We are reiterating our recommendation on the shares of
) at Neutral, following the acquisition of privately-held
supplemental health insurer Family Heritage Life Insurance Company
of America for about $218.5 million. Though the transaction will
accrue immediately to 2012 earnings per share, there remains
execution risk. Also a competitive life insurance market and health
insurance market keeps us on the side lines.
Torchmark's operates its business via its subsidiaries that
includes Liberty National Life, American Income Life Insurance,
United Investors Life Insurance, United American Insurance, as well
as Globe Life and Accident Insurance.
American Income, which is 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.
In the second quarter of 2012, net life sales grew 10% to $40
million, led by management's aggressive action to bring about
turnaround in sales. These initiatives are progressing well and for
2012, management is currently projecting 12%-15% sales
Globe Life is largely benefited by a low competition as it
operates in a relatively non-competitive market. It also enjoys
some competitive advantages like an experienced group of people,
cost control among others. The Direct response operation at Globe
Life has also shown consistently growth over the past several
While the Direct response operation continues to grow its
traditional direct mail and insert media distribution, management
is also trying to develop new distribution platforms like the
Internet and social networking sites. The company expects amid
single digit growth in life sales at its direct response channel
for the remainder of 2012.
Torchmark has also undertaken restructuring efforts aimed at
doing away with non-core businesses that will strengthen its
capital and at the same time enable it to focus on its core
operations. It also scores favorably with rating agencies and
carries a strong balance sheet.
However, the underperforming Liberty National dwarfs these
positives. Though growth initiatives have been undertaken, the
challenge to grow remains and we don't expect this distribution
channel to contribute meaningfully to the company's earnings in the
Earnings from Torchmark's health operations have also been
depressing and we expect this line to remain under
Torchmark, which competes with
), currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating.
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