We are reiterating our recommendation on the shares of Torchmark Corp. (TMK) at Neutral. Our recommendation is based on the company's strong third quarter earnings, which climbed 10.3% on a year-over-year basis.
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 recommendation.
Peer Assurant Inc. (AIZ) 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.