979	)
Deduct litigation expense⁽⁸⁾																							(12,000	)

Pretax income per Consolidated Statement of Operations																						$	723,782

(1)

Medicare Part D items adjusted to GAAP from the segment analysis, which matches expected benefits with policy premium.

(2)

Reclassification of interest amount due to accounting rule requiring deconsolidation of Trust Preferred Securities.

(3)

Administrative expense is not allocated to insurance segments.

(4)

Elimination of intersegment commission.

(5)

Amortization of low-income housing interests.

(6)

State administrative settlement expense.

(7)

Loss on sale of equipment.

(8)

Litigation expense.

100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 14—Business Segments (continued)


	For the Year 2010
	Life			Health			Annuity			Investment			Other			Corporate			Adjustments			Consolidated
Revenue:
Premium	$	1,663,699		$	987,937		$	638											$	(516	)⁽¹⁾	$	2,651,758
Net investment income										$	685,253									(8,889	)^(2,5)		676,364
Other income													$	2,834						(664	)⁽⁴⁾		2,170

Total revenue		1,663,699			987,937			638			685,253			2,834						(10,069	)		3,330,292
Expenses:
Policy benefits		1,082,423			669,707			41,430												(516	)⁽¹⁾		1,793,044
Required interest on net reserves		(434,319	)		(35,368	)		(51,996	)		521,683												0
Amortization of acquisition costs		443,541			86,067			9,722			(176,940	)											362,390
Commissions, premium taxes, and non-deferred acquisition costs		141,792			68,565			134												(664	)⁽⁴⁾		209,827
Insurance administrative expense⁽³⁾														155,615									155,615
Parent expense																$	8,809						8,809
Stock-based compensation expense																	11,848						11,848
Interest expense											75,265									264	⁽²⁾		75,529

Total expenses		1,233,437			788,971			(710	)		420,008			155,615			20,657			(916	)		2,617,062

Subtotal		430,262			198,966			1,348			265,245			(152,781	)		(20,657	)		(9,153	)		713,230
Amortization of low-income housing interests																				9,153	⁽⁵⁾		9,153

Measure of segment profitability (pretax)	$	430,262		$	198,966		$	1,348		$	265,245		$	(152,781	)	$	(20,657	)	$	0			722,383

Deduct applicable income taxes																							(242,558	)

Segment profits after tax																							479,825


Add back income taxes applicable to segment profitability																							242,558
Add (deduct) realized investment gains (losses)																							37,340
Deduct amortization of low-income housing⁽⁵⁾																							(9,153	)

Pretax income per Consolidated Statement of Operations																						$	750,570

(1)

Medicare Part D items adjusted to GAAP from the segment analysis, which matches expected benefits with policy premium.

(2)

Reclassification of interest amount due to accounting rule requiring deconsolidation of Trust Preferred Securities.

(3)

Administrative expense is not allocated to insurance segments.

(4)

Elimination of intersegment commission.

(5)

Amortization of low-income housing interests, previously considered a reduction of consolidated pretax segment profitability.

101

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 14—Business Segments (continued)


	For the Year 2009
	Life			Health			Annuity			Investment			Other			Corporate			Adjustments			Consolidated
Revenue:
Premium	$	1,591,853		$	1,020,202		$	541											$	(2,491	)⁽¹⁾	$	2,610,105
Net investment income										$	632,276									264	⁽²⁾		632,540
Other income													$	2,914						(994	)⁽⁴⁾		1,920

Total revenue		1,591,853			1,020,202			541			632,276			2,914						(3,221	)		3,244,565
Expenses:
Policy benefits		1,040,248			679,810			35,762												(2,491	)⁽¹⁾		1,753,329
Required interest on net reserves		(410,917	)		(34,243	)		(41,840	)		487,000												0
Amortization of acquisition costs		425,452			94,600			6,040			(170,106	)											355,986
Commissions, premium taxes, and non-deferred acquisition costs		141,139			81,714			267												(994	)⁽⁴⁾		222,126
Insurance administrative expense⁽³⁾														150,325						355	⁽⁵⁾		150,680
Parent expense																$	9,590						9,590
Stock-based compensation expense																	9,860						9,860
Interest expense											69,668									264	⁽²⁾		69,932

