We are reiterating our recommendation on the shares of Torchmark Corp. (TMK) 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 growth.
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 years.
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 near term.
Earnings from Torchmark's health operations have also been depressing and we expect this line to remain under pressure.
Torchmark, which competes with Assurant Inc. (AIZ), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.