We are reiterating our Neutral recommendation on life and health
). Though we are optimistic about the company's life insurance
business, its underperforming health insurance business keeps us on
Torchmark distributes its Life and Health products primarily
via its subsidiaries American Income Life Insurance Co. ("AIL"),
Direct Response operations at Globe Life and Liberty National
Life ("LNL"). While AIL and Direct Response have performed
strongly over the last several years, LNL has lagged
In the recently concluded quarter, AIL net life sales
increased 17% on the back of a 26% increase in agents over the
prior year. This was the result of the management's aggressive
actions to bring about a turnaround in sales. These initiatives
are progressing well and management is currently projecting
12%-14% growth for 2012. Given its niche in the organized labor
market, where competition is less, we believe the unit is
uniquely poised to post increased sales.
Torchmark's Globe Life also enjoys competitive advantage over
its peers, on account of an experienced team and effective cost
control measures. While Direct Response continues to increase its
traditional direct mail and insert media distribution, management
is also trying to increase its presence on new distribution
platforms like the Internet and social networking sites.
The company expects a 6% growth in life sales at its Direct
Torchmark is also aligning its operations to focus on more
profitable business lines. The company sold its subsidiary United
Investors Life (UIL), which primarily marketed fixed and variable
annuity products, generating low returns.
However, Torchmark's other subsidiary LNL has not been able to
contribute meaningfully to the company's earnings. Over the past
16 years, life premiums have increased by only $2 million.
Moreover, the life underwriting margin in 2011 was $5 million
less than it was 16 years ago. The underperformance of this
channel was primarily due to its cost structure, which was
characterized by high, fixed acquisition costs. Though the
company has taken a number of initiatives like changing the
compensation structure as well as appointing new managers, growth
challenges remain. Moreover, we don't expect this distribution
channel to contribute meaningfully to the company's earnings in
the near term.
Its Health business also remains a weak spot. The lack of
growth was due to discontinued sales of limited-benefit
hospital-surgical health products in 2010 as well as due to a
decline in agent count. Though Medicare Supplement remains the
largest contributor to total health premium, increased
competition has dampened the sales of this product in recent
years, resulting in premium declines in each successive year. We
do not expect much growth from this segment as management
continues to focus on expanding its more profitable life
Despite top-line pressure, we expect the company to manage its
bottom-line earnings through a solid capital management strategy.
With an expected free cash flow of $347 million for 2012, we
anticipate continual buyback activity, which would consequently
Based in Birmingham, Alabama, Torchmark closely competes with
Prudential Financial Inc.
) and others. The stock currently retains a Zacks # 3 Rank, which
translates into a short-term 'Hold' rating.
PRUDENTIAL FINL (PRU): Free Stock Analysis
TORCHMARK CORP (TMK): Free Stock Analysis
UNUM GROUP (UNM): Free Stock Analysis Report
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