Total expenses		1,195,922			821,881			229			386,562			150,325			19,450			(2,866	)		2,571,503

Subtotal		395,931			198,321			312			245,714			(147,411	)		(19,450	)		(355	)		673,062
Nonoperating items																				355	⁽⁵⁾		355

Measure of segment profitability (pretax)	$	395,931		$	198,321		$	312		$	245,714		$	(147,411	)	$	(19,450	)	$	0			673,417

Deduct applicable income taxes																							(226,426	)

Segment profits after tax																							446,991

Add back income taxes applicable to segment profitability																							226,426
Add (deduct) realized investment gains (losses) and impairments																							(129,492	)
Deduct loss on Company-occupied property⁽⁵⁾																							(355	)

Pretax income per Consolidated Statement of Operations																						$	543,570

(1)

Medicare Part D items adjusted to GAAP from the segment analysis, which matches expected benefits with policy premium.

(2)

Reclassification of interest amount due to accounting rule requiring deconsolidation of Trust Preferred Securities.

(3)

Administrative expense is not allocated to insurance segments.

(4)

Elimination of intersegment commission.

(5)

Loss on Company-occupied property.

Torchmark holds a sizeable investment portfolio to support its insurance liabilities, the yield from which is used to offset policy benefit, acquisition, administrative and tax expenses. This yield or investment income is taken into account when establishing premium rates and profitability expectations of its insurance products. In holding such a portfolio, investments are sold, called, or written down from time to time, resulting in a realized gain or loss. These gains or losses generally occur as a result of disposition due to issuer calls, a downgrade in credit quality, compliance with Company investment policies, or other reasons often beyond management’s control. Unlike investment income, realized gains and losses are incidental to insurance operations, and only overall yields are considered when setting premium rates or insurance product profitability expectations. While these gains and losses are not relevant to segment profitability or core operating results, they can have a material positive or negative result on net income. For these reasons, management removes realized investment gains and losses when it views its segment operations.

102

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 14—Business Segments (continued)

The following table summarizes the measures of segment profitability as determined in the three preceding tables for comparison with prior periods. The table also reconciles segment profits to net income.

Analysis of Profitability by Segment


	2011			2010*			2009			2011 Change			%			2010 Change			%
Life insurance underwriting margin	$	460,963		$	430,262		$	395,931		$	30,701			7		$	34,331			9
Health insurance underwriting margin		188,990			198,966			198,321			(9,976	)		(5	)		645			0
Annuity underwriting margin		2,345			1,348			312			997						1,036
Other insurance:
Other income		2,507			2,834			2,914			(327	)		(12	)		(80	)		(3	)
Administrative expense		(159,109	)		(155,615	)		(150,325	)		(3,494	)		2			(5,290	)		4
Excess investment income		258,986			265,245			245,714			(6,259	)		(2	)		19,531			8
Corporate and adjustments		(22,647	)		(20,657	)		(19,450	)		(1,990	)		10			(1,207	)		6

Pre-tax total		732,035			722,383			673,417			9,652			1			48,966			7
Applicable taxes		(238,335	)		(242,558	)		(226,426	)		4,223			(2	)		(16,132	)		7

After-tax total, before discontinued operations		493,700			479,825			446,991			13,875			3			32,834			7
Discontinued operations (after tax)		0			27,932			26,810			(27,932	)					1,122			4

Total		493,700			507,757			473,801			(14,057	)		(3	)		33,956			7
Realized gains (losses)—investments (after tax)		16,838			24,270			(85,345	)		(7,432	)					109,615
Realized gains (losses)—discontinued operations (after tax)		0			1,852			(7,909	)		(1,852	)					9,761
Loss on disposal of discontinued operations (after tax)		(455	)		(35,013	)		0			34,558						(35,013	)
Tax settlements (after tax)		0			0			2,858			0						(2,858	)
Cost of legal settlements (after tax)		(7,800	)		0			0			(7,800	)					0
State administrative settlement (after tax)		(4,486	)		0			0			(4,486	)					0
Loss on Company-occupied property (after tax)		0			0			(231	)		0						231
Loss on sale of equipment (after tax)		(636	)		0			0			(636	)					0

Net income	$	497,161		$	498,866		$	383,174		$	(1,705)			0		$	115,692			30

During 2011, management changed the definition of total segment profits before tax to exclude the amortization of low-income housing interests, which management views as a tax expense. Accordingly, the 2010 total segment profits before tax and applicable tax amount have been updated for comparison purposes.

