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.

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 13-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 13-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, 2008. 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)



                                                                               2008                   2007
                                   2008           2007           2006         Change        %        Change        %
Life insurance underwriting
margin                          $  431,775     $  417,038     $  397,444     $  14,737        4     $  19,594       5
Health insurance underwriting
margin                             194,711        208,254        206,694       (13,543 )     (7 )       1,560       1
Annuity underwriting margin         (6,423 )        9,337         11,915       (15,760 )   (169 )      (2,578 )   (22 )
Other insurance:
Other income                         4,154          4,313          4,024          (159 )     (4 )         289       7
Administrative expense            (159,283 )     (154,552 )     (155,331 )      (4,731 )      3           779      (1 )
Excess investment income           328,141        323,762        318,763         4,379        1         4,999       2
Corporate and adjustments          (21,278 )      (17,921 )      (14,437 )      (3,357 )     19        (3,484 )    24

Pre-tax total                      771,797        790,231        769,072       (18,434 )     (2 )      21,159       3
Applicable taxes                  (258,510 )     (268,118 )     (264,716 )       9,608       (4 )      (3,402 )     1

After-tax total                    513,287        522,113        504,356        (8,826 )     (2 )      17,757       4
Remove benefit from
interest-rate swaps (after
tax) from Investment
Segment**                              -0-            -0-           (319 )         -0-                    319
Realized gains (losses)
(after tax)*                       (69,878 )        1,777         (7,254 )     (71,655 )                9,031
Gain on sale of agency
buildings (after tax)                  181          2,768          2,816        (2,587 )                  (48 )
Tax settlements (after tax)         10,823          1,149         11,607         9,674                (10,458 )
Net proceeds (cost) from
legal settlements (after tax)         (770 )         (272 )        7,425          (498 )               (7,697 )
Loss on writedown of
Company-occupied property
(after tax)                         (1,384 )          -0-            -0-        (1,384 )                  -0-

Net income                      $  452,259     $  527,535     $  518,631     $ (75,276 )    (14 )   $   8,904       2

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

** Included as an addition to income of both the Investment Segment and Realized investment gains.

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 $75 million or 14% to $452 million in 2008. On a diluted per share basis, net income declined 7% to $5.11. The primary cause for the 2008 decline was after-tax realized investment losses of $70 million ($108 million before tax). These losses were due mostly to writedowns of fixed-maturity securities issued by Lehman Brothers and Washington Mutual. In 2007, net income grew 2% or $9 million over the prior year to $528 million. On a per share basis, 2007 net income grew 7% to $5.50. Per share earnings growth exceeded the growth in dollar earnings in both periods as a result of our share repurchase program discussed later under this caption. Life insurance was our strongest performing segment in both years, contributing $15 million to 2008 pretax growth and $20 million to 2007 growth. Margin improvements in this segment were a result of premium growth and lower obligation ratios in both periods. The investment segment also contributed to the growth in pretax income in each year, rising $4 million in 2008 and $5 million in 2007. Excess investment income, measuring the profit of the investment segment, was benefited by reduced financing costs and growth in the size of the investment portfolio in both years. The growth in excess investment income was attained even though significant cash flow has been used to buy Torchmark stock in all three periods.

In 2008, the contributions to growth in our life insurance and investment segments were more than offset by declines in our annuity and health segments. Our 2008 annuity underwriting loss was $6 million, compared with gains of $9 million in 2007 and $12 million in 2006. In 2008, declines in equity markets have caused variable policyholder account values to decline, guaranteed minimum death benefit costs to increase, policyholders to withdraw funds, and changes in actuarial assumptions all of which have resulted in the underwriting losses. We do not emphasize this segment and have discontinued the sale of variable annuities in 2008, only offering a fixed annuity product. Health insurance underwriting margin improved $2 million to $208 million in 2007, but declined 7% or $14 million in 2008 to $195 million. This

segment has experienced increased competition in recent periods, especially in 2008, which has caused a decline in agent count resulting in a significant reduction in new sales.

