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

The tables in Note G-Business Segments demonstrate how the measures of profitability are determined. Those tables also reconcile our revenues and expenses by segment to major income statement line items for the nine-month periods ended September 30, 2009 and 2008. Additionally, a table in that note, Analysis of Profitability by Segment, provides a summary of the profitability measures that demonstrates year-to-year comparability and which reconciles those measures to our net income. That summary represents our overall operations in the manner that management views the business, and is a basis of the following highlights discussion.

A discussion of operations by each segment follows later in this report. These discussions compare the first nine months of 2009 with the same period of 2008, unless otherwise noted.

Highlights, comparing the first nine months of 2009 with the first nine months of 2008. Net income per diluted share increased 1% to $3.51. Net income for the 2009 period reflects an after-tax charge of $.94 per share for realized investment losses, which includes $1.08 attributable to writedowns of securities determined to be other-than-temporarily impaired offset by realized gains. Net income per share during the 2008 period reflected an after tax loss of $.90 per share for realized investment losses of which $.86 was a result of other-than-temporary impairments of fixed maturities and real estate. These writedowns of investments are discussed in detail in Note E-Investments under the caption Other-Than-Temporary Impairments in this report. Additionally, we benefited from tax settlements in both years as described in Note F-Income Taxes and Note G-Business Segments. Net income was increased by $3 million or $.04 per share in 2009 and $11 million or $.12 per share in 2008, as a result of these tax settlements.

As explained in Note G-Business Segments, differences in our estimate of interim results for Medicare Part D as we view this product for segment purposes and GAAP resulted in a $7 million after-tax charge to 2009 earnings or $.08 per share, compared with a charge of $8 million after-tax or $.08 per share in the prior period. We expect our 2009 full year benefit ratios to be approximately the same as those for interim periods, as was the case in 2008 and prior years. For this reason, there should be no differences in segment versus GAAP reporting by year end 2009, as it relates to Medicare Part D.

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

Total premium income declined 3% for the 2009 nine months to $2.0 billion, as health premium declined 10%. Total net sales declined 7% to $319 million. First-year collected premium declined 12% to $247 million for the period.

Life insurance premium income grew 2% to $1.2 billion. Life net sales increased in each of Torchmark's major distribution groups, increasing 11% in total to $246 million. First-year collected life premium rose 7% to $167 million. Life underwriting margins increased 4% to $332 million.

Health insurance premium income, excluding Medicare Part D premium, decreased 12% to $636 million. Health net sales, excluding Part D, declined 47% to $58 million and first-year collected health premium, excluding Part D, declined 46% to $60 million. These declines resulted primarily from the increased turnover of agents in our United American (UA) Branch Office Agency. This Agency has historically been a key distributor of our health products, but has been facing increased competition in recent periods. We are addressing the turnover in the UA Branch Office Agency by combining this Agency with the Liberty National Exclusive Agency, offering the agents new lines of products to sell with new compensation incentives focused on marketing those products. Beginning in 2009, we have combined the financial results for Liberty National and the UA Branch Office systems to reflect their ongoing consolidation. We will continue to report net sales and producing agents separately for the balance of 2009. Health underwriting income of $115 million, excluding Part D, remained at 18% of premium in 2009.

Our Medicare Part D prescription drug business is a component of the health insurance segment. In the manner we view our Medicare Part D business as described in Note G-Business Segments, policyholder premium was $139 million in 2009 compared with $133 million in 2008, an increase of 5%. Underwriting income declined 8% to $15 million.

Excess investment income per diluted share decreased 1% to $2.74, while excess investment income declined 9% to $228 million. Net investment income increased $2 million, or less than 1%, even though the portfolio at amortized cost grew 4%. We held significantly more short-term investments in the 2009 period due to the uncertain economic environment, even though yields on short-terms were 0.2% in 2009 compared with 2.2% a year earlier. The decline in excess investment income was due to the greater holding of short-terms which negatively affected net investment income and from the $21 million or 10% increase in interest cost on net insurance policy liabilities. Financing costs increased 10% in the period primarily as a result of the increased interest expense from the new debt issue noted below.

In the first nine months of 2009, we invested new money at an effective annual yield on new investments of 6.71%. This yield compares with an average portfolio yield of 6.88% (as of September 30, 2009). The fixed-maturity portfolio at fair value accounted for 93% of total investments at September 30, 2009 and had an average rating of BBB+. Short-term investments accounted for 3% of the portfolio, up from 2% at year end 2008, providing for more flexibility in the recent uncertain economic environment.