103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 14—Business Segments (continued)

Assets for each segment are reported based on a specific identification basis. The insurance segments’ assets contain deferred acquisition costs (including the value of insurance purchased). The investment segment includes the investment portfolio, cash, and accrued investment income. Goodwill is assigned to the insurance segments at the time of purchase based on the excess of cost over the fair value of assets acquired for the benefit of that segment. All other assets, representing approximately 4% of total assets, are included in the other category. The table below reconciles segment assets to total assets as reported in the consolidated financial statements.

Assets by Segment



	At December 31, 2011
	Life		Health		Annuity		Investment		Other		Consolidated
Cash and invested assets							$	12,437,699			$	12,437,699
Accrued investment income								192,325				192,325
Deferred acquisition costs	$	2,566,748	$	315,587	$	34,397						2,916,732
Goodwill		309,609		87,282								396,891
Other assets									$	644,625		644,625

Total assets	$	2,876,357	$	402,869	$	34,397	$	12,630,024	$	644,625	$	16,588,272


	At December 31, 2010
	Life		Health		Annuity		Investment		Other		Consolidated
Cash and invested assets							$	11,563,656			$	11,563,656
Accrued investment income								183,861				183,861
Deferred acquisition costs	$	2,486,001	$	328,771	$	54,774						2,869,546
Goodwill		309,609		87,282								396,891
Other assets									$	609,019		609,019

Total assets	$	2,795,610	$	416,053	$	54,774	$	11,747,517	$	609,019	$	15,622,973

Other Balances by Segment


	At December 31, 2011
	Life		Health		Annuity		Consolidated
Future policy benefits	$	7,697,108	$	589,441	$	1,285,708	$	9,572,257
Unearned and advance premium		16,965		52,574				69,539
Policy claims and other benefits payable		118,737		103,517				222,254

Total	$	7,832,810	$	745,532	$	1,285,708	$	9,864,050


	At December 31, 2010
	Life		Health		Annuity		Consolidated
Future policy benefits	$	7,318,283	$	570,775	$	1,260,973	$	9,150,031
Unearned and advance premium		17,343		56,822				74,165
Policy claims and other benefits payable		121,000		100,598				221,598

Total	$	7,456,626	$	728,195	$	1,260,973	$	9,445,794

104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 15—Commitments and Contingencies

Reinsurance: Insurance affiliates of Torchmark reinsure that portion of insurance risk which is in excess of their retention limits. Retention limits for ordinary life insurance range up to $2.0 million per life. Life insurance ceded represented .5% of total life insurance in force at December 31, 2011. Insurance ceded on life and accident and health products represented .3% of premium income for 2011. Torchmark would be liable for the reinsured risks ceded to other companies to the extent that such reinsuring companies are unable to meet their obligations.

Insurance affiliates also assume insurance risks of other companies. Life reinsurance assumed represented 3.0% of life insurance in force at December 31, 2011 and reinsurance assumed on life and accident and health products represented 1.2% of premium income for 2011.

Leases: Torchmark leases office space and office equipment under a variety of operating lease arrangements. Rental expense for operating leases was $4.8 million in 2011, $4.9 million in 2010, and $4.9 million in 2009. Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 2011 were as follows: 2012, $2.7 million; 2013, $2.4 million; 2014, $2.0 million; 2015, $2.0 million; 2016, $1.4 million and in the aggregate, $13.2 million.

Low-Income Housing Tax Credit Interests: As described in Note 1, Torchmark has $293 million invested in entities which provide certain tax benefits. As of December 31, 2011, Torchmark remained obligated under these commitments for $109 million, of which $85 million is due in 2012, $21 million in 2013, $2 million in 2014, and $1 million thereafter.

