Our annuity margins declined 46% to $13 million. The decline in our annuity margin occurred in our variable annuity business. Three factors contributed: (1) the continued replacement of the business by Waddell & Reed, a former subsidiary of Torchmark, (2) the decline in the stock market and the underlying securities that comprise the variable annuity accounts has resulted in lower fees/income to our operations, and (3) greater death benefits as a result of variable annuity account values falling below the minimum death benefit levels provided in our contracts. With respect to the replacement activity, an Alabama Circuit Court jury awarded $50 million compensatory damages to our subsidiary, United Investors, in March of 2002; Waddell & Reed has appealed this verdict. Nonetheless, the replacement activity continues, and the probability of additional litigation remains high. As for the declining stock market and the resulting detrimental effect on fee income and guaranteed minimum death benefits, we can only hope that the stock market at least stabilizes; otherwise, the underwriting margin will experience further decline. For the year, fixed annuity contributions were $65 million and our variable annuity contributions were $26 million. We intend to be active in these businesses by developing relationships with independent agencies. Insurance administrative expenses increased 5% to $125 million. As a percentage of premium, administrative expenses were 5.5% compared to 5.4% in the prior year. Included in our administrative expenses were our litigation expenses which increased 107% to $6.4 million, including just over $4 million associated with the Waddell & Reed litigation. Our investment portfolio is concentrated in high quality fixed-maturity assets, and fixed-maturity assets represented 92% of our invested assets. For a variety of reasons, not the least of which is our discomfort with alternatives, fixed-maturity assets will likely become an increasing percentage of our invested assets. The average credit rating quality of the fixed-maturity portfolio was A- as rated by Standard & Poor's and A3 as rated by Moody's. On a tax-equivalent basis (i.e., recognizing that certain bonds are subject to lower federal taxes), our net investment income was $522 million. Excess investment income is the difference between our net investment income and the interest required on our net interest-bearing liabilities. Required investment income was $227 million, resulting in excess investment income of $295 million. Because of our stock repurchase program, comparing the yearly change in excess investment income is misleading. A better comparison is on a per-share basis; as such, our excess investment income increased 20% for the year. As noted in the chart, we have entered into derivative agreements known as “interest rate swaps”. These agreements produced $23 million of excess investment income for the year. Should interest rates rise INVESTMENTS ADMINISTRATIVE EXPENSES Torchmark Corporation • Letter to Shareholders 14 ANNUITY OPERATIONS (In millions, except %) ANNUITIES YEAR END RESERVES FIXED 628 610 VARIABLE 1,538 2,356 UNDERWRITING MARGIN 13 25 2001 $ 2002 $