During the first nine months of 2009, the net unrealized losses in our fixed maturity portfolio improved from $1.8 billion at year end 2008 to $396 million at September 30, 2009. The fixed maturity portfolio contains no securities backed by subprime or Alt A mortgages. We are not a party to any counterparty risk, with no credit default swaps or other derivative contracts. We do not engage in securities lending.

As described in Note H-Debt Transactions, we issued $300 million principal amount of 9 1/4% Senior Notes as of June 30, 2009 for proceeds of $296 million after expenses. We used a portion of these funds to repay our $99 million of 8 1/4% Senior Debentures due August 15, 2009. The remainder of the funds was primarily invested in fixed maturities.

We have an on-going share repurchase program which began in 1986 and was reaffirmed at the October 30, 2008 Board of Directors' meeting. With no specified authorization amount, we determine the amount of repurchases based on the amount of our excess cash flow, general market conditions, and other alternative uses. In view of the current economic conditions, we temporarily suspended our share repurchase program in the first quarter of 2009. We may resume the program with a reaffirmation of the Board of Directors when market conditions are favorable but do not anticipate acquisitions for the remainder of 2009. In the first quarter of 2009, we acquired 2.07 million shares of the Company's common stock in the open market at a cost of $48 million ($22.98 average price per share). Of the $48 million, $47 million was from excess operating cash flow, which was used to repurchase 2.05 million shares, and $869 thousand was from the cash received from stock option exercises by current and former employees. Proceeds from these option exercises were used to repurchase 20 thousand shares in order to offset dilution from the exercises. No further purchases have been made during the remainder of 2009.

A detailed discussion of our operations by component segment follows.

Life insurance, comparing the first nine months of 2009 with the first nine months of 2008. Life insurance is our predominant segment, representing 61% of premium income and 72% of insurance underwriting margin in the first nine months of 2009. In addition, investments supporting the reserves for life business generate the majority of excess investment income attributable to the Investment segment. Life insurance premium income increased 2% to $1.2 billion. We are currently in the process of combining our United American (UA) Branch Office Exclusive Agency with the Liberty National Exclusive Agency. Management expects that our subsidiaries, UA and Liberty National, will be merged in early 2010. For this reason, all premium income and margin data will be reported on a combined basis in this report. However, we will continue to report sales data and agent counts separately for the two agencies until the two companies are merged. The following table presents Torchmark's life insurance premium by distribution method.

                                 Life Insurance

                         Premium by Distribution Method

                         (Dollar amounts in thousands)



                                                 Nine months ended September 30,            Increase
                                                   2009                  2008              (Decrease)
                                                          % of                  % of
                                              Amount      Total     Amount      Total    Amount       %
Direct Response                             $   403,774      33   $   385,232      32   $ 18,542       5
American Income Exclusive Agency                375,448      30       354,873      29     20,575       6
Liberty National Exclusive Agency               224,649      18       228,948      19     (4,299 )    (2 )
Other Agencies                                  238,313      19       246,501      20     (8,188 )    (3 )

Total Life Premium                          $ 1,242,184     100   $ 1,215,554     100   $ 26,630       2

Net sales, defined earlier in this report as an indicator of new business production, grew 11% to $246 million. All four of our primary distribution groups had growth in net sales. An analysis of life net sales by distribution group is presented below.

                                 Life Insurance

                        Net Sales by Distribution Method

                         (Dollar amounts in thousands)



                                                  Nine months ended September 30,           Increase
                                                     2009                 2008             (Decrease)
                                                            % of                % of
                                                Amount      Total    Amount     Total    Amount       %
Direct Response                               $   101,158      41   $  91,766      42   $  9,392      10
American Income Exclusive Agency                   92,549      37      80,125      36     12,424      16
Liberty National Exclusive Agency                  36,081      15      35,209      16        872       2
United American Branch Office Agency                6,934       3       5,146       2      1,788      35
Other Agencies                                      8,887       4       9,248       4       (361 )    (4 )

Total Life Net Sales                          $   245,609     100   $ 221,494     100   $ 24,115      11

First-year collected life premium, defined earlier in this report, was $167 million in the 2009 period, rising 7% over the prior-year period. First-year collected life premium by distribution group is presented in the table below.