Concentrations of Credit Risk: Torchmark maintains a diversified investment portfolio with limited concentration in any given issuer. At December 31, 2011, the investment portfolio, at fair value, consisted of the following:


Investment-grade corporate securities	80	%
Securities of state and municipal governments	11
Below-investment-grade securities	5
Policy loans, which are secured by the underlying insurance policy values	3
Other fixed maturities, equity securities, mortgages, real estate, other long-term investments, and short-term investments	1

	100	%

As of December 31, 2011, securities of state and municipal governments represented 11% of invested assets at fair value. Such investments are made throughout the U.S. At year-end 2011, 5% or more of the state and municipal bond portfolio at fair value was invested in securities issued within the following states: Texas (34%), Ohio (8%), Washington (7%), and Alabama (5%). Otherwise, there was no significant concentration within any given state.

105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 15—Commitments and Contingencies (continued)

Corporate debt and equity investments are made in a wide range of industries. Below are the ten largest industry concentrations held in the corporate portfolio at December 31, 2011, based on fair value:


Insurance	18	%
Electric utilities and services	17	%
Banks	12	%
Oil and gas extraction	6	%
Pipelines	6	%
Mining	4	%
Transportation	3	%
Chemicals	3	%
Telecommunications	3	%
Diversified financial services	2	%

At year-end 2011, 5% of invested assets at fair value was represented by fixed maturities rated below investment grade (BB or lower as determined by the weighted average of available ratings from rating services). Par value of these investments was $787 million, amortized cost was $701 million, and fair value was $579 million. While these investments could be subject to additional credit risk, such risk should generally be reflected in their fair value.

Collateral Requirements: Torchmark requires collateral for investments in instruments where collateral is available and is typically required because of the nature of the investment. Torchmark’s mortgages are secured by the underlying real estate.

Guarantees: At December 31, 2011, Torchmark had in place four guarantee agreements, all of which were either parent company guarantees of subsidiary obligations to a third party, or parent company guarantees of obligations between wholly-owned subsidiaries. As of December 31, 2011, Torchmark had no liability with respect to these guarantees.

Trust Preferred Securities: Torchmark entered into a performance guarantee for the obligations of the Torchmark Capital Trust III when the trust preferred securities were issued by that trust. It guarantees payment of distributions and the redemption price of the securities until the securities are redeemed in full, or all obligations have been satisfied should Trust III default on an obligation. The total redemption price of the trust preferred securities is $120 million.

Letters of Credit: Torchmark has guaranteed letters of credit in connection with its credit facility with a group of banks. The letters of credit were issued by TMK Re, Ltd., a wholly-owned subsidiary, to secure TMK Re, Ltd.’s obligation for claims on certain policies reinsured by TMK Re, Ltd. that were sold by other Torchmark insurance companies. These letters of credit facilitate TMK Re, Ltd.’s ability to reinsure the business of Torchmark’s insurance carriers. The agreement expires in 2015. The maximum amount of letters of credit available is $250 million. Torchmark (parent company) would be liable to the extent that TMK Re, Ltd. does not pay the reinsured party. At December 31, 2011, $198 million of letters of credit were outstanding.

106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 15—Commitments and Contingencies (continued)

Equipment leases: Torchmark has guaranteed performance of a subsidiary as lessee under two leasing arrangements for aviation equipment. One of the leases commenced in 2003 for a lease term of approximately 10 years and the other was entered into in 2009 also for 10 years. Torchmark has certain renewal and early termination options under the first lease. At December 31, 2011, total remaining undiscounted payments under the leases were approximately $8 million. Torchmark (parent company) would be responsible for any subsidiary obligation in the event the subsidiary did not make payments or otherwise perform under the terms of the lease.

Litigation: Torchmark and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including claims involving tax matters, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of Torchmark’s subsidiaries, employment discrimination, and miscellaneous other causes of action. Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, management does not believe that such litigation will have a material adverse effect on Torchmark’s financial condition, future operating results or liquidity; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future. This bespeaks caution, particularly in states with reputations for high punitive damage verdicts such as Alabama and Mississippi. Torchmark’s management recognizes that large punitive damage awards bearing little or no relation to actual damages continue to be awarded by juries in jurisdictions in which Torchmark and its subsidiaries have substantial business, particularly Alabama and Mississippi, creating the potential for unpredictable material adverse judgments in any given punitive damage suit.

