Investors have definitely warmed up to insurance companies in recent months, as a quick look at the charts of property and casualty insurers like Allstate (NYSE:ALL) and Progressive (NYSE:PGR) will show. The same is true for the life insurers, as stocks like Lincoln National (NYSE:LNC) and MetLife (NYSE:MET) (even with the disappointment tied to the Fed's stress test) have done reasonably well.

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Where does that leave Torchmark (NYSE:TMK)? Torchmark is an odd insurance company, as it offers fairly simple products and focuses in part on a competitive cost structure. While the stock is up nearly 50% over early October lows, current analyst targets seem to suggest that the future will not be nearly as strong as the past. If Torchmark can reclaim past returns on equity (ROE), though, the returns could be still be significant.

Recent Results More of the Same
Torchmark doesn't often deliver big surprises with its earnings, and it's more of a steady-as-she-goes story. In the most recent quarter, for instance, the company reported that premiums rose just 1% as decent growth in life (up 4%) offset ongoing declines in healthcare (down 5%). Overall earnings per share rose by about 12% from last year, and were more or less in line with expectations.

Not Chasing the Healthcare Business
Torchmark's health insurance business is not like what WellPoint (NYSE:WLP) or UnitedHealth (NYSE:UNH) do; Torchmark focuses on supplemental health insurance offerings and tries to limit its risk with benefit caps. It also offers specialty products like cancer insurance, where it competes with companies like Aflac (NYSE:AFL).

On the whole, this is an increasingly small part of Torchmark's future. Not only is the competition in health insurance intense, but the margins are low and the level of regulation and government influence is quite large. While the pace of decline in this business has slowed considerably, Torchmark management has done well to put profitability above ego and let this business find a new equilibrium supported by its ongoing returns.

A Different Sort of Life Insurance Company
Torchmark has built a very profitable life insurance company by doing a relatively small number of things and doing them quite well. Unlike larger insurance companies like MetLife or Lincoln National, Torchmark focuses on simple products like whole life and term insurance targeted to middle-income customers. Variable annuities and interest-sensitive whole life are tiny parts of the business, as are universal policies. For related reading, see An Overview Of Annuities.

Torchmark is also helped by long-running affinity relationships, particularly with labor unions, that reduce its marketing and customer retention costs. All in all, then, Torchmark has a lean, relatively simple life insurance business that is quite profitable and not as interest-sensitive as some of its peers.

It's not all perfect, though. The Liberty National business seems to be in a permanent turnaround (nine years and running ... ), with sales down almost one-quarter in the last quarter on a 15% reduction in agent headcount. With American Income and direct response doing well, though, and offering higher margins, it nets out favorably for the company.

The Bottom Line
Torchmark has long been willing to go further out on the yield curve to boost its investment income. While almost 94% of the bond portfolio is investment-grade, about 50% of that is rated BBB+ or less and effective duration has been increasing. For more, see The Impact Of An Inverted Yield Curve.

Torchmark used to regularly post ROE in the mid-teens, before the credit crunch and the zero interest policy changed the operating environment. These effects won't last forever, but that's not to say that Torchmark can just automatically go back to prior ROE levels, as the market (and regulators) may well not tolerate the same degree of financial leverage as before.

If you believe Torchmark can get its long-term ROE back to the 13 to 14% range (which is actually below the long-term average), then the stock should be worth something in the high $50s to low $60s. At today's prices, though, the going assumption is that Torchmark's future profitability is permanently impaired and capped in the very low double-digits. For additional reading, check out 5 Must-Have Metrics For Value Investors.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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