                                 Life Insurance

              First-Year Collected Premium by Distribution Method

                         (Dollar amounts in thousands)



                                                 Nine months ended September 30,           Increase
                                                    2009                 2008             (Decrease)
                                                           % of                % of
                                               Amount      Total    Amount     Total    Amount        %
Direct Response                              $    63,668      38   $  60,800      39   $  2,868        5
American Income Exclusive Agency                  69,505      41      60,934      39      8,571       14
Liberty National Exclusive Agency                 26,261      16      24,787      16      1,474        6
Other Agencies                                     8,020       5       9,839       6     (1,819 )    (18 )

Total                                        $   167,454     100   $ 156,360     100   $ 11,094        7

The Direct Response operation consists of two primary components: insert media and direct mail. Insert media, which targets primarily the adult market, involves placing insurance solicitations as advertising inserts into a variety of media, such as coupon packets, newspapers, bank statements, and billings. Direct mail targets primarily young middle-income households with children. The juvenile life insurance policy is a key product. Not only is the juvenile market an important source of sales, but it also is a vehicle to reach the parents and grandparents of the juvenile policyholders. 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.

Direct Response's life premium income rose 5% to $404 million, representing 33% of Torchmark's total life premium, the largest contribution to premium of any distribution system. Net sales of $101 million rose 10% and first-year collected premium of $64 million rose 5% over the prior year period.

The American Income Exclusive Agency markets primarily to members of labor unions, but also to credit unions and other associations. This agency produced premium income of $375 million, an increase of 6%. American Income is Torchmark's fastest growing life insurance agency on the basis of premium growth. Net sales increased 16% to $93 million, while first-year collected premium rose 14% to $70 million. Growth in sales in our captive agencies is highly dependent on growing the size of the agency force. The American Income agent count was 3,929 at September 30, 2009, 36% higher than a year earlier (2,887). The American Income agency continues to emphasize the recruiting and retention of new agents, focusing on an incentive program to reward growth in both recruiting and production.

As previously mentioned, we are merging the UA Branch Office Agency into the Liberty National Exclusive Agency. The Liberty National Agency has historically marketed life insurance to middle-income customers primarily in the Southeast. The UA Branch Office Agency has historically emphasized health products, but is now changing its focus for newly recruited agents to market Liberty's life and health products. Life premium income for this combined agency was $225 million for the 2009 period, a 2% decline compared with $229 million in the 2008 period. First-year collected premium on a combined basis rose 6% to $26 million.

Liberty National's net sales increased 2% to $36 million. The Liberty Agency had 2,693 producing agents at September 30, 2009, compared with 3,320 a year earlier, a decline of 19%. The decrease in agent count is due primarily to agent compensation issues. A two-tier bonus threshold proved more difficult for producing agents to meet than anticipated. Management reverted to a level bonus threshold during the third quarter of 2009. In addition, due to deteriorating first year persistency rates on business written over the past several quarters, management modified compensation incentives in the third quarter to place more emphasis on retention. This has resulted in the departure of some of the weaker agents. Management believes that declines in agent count could continue during the remainder of 2009, but expects the counts to increase in 2010.

The UA Branch Office Agency produced net sales of $6.9 million in 2009 of Liberty National's life products. As noted above, this Agency traditionally focused on health product sales. Due to intense competition in recent periods in the health insurance market, the UA Branch has experienced sharp declines in agent count. The UA Branch Office Agency had 899 producing agents at September 30, 2009, compared with 1,832 agents a year earlier, a decline of 51%.

As is the case with all of our captive agency forces, growing the number of productive agents is critical to the growth in sales. We have shifted the emphasis in the UA Branch to life and health products currently marketed by Liberty National agents. These products are priced to achieve higher profit margins and have better persistency

than the UA Branch's limited-benefit health insurance. This Agency will continue to offer the current product portfolio, but the majority of our financial incentives will be used to encourage new agents to sell the Liberty National product line. We believe that the combination of this Agency with the Liberty National Agency will provide financial incentives to agents and will improve the stability and profitability of the UA Branch Office Agency.

The Other Agencies distribution systems offering life insurance include the Military Agency, the UA Independent Agency (which predominantly writes health insurance), United Investors, and various minor distribution channels. The Other Agencies distribution group contributed $238 million of life premium income, or 19% of Torchmark's total in the 2009 period, but contributed only 4% of net sales.