As previously disclosed in filings with the Securities and Exchange Commission (SEC), United American was named as a defendant in purported class action litigation originally filed on September 16, 2004, in the Circuit Court of Saline County, Arkansas on behalf of the Arkansas purchasers of association group health insurance policies or certificates issued by United American through Heartland Alliance of America Association and Farm & Ranch Healthcare, Inc. (Smith and Ivie v. Collingsworth, et al., CV2004-742-2). The plaintiffs asserted claims for fraudulent concealment, breach of contract, common law liability for non-disclosure, breach of fiduciary duties, civil conspiracy, unjust enrichment, violation of the Arkansas Deceptive Trade Practices Act, and violation of Arkansas law and the rules and regulations of the Arkansas Insurance Department. Declaratory, injunctive and equitable relief, as well as actual and punitive damages were sought by the plaintiffs. On September 7, 2005, the plaintiffs amended their complaint to assert a nation-wide class, defined as all United American insureds who simultaneously purchased both an individual Hospital and Surgical Expense health insurance policy (Form HSXC) and an individual supplemental term life insurance policy (Form RT85) from Farm & Ranch through Heartland. Defendants removed this litigation to the United States District Court for the Western District of Arkansas (No. 4:05-cv-1382) but that Court remanded the litigation back to the state court on plaintiffs’ motion. On July 22, 2008, the plaintiffs filed a second amended complaint, asserting a class defined as “all persons who, between January 1998 and the present, were residents of Arkansas, California, Georgia, Louisiana or Texas, and purchased through Farm & Ranch: (1) a health insurance policy issued by United American known as Flexguard Plan, CS-1 Common Sense Plan, GSP Good Sense Plan, SHXC Surgical & Hospital Expense Policy, HSXC 7500 Hospital/Surgical Plan, MMXC Hospital/Surgical Plan, SMXC Surgical/Medical Expense Plan and/or SSXC Surgical Safeguard Expense Plan, and (ii) a membership in Heartland.” Plaintiffs assert claims for breach of contract, violation of Arkansas Deceptive Trade Practices Act and/or applicable consumer protection laws in other states, unjust enrichment, and common law fraud. Plaintiffs seek actual, compensatory, statutory and punitive damages, equitable and declaratory relief. On September 8, 2009, the Saline County Circuit Court granted the plaintiff’s motion certifying the class. On October 7, 2009, United American filed its notice of appeal of the class certification and subsequently filed its appellate brief on April 8, 2010. On December 2, 2010, the Arkansas Supreme Court affirmed the lower court’s decision to certify the class. On January 6, 2012, the parties agreed in principal to settle the case. On January 11, 2012, the Court ordered the continuation of the trial, previously set to commence on January 17, 2012, pending notice to the class and the Court’s consideration of the agreed-upon settlement.

107

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 15—Commitments and Contingencies (continued)

On March 15, 2011, purported class action litigation was filed against American Income and Torchmark in the District Court for the Northern District of Ohio (Fitzhugh v. American Income Life Insurance Company and Torchmark Corporation, Case No. 1:11-cv-00533). The plaintiff, a formerly independently contracted American Income agent, alleges that American Income intentionally misclassified its agents as independent contractors rather than as employees in order to escape minimum wage and overtime requirements of the Fair Labor Standards Act, as well as to avoid payroll taxes, workers compensation premiums and other benefits required to be provided by employers. Monetary damages in the amount of unpaid compensation plus liquidated damages and/or prejudgment interest as well as injunctive and/or declaratory relief is sought by the plaintiff on behalf of the purported class. On November 3, 2011, the Court granted American Income’s motion to compel arbitration and dismissed the case. Plaintiffs have appealed this decision.

Torchmark subsidiary, United American was named as defendant in purported class action litigation filed on May 31, 2011 in Cross County Arkansas Circuit Court (Kennedy v. United American Insurance Company (Case # CV-2011-84-5). In the litigation, filed on behalf of a proposed nationwide class of owners of certain limited hospital and surgical expense benefit policies from United American, the plaintiff alleged that United American breached the policy by failing and/or refusing to pay benefits for the total number of days an insured is confined to a hospital and by limiting payment to the number of days for which there are incurred hospital room charges rather than also including benefits for services and supplies. Claims for unjust enrichment, breach of contract, bad faith refusal to pay first party benefits, breach of the implied duty of good faith and fair dealing, bad faith, and violation of the Arkansas Deceptive Trade Practices Act were initially asserted. The plaintiff sought declaratory relief, restitution and/or monetary damages, punitive damages, costs and attorneys fees. In September 2011, the plaintiff dismissed all causes of action, except for the breach of contract claim.

