This Insurer Knows Exactly What It’s Doing

by Jon Markman | March 1, 2012 8:00 am

A key to success as a business is finding one or two valuable strategies to focus on, and master them. This has been the business model of insurance company Torchmark (NYSE:TMK[1]) for over a century, and it’s helped the company quietly grow into a $5 billion market cap.

Headquartered in Texas, Torchmark specializes in life and supplemental health insurance for middle-income Americans, and it operates via subsidiaries such as American Income Life, Globe Life & Accident and Liberty National Life Insurance. It has developed quite a niche as a low-cost provider of insurance products.

For example, nearly 35% of TMK’s life insurance revenues come from Globe Life, which depends on direct mailing, magazine inserts and TV ads to sell policies. This strategy provides tremendous cost savings because it requires no sales force, and thus no sales commissions to eat into margins.

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The company believes direct response — i.e. direct mail and insert media — is the most cost-effective way of selling its low-face-value policies. It targets military personnel, union members, senior citizens and middle-income families with relatively easy-to-understand product offerings.

TMK shies away from more complex products like variable life and universal life policies, instead focusing solely on simple whole and term life policies that are easier to market. This further reduces the firm’s policy acquisition costs compared to most full-service insurance firms.

On the health insurance side, TMK focuses exclusively on Medicare supplement policies. These polices fill the gap in coverage of a government-sponsored Medicare plan. The health insurance division does employ sales agents, but with an extremely narrow product focus, so it can operate with minimal training and setup costs.

Torchmark was originally founded in 1900, and its first subsidiary was Liberty National Life Insurance out of Birmingham, Ala. It wasn’t until 80 years later that it made its first substantial acquisition, and it made several more over the next 30 years. The holding company now operates five major insurance subsidiaries, primarily focused on the Southeast.

Mark McAndrew, as chairman and chief executive, currently heads TMK. He’s been in the job since 2005, but has been employed with the company for over 30 years. He’s served in a number of senior executive roles and has spent time working with each of the company’s subsidiaries.