Total revenues declined 5% in 2008 to $3.33 billion. In 2007, total revenues rose 2% to $3.49 billion from $3.42 billion in 2006. Life premium rose $47 million in 2008 and $46 million in 2007, while net investment income rose $23 million in 2008 and $20 million in 2007. Growth in these two revenue components accounted for the increase in 2007 revenues. However, 2008 revenues were negatively affected by the aforementioned pretax realized loss of $108 million and a decline in health premium of $110 million, described further under this caption.

Life insurance premium has grown steadily in each of the three years ending December 31, 2008, rising 3% in 2008 to $1.62 billion and also 3% in 2007. Margins as a percentage of premium have also increased slightly each year to 27% of premium in 2008 and 2007 from 26% in 2006. Life net sales rose 13% in 2008 to $298 million, after having declined slightly in the two preceding years. Net sales rose in each of the three major life distribution channels in 2008. Life insurance segment results are discussed further under the caption Life Insurance.

We market three primary health insurance products: under-age-65 limited-benefit health insurance, Medicare Supplement insurance, and the Medicare Part D prescription drug benefit. Health premium declined 9% in 2008 to $1.1 billion from $1.2 billion in 2007. Health premium was flat in 2007 with 2006. The primary factor in the 2008 decline was the decline in agent count in our United American Branch Office during the year, our largest health producer. This agency has experienced intense competition, which has resulted in a significant decrease in new health sales and has negatively impacted premium income. Efforts are underway to rebuild this agency. Prior to 2008, this agency had been instrumental in the growth in the sales of our limited-benefit health product, as demand for this product had increased. Accordingly, premium from the limited-benefit product has grown significantly in relation to Medicare Supplement premium in recent years. While Medicare Supplement remains our largest contributor to total health premium, increased competition has also dampened sales of this product resulting in premium declines in each successive year. Also, 2008 was our third year of offering Medicare Part D insurance. As most of the country's Part D enrollees selected a plan provider in 2006, we do not expect growth in our Part D business going forward. See the discussion under Health Insurance for a more detailed discussion of health insurance results.

While we still offer fixed annuities, we do not emphasize sales of annuity products, favoring life insurance instead. 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 $4 million in 2008 and $5 million in 2007. It had declined 2% in the previous year. This segment benefited from lower financing costs in each successive year. In 2008, these costs declined primarily due to lower rates and a lower average balance on our short-term debt. In 2007, our interest expense on funded debt declined due to the refinancing of the two funded debt issues noted below. Prior to 2008, the average yield on new investments acquired had been lower than the average portfolio yield, restricting growth in net investment income in relation to the size of the portfolio. In 2008, however, the yield on new investments exceeded the portfolio yield by 25 basis points. Growth in total investment income has been 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. Management believes that the acquisition of Torchmark stock at favorable prices provides a superior return on available cash.

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 93% of our invested assets at fair value consists of fixed maturities of which 94% was investment grade at December 31, 2008. The average quality rating of the portfolio was BBB+. The portfolio contains no securities backed by sub prime or Alt-A mortgages, no residential mortgages, 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 3-Investments in the Notes to Consolidated Statements of Operations for a more detailed discussion of this segment.

As mentioned earlier in this summary, we wrote down certain fixed maturities and equities during 2008, including bonds issued by Lehman Brothers, Washington Mutual, and various other institutions in the pretax amount of $106 million. The write downs were taken as these securities met our criteria for other-than-temporary impairment. These writedowns compared with $11 million taken in 2007 and none in 2006. Please refer to Note 3-Investments in the Notes to Consolidated Financial Statements under the caption Other-than-temporary impairments for more information on these writedowns and our criteria for consideration of other-than-temporary impairment. Including the writedowns, we had total after-tax realized investment losses of $70 million in 2008 ($.79 per share), compared with a $2 million gain in 2007 ($.02 per share), and a $7 million loss in 2006 ($.07 per share). Realized investment gains and losses can vary significantly from period to period and may have a material positive or negative impact on net income. Under the caption Realized Gains and Losses in this report, we present a complete analysis and discussion of our realized gains and losses including the writedowns. Also, as explained in Note 13-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.