On November 14, 2011, plaintiff filed an amended complaint based upon the same facts asserting only breach of contract claims on behalf of a purported nationwide restitution/monetary relief class or, in the first alternative, a purported multiple-state restitution/monetary relief class or, in the second alternative, a purported Arkansas statewide restitution/monetary relief class. Restitution and/or monetary relief for United American’s alleged breaches of contract, costs, attorney’s fees and expenses, expert fees, prejudgment interest and other relief are sought on behalf of the plaintiff and members of the class. On December 7, 2011, United American filed a Motion to Dismiss the plaintiff’s amended complaint and on January 11, 2012, plaintiff filed a response thereto. Discovery has commenced and is ongoing.

108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 16—Selected Quarterly Data (Unaudited)

The following is a summary of quarterly results for the two years ended December 31, 2011. The information is unaudited but includes all adjustments (consisting of normal accruals) which management considers necessary for a fair presentation of the results of operations for these periods.


	Three Months Ended
	March 31,			June 30,			September 30,			December 31,

2011:
Premium and policy charges	$	679,901		$	672,350		$	650,525		$	653,542
Net investment income		171,647			173,104			173,491			174,786
Realized investment gains(losses)		(22,723	)		31,272			12,600			4,755
Total revenues		829,272			877,334			837,241			833,554
Policy benefits		464,127			454,694			438,774			435,681
Amortization of acquisition expenses		92,463			91,664			89,899			90,557
Pretax Income from continuing operations		147,517			209,052			190,123			177,090
Income from continuing operations		100,740			142,781			131,256			122,839
Income from discontinued operations		(599	)		0			144			0
Net income		100,141			142,781			131,400			122,839
Basic net income per common share*
Continuing operations		.87			1.29			1.25			1.21
Discontinued operations		(0.01	)		0.00			0.00			0.00
Total basic net income per share		.86			1.29			1.25			1.21
Diluted net income per common share*
Continuing operations		.85			1.27			1.25			1.20
Discontinued operations		(0.01	)		0.00			0.00			0.00
Total diluted net income per share		.84			1.27			1.25			1.20

2010:
Premium and policy charges	$	670,944		$	669,569		$	657,827		$	653,418
Net investment income		167,111			170,612			172,337			166,304
Realized investment gains(losses)		7,261			(5,002	)		8,045			27,036
Total revenues		845,678			835,895			838,888			847,171
Policy benefits		468,934			454,177			433,514			436,419
Amortization of acquisition expenses		94,688			89,261			90,904			87,537
Pretax income from continuing operations		167,961			175,003			200,122			207,484
Income from continuing operations		111,433			116,132			132,772			143,758
Income from discontinued operations		6,283			6,201			(23,566	)		5,853
Net income		117,716			122,333			109,206			149,611
Basic net income per common share*
Continuing operations		0.90			0.94			1.09			1.20
Discontinued operations		0.05			0.05			(0.19	)		0.05
Total basic net income per share		0.95			0.99			0.90			1.25
Diluted net income per common share*
Continuing operations		0.89			0.94			1.08			1.18
Discontinued operations		0.05			0.05			(0.19	)		0.05
Total diluted net income per share		0.94			0.99			0.89			1.23

Basic and diluted net income per share by quarter may not add to per share income on a year-to-date basis due to share weighting and rounding.

109

Exhibit 11. Statement re computation of per share earnings

TORCHMARK CORPORATION

COMPUTATION OF EARNINGS PER SHARE*


	Twelve Months Ended December 31,
	2011			2010			2009
Income from continuing operations	$	497,616,000		$	504,095,000		$	364,273,000
Income (loss) from discontinued operations		(455,000	)		(5,229,000	)		18,901,000


Net Income	$	497,161,000		$	498,866,000		$	383,174,000

Basic weighted average shares outstanding		108,278,113			122,009,228			124,550,384
Diluted weighted average shares outstanding		109,815,390			123,123,338			124,550,384

Basic net income per share:
Continuing operations		4.60		$	4.13		$	2.93
Discontinued operations		(0.01	)		(0.04	)		0.15

Total basic net income per share		4.59		$	4.09		$	3.08


Diluted net income per share:
Continuing operations		4.53		$	4.09		$	2.93
Discontinued operations		0.00			(0.04	)		0.15

