We are reiterating our recommendation on the shares of
) at Neutral. Our recommendation is based on the company's strong
third quarter earnings, which climbed 10.3% on a year-over-year
Torchmark's acquisition of privately-held supplemental health
insurer, Family Heritage Life Insurance Company of America, which
will be immediately accretive to the former's earnings, also
motivated us to retain our view on the company. However, a
competitive health insurance market and low interest rate
environment keep us on the sidelines.
Torchmark operates its business via its subsidiaries - Liberty
National Life, American Income Life Insurance, United Investors
Life Insurance, United American Insurance, as well as Globe Life
and Accident Insurance.
American Income - Torchmark's most profitable distribution system
- has grown consistently over the past several years. In the last
10 years, producing agents at American Income have grown
considerably, leading to an increase in net sales.
Another distribution channel, Globe Life is largely benefited by
a low competition as it operates in a relatively non-competitive
market. It also enjoys some competitive advantages, such as an
experienced workforce and better cost-control. The Direct
response operation at Globe Life has also shown consistent growth
over the past several years.
While the Direct response operation continues to grow its
traditional direct mail and insert media distribution, management
is trying to develop new distribution platforms including the
Internet and social networking sites. The company expects a
mid-single digit growth in life sales at its direct response
channel for the remainder of 2012.
Torchmark has also undertaken restructuring efforts in an effort
to do away with non-core businesses that will strengthen its
capital and at the same time enable it to focus on core
operations. The company also scores favorably with rating
agencies and has a strong balance sheet.
However, the underperforming Liberty National eclipses these
positives. Though growth initiatives have been undertaken, the
challenge to grow still remains. Moreover, we don't expect this
distribution channel to contribute meaningfully to the company's
earnings in the near term. Also, a low interest rate environment
remains a headwind.
Torchmark currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating and also supports our long term
) also currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating and blends well with our long-term Neutral
recommendation on its shares.
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