During the second quarter of 2006, we issued two new debt securities in separate public offerings: (1) our 7.1% Trust Preferred Securities, redemption amount $120 million and (2) our 6 3/8% Senior Notes, par value $250 million. These offerings essentially provided funding for the repayment of two existing debt instruments in the fourth quarter of 2006: (1) the call of our 7¾% Trust Preferred Securities at a redemption price of $150 million and (2) the maturity of our 6¼% Senior Notes, par value $180 million. More information on these transactions can be found in Note 10-Debt in the Notes to Consolidated Financial Statements and in our discussion of Capital Resources in this report.

In each of the years 2006 through 2008, net income was affected by certain significant, unusual, and nonrecurring nonoperating items. We do not view these items as components of core operating results because they are not indicative of past performance or future prospects of the insurance operations. A discussion of these items follows.

As reported in Note 1-Significant Accounting Policies in the Notes to Consolidated Financial Statements under the caption Litigation and Tax Settlements, we have been involved in a number of litigation issues over the course of the three year period 2006 through 2008 in which we either received settlements net of expenses or incurred settlement losses and expenses. These issues resulted in after-tax charges of $770 thousand in 2008, $272 thousand in 2007, and an after-tax benefit of $7.4 million in 2006. Additionally, as described under the same caption of Note 1, we received tax settlements in each year in the amounts of $10.8 million in 2008, $1.1 million in 2007, and $11.6 million in 2006. All of these litigation and tax issues pertained to issues arising many years ago and are not considered by management to relate to our current operations. Legal expenses and litigation items pertaining to current operations are included in either insurance administrative expenses or parent expenses, as appropriate, in our segment analysis. As explained in Note 3-Investments under the caption Other-than-temporary impairments, we wrote down certain company-occupied property to fair value during 2008. The write down resulted in an after-tax charge of $1.4 million.

In 2006, Liberty began a program to dispose of its agency office buildings, replacing them with rental facilities. In 2006, 21 buildings were sold for gross proceeds of $6.7 million and a pre-tax gain of $4.8 million. In 2007, 21 additional buildings were sold for proceeds of $6.4 million and a pretax gain of $4.3 million ($2.8 million after tax). The program began to wind down in 2008 as five buildings were sold for proceeds of $787 thousand and a pretax gain of $278 thousand ($181 thousand after tax). Four buildings remained to be sold at December 31, 2008. Because of the significant scale of this nonoperating activity, we have removed $4.3 million ($2.8 million after tax) from our core results representing the gain in 2006 and the gains on the sales in 2007 and 2008.

Torchmark has in place an ongoing share repurchase program which began in 1986 and was reaffirmed at its October 30, 2008 Board of Director's meeting. 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. The following chart summarizes share purchase activity for each of the three years ended December 31, 2008.

                          Analysis of Share Purchases

                             (Amounts in thousands)



                                         2008                 2007                 2006
Purchases                         Shares    Amount     Shares    Amount     Shares    Amount
Excess cash flow and borrowings    7,638   $ 426,640    6,150   $ 402,116    5,575   $ 320,425
Option proceeds                      487      29,096      766      49,675      415      24,436

Total                              8,125   $ 455,736    6,916   $ 451,791    5,990   $ 344,861

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.

Life Insurance. Life insurance is our largest insurance segment, with 2008 life premium representing 59% of total premium. Life underwriting income before other income and administrative expense represented 70% of the total in 2008. Additionally, investments supporting the reserves for life products result in the majority of excess investment income attributable to the investment segment.