Total diluted net income per share		4.53		$	4.05		$	3.08

Retroactively adjusted for three-for-two stock split

120

TORCHMARK CORPORATION

(PARENT COMPANY)

SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED BALANCE SHEETS

(Amounts in thousands)


	December 31,
	2011			2010
Assets:
Investments:
Long-term investments	$	36,458		$	15,963
Short-term investments		58			62,582

Total investments		36,516			78,545
Cash		27,099			0
Investment in affiliates		4,960,492			4,624,583
Due from affiliates		50,977			138,130
Taxes receivable		61,616			65,195
Other assets		7,581			5,391

Total assets	$	5,144,281		$	4,911,844


Liabilities and shareholders’ equity:
Liabilities:
Short-term debt	$	224,842		$	198,875
Long-term debt		790,571			789,643
Due to affiliates		145,556			136,931
Other liabilities		123,681			119,066

Total liabilities		1,284,650			1,244,515

Shareholders’ equity:
Preferred stock		351			351
Common stock		112,312			119,812
Additional paid-in capital		775,842			783,119
Accumulated other comprehensive income		549,916			23,092
Retained earnings		3,264,711			3,124,436
Treasury stock		(843,501	)		(383,481	)

Total shareholders’ equity		3,859,631			3,667,329

Total liabilities and shareholders’ equity	$	5,144,281		$	4,911,844

See Notes to Condensed Financial Statements and accompanying Report of Independent Registered

Public Accounting Firm.

121

TORCHMARK CORPORATION

(PARENT COMPANY)

SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)

CONDENSED STATEMENTS OF OPERATIONS

(Amounts in thousands)


	Year Ended December 31,
	2011			2010			2009
Net investment income	$	23,542		$	26,031		$	17,374
Realized investment gains (losses)		508			(1,646	)		(1	)

Total revenue		24,050			24,385			17,373

General operating expenses		30,945			21,682			18,119
Reimbursements from affiliates		(19,335	)		(13,375	)		(5,973	)
Interest expense		75,426			74,827			71,687

Total expenses		87,036			83,134			83,833


Operating income (loss) before income taxes and equity in earnings of affiliates		(62,986	)		(58,749	)		(66,460	)
Income taxes		14,380			18,521			19,773


Net operating loss before equity in earnings of affiliates		(48,606	)		(40,228	)		(46,687	)
Equity in earnings of affiliates		545,767			539,094			429,861


Net income	$	497,161		$	498,866		$	383,174

See Notes to Condensed Financial Statements and accompanying Report of Independent Registered

Public Accounting Firm.

122

TORCHMARK CORPORATION

(PARENT COMPANY)

SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(continued)

CONDENSED STATEMENTS OF CASH FLOWS

(Amounts in thousands)


	Year Ended December 31,
	2011			2010			2009
Cash provided from (used for) operations before dividends from subsidiaries	$	(33,042	)	$	(33,403	)	$	(51,241	)
Cash dividends from subsidiaries		769,139			370,947			354,695

Cash provided from operations		736,097			337,544			303,454

Cash provided from (used for) investing activities:
Acquisition of investments		0			(14,279	)		(125	)
Disposition of investments		11,828			33			31
Net decrease (increase) in short-term investments		62,524			106,881			(129,789	)
Investment in subsidiaries		(25,000	)		(18,722	)		(100,000	)

Cash provided from (used for) investing activities		49,352			73,913			(229,883	)

Cash provided from (used for) financing activities:
Issuance of 9¹/₄% Senior Notes		0			0			296,308
Acquisition of 9¹/₄% Senior Notes		0			(8,913	)		0
Repayment of 8¹/₄% Senior Debentures		0			0			(99,050	)
Net issuance (repayment) of commercial paper		25,967			(34,432	)		(71,329	)
Issuance of stock		162,613			37,863			4,430
Acquisitions of treasury stock		(972,556	)		(246,006	)		(47,564	)
Net borrowings to/from subsidiaries		96,000			(86,800	)		(87,200	)
Excess tax benefit on stock option exercises		2,021			162			(30	)
Payment of dividends		(72,395	)		(73,331	)		(69,885	)

Cash provided from (used for) financing activities		(758,350	)		(411,457	)		(74,320	)


Net increase (decrease) in cash		27,099			0			(749	)
Cash balance at beginning of period		0			0			749

Cash balance at end of period	$	27,099		$	0		$	0

See Notes to Condensed Financial Statements and accompanying Report of Independent Registered

Public Accounting Firm.