                                 Life Insurance

                               Summary of Results

                         (Dollar amounts in thousands)



                                               Nine months ended September 30,
                                                2009                    2008                Increase
                                                       % of                    % of
                                          Amount      Premium     Amount      Premium    Amount       %
Premium and policy charges              $ 1,242,184       100   $ 1,215,554       100   $ 26,630       2
Net policy obligations                      496,429        40       504,251        42     (7,822 )    (2 )
Commissions and acquisition expense         413,287        33       391,578        32     21,709       6

Insurance underwriting income before
other income and administrative
expense                                 $   332,468        27   $   319,725        26   $ 12,743       4

Life insurance underwriting income before insurance administrative expense was $332 million, increasing 4%. This margin growth was caused by the combination of premium growth, a reduction in Direct Response's obligation ratios, and improvement in American Income's margin in 2009. As a percentage of life premium, underwriting margin rose from 26% to 27%.

Health insurance, comparing the first nine months of 2009 with the first nine months of 2008. Health premium accounted for 38% of our total premium in the 2009 period, while the health underwriting margin accounted for 28% of total underwriting margin, reflective of the lower underwriting margin as a percent of premium for health compared with life insurance. Our health products include a variety of limited-benefit health plans including hospital/surgical, cancer and accident plans sold to customers under age 65, as well as Medicare Supplements sold to Medicare enrollees. We also provide coverage under the Medicare Part D prescription drug plan. Medicare Part D business is shown as a separate health component and will be discussed separately in the analysis of the health segment.

As explained in Note G-Business Segments, management does not view the government risk-sharing premium for Medicare Part D as a component of premium income. Excluding this risk-sharing premium, health insurance premium for the 2009 period was $775 million, declining 10%. A reconciliation between segment reporting for Medicare Part D and GAAP is presented in the chart in Note G-Business Segments, and those differences are fully discussed in that note.

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

                                                 Nine months ended September 30,            Increase
                                                    2009                 2008              (Decrease)
                                                           % of                % of
                                               Amount      Total    Amount     Total    Amount         %
United American Independent Agency
Limited-benefit plans                        $    46,406           $  61,294           $ (14,888 )    (24 )
Medicare Supplement                              201,023             210,295              (9,272 )     (4 )

                                                 247,429      39     271,589      37     (24,160 )     (9 )
Liberty National Exclusive Agency
Limited-benefit plans                            187,724             240,307             (52,583 )    (22 )
Medicare Supplement                              110,591             125,032             (14,441 )    (12 )

                                                 298,315      47     365,339      50     (67,024 )    (18 )
American Income Exclusive Agency
Limited-benefit plans                             54,766              54,408                 358        1
Medicare Supplement                                  834                 980                (146 )    (15 )

                                                  55,600       9      55,388       8         212        0
Direct Response
Limited-benefit plans                                337                 369                 (32 )     (9 )
Medicare Supplement                               34,434              33,665                 769        2

                                                  34,771       5      34,034       5         737        2
Total Health Premium (Before Part D)
Limited-benefit plans                            289,233      45     356,378      49     (67,145 )    (19 )
Medicare Supplement                              346,882      55     369,972      51     (23,090 )     (6 )

Total (Before Part D)                            636,115     100     726,350     100     (90,235 )    (12 )


Medicare Part D*                                 138,954             132,677               6,277        5

Total Health Premium*                        $   775,069           $ 859,027           $ (83,958 )    (10 )

* Health premium per the segment analysis will not agree with health premium on the Consolidated Statement of Operations because of the Part D government risk-sharing premium adjustment explained in Note G - Business Segments.

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

                                                 Nine months ended September 30,            Increase
                                                    2009                 2008              (Decrease)
                                                           % of                % of
                                               Amount      Total    Amount     Total    Amount         %
United American Independent Agency
Limited-benefit plans                        $   10,202            $  18,581           $  (8,379 )    (45 )
Medicare Supplement                              10,539                8,310               2,229       27

                                                 20,741       36      26,891      25      (6,150 )    (23 )
United American Branch Office Agency
Limited-benefit plans                            11,600               55,179             (43,579 )    (79 )
Medicare Supplement                               3,410                5,572              (2,162 )    (39 )

                                                 15,010       26      60,751      56     (45,741 )    (75 )
Liberty National Exclusive Agency
Limited-benefit plans                             9,417                8,459                 958       11
Medicare Supplement                                  61                   82                 (21 )    (26 )

                                                  9,478       16       8,541       8         937       11
. . .