Life insurance premium rose 3% to $1.62 billion in 2008 after having increased 3% in 2007 to $1.57 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)



                                             2008                      2007                      2006
                                                    % of                      % of                      % of
                                       Amount       Total        Amount       Total        Amount       Total
Direct Response                      $   511,165       32 %    $   484,176       31 %    $   457,159       30 %
American Income Exclusive Agency         473,784       29          440,164       28          409,188       27
Liberty National Exclusive Agency        287,312       18          293,936       19          300,933       20
Other Agencies                           344,543       21          351,688       22          356,987       23

                                     $ 1,616,804      100 %    $ 1,569,964      100 %    $ 1,524,267      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 $1.71 billion at December 31, 2008, an increase of 2% over $1.67 billion a year earlier. Annualized life premium in force was $1.62 billion at December 31, 2006.

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)



                                            2008                    2007                    2006
                                                  % of                    % of                    % of
                                      Amount      Total       Amount      Total       Amount      Total
Direct Response                      $ 123,076       41 %    $ 114,232       43 %    $ 115,031       43 %
American Income Exclusive Agency       108,353       37         92,306       35         86,369       33
Liberty National Exclusive Agency       48,540       16         36,981       14         41,369       16
Other Agencies                          18,494        6         20,727        8         22,728        8

                                     $ 298,463      100 %    $ 264,246      100 %    $ 265,497      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)



                                            2008                    2007                    2006
                                                  % of                    % of                    % of
                                      Amount      Total       Amount      Total       Amount      Total
Direct Response                      $  80,075       39 %    $  76,043       38 %    $  77,385       37 %
American Income Exclusive Agency        82,063       39         73,862       37         72,072       35
Liberty National Exclusive Agency       29,571       14         28,773       15         34,342       16
Other Agencies                          16,473        8         18,980       10         25,269       12

                                     $ 208,182      100 %    $ 197,658      100 %    $ 209,068      100 %

Direct Response is our leading writer of life insurance. The Direct Response operation consists of two primary components: direct mail and insert media. Direct mail targets primarily young middle-income households with children. The juvenile life insurance policy is a key product. Not only is the juvenile market an important source of sales, but it also is a vehicle to reach the parents and grandparents of the juvenile policyholders. 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.

Insert media, which targets primarily the adult market, involves placing insurance solicitations as advertising inserts into a variety of media, such as coupon packets, newspapers, bank statements, and billings. This media was historically placed by Direct Marketing and Advertising Distributors, Inc. (DMAD), previously an unrelated entity with which we have had a business relationship for over fifteen years. We acquired DMAD in January, 2007 for $47 million, and integrated their operations during 2007. This acquisition allowed the Company to expand marketing opportunities through increased solicitation volume and also improve margins through cost savings in the insert media component.

The Direct Response operation accounted for 32% of our life insurance premium during 2008, the largest of any distribution group. Direct Response's share of total life premium has risen steadily in each of the last three years as illustrated in the chart above. Life premium for this channel rose 6% in both 2008 and 2007. Net sales rose 8% in 2008 to $123 million after a 1% decline in 2007 to $114 million. First-year collected premium increased 5% in 2008 to $80 million after a 2% decline in 2007.

The American Income Exclusive Agency focuses primarily on members of labor unions, but also on credit unions and other associations for its life insurance sales. It is a high profit margin business characterized by lower policy obligation ratios. Life premium for this agency rose 8% to $474 million in 2008, after having also increased 8% in 2007. Net sales increased 17% in 2008 to $108 million from $92 million in 2007. Net sales rose 7% in 2007. First-year collected premium rose 11% in 2008 to $82 million, after having increased 2% in 2007. 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. Growth in the agent count has contributed to the improvements in sales in this agency. The American Income agent count was 3,085 at December 31, 2008 compared with 2,545 a year earlier, an increase of 21%. The agent count rose 8% in 2007 from 2,353 at year end 2006. 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 recruiting of new agents.

The Liberty National Exclusive Agency distribution system markets its life . . .