123

TORCHMARK CORPORATION

(PARENT COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Amounts in thousands)

Note A—Dividends from Subsidiaries

Cash dividends paid to Torchmark from the consolidated subsidiaries were as follows:


	2011		2010		2009
Consolidated subsidiaries	$	769,139	$	370,947	$	354,695

Note B—Supplemental Disclosures of Cash Flow Information

The following table summarizes noncash transactions, which are not reflected on the Condensed Statements of Cash Flows:


	Year Ended December 31,
	2011		2010		2009
Stock-based compensation not involving cash	$	14,954	$	11,848	$	9,860

The following table summarizes certain amounts paid (received) during the period:


	Year Ended December 31,
	2011		2010		2009
Interest paid	$	74,569	$	75,909	$	73,031
Income taxes received		22,893		2,379		25,202

Note C—Special Items

In 2009, a Federal income tax expense of $1.5 million was incurred relating to Internal Revenue Service examinations of prior years.

Note D—Preferred Stock

As of December 31, 2011, Torchmark had 351 thousand shares of Cumulative Preferred Stock, Series A, issued and outstanding, of which 280 thousand shares were 6.50% Cumulative Preferred Stock, Series A, and 71 thousand shares were 7.15% Cumulative Preferred Stock, Series A (collectively, the “Series A Preferred Stock”). All issued and outstanding shares of Series A Preferred Stock were held by wholly-owned insurance subsidiaries. In the event of liquidation, the holders of the Series A Preferred Stock at the time outstanding would be entitled to receive a liquidating distribution out of the assets legally available to stockholders in the amount of $1 thousand per share or $351 million in the aggregate, plus any accrued and unpaid dividends, before any distribution is made to holders of Torchmark common stock. Holders of Series A Preferred Stock do not have any voting rights nor have rights to convert such shares into shares of any other class of Torchmark capital stock.

See accompanying Report of Independent Registered Public Accounting Firm.

124

TORCHMARK CORPORATION

SCHEDULE IV. REINSURANCE (CONSOLIDATED)

(Amounts in thousands)


	Gross Amount		Ceded to Other Companies⁽¹⁾		Assumed from Other Companies		Net Amount		Percentage of Amount Assumed to Net

For the Year Ended December 31, 2011:
Life insurance in force	$	144,778,793	$	738,935	$	4,414,247	$	148,454,105		3.0	%


Premiums:⁽²⁾
Life insurance	$	1,675,307	$	4,716	$	31,311	$	1,701,902		1.8	%
Health insurance		931,751		2,285		0		929,466		0	%

Total premium	$	2,607,058	$	7,001	$	31,311	$	2,631,368		1.2	%


For the Year Ended December 31, 2010:
Life insurance in force	$	140,653,839	$	722,577	$	4,743,222	$	144,674,484		3.3	%


Premiums:⁽²⁾
Life insurance	$	1,618,973	$	4,684	$	23,419	$	1,637,708		1.4	%
Health insurance		990,024		2,603		0		987,421		0	%

Total premium	$	2,608,997	$	7,287	$	23,419	$	2,625,129		.9	%


For the Year Ended December 31, 2009:
Life insurance in force	$	139,408,962	$	744,213	$	1,898,360	$	140,563,109		1.4	%


Premiums:⁽²⁾
Life insurance	$	1,550,434	$	4,647	$	18,172	$	1,563,959		1.2	%
Health insurance		1,020,467		2,756		0		1,017,711		0	%

Total premium	$	2,570,901	$	7,403	$	18,172	$	2,581,670		.7	%

(1)

No amounts have been netted against ceded premium

(2)

Excludes policy charges of $24,950, $26,629, and $28,435, in each of the years 2011, 2010, and 2009, respectively.

See accompanying Report of Independent Registered Public Accounting Firm.

125

GLOBE LIFE INC. - FORM 8-K/A - EX-99.1 - September 13, 2012

Attached files

GLOBE LIFE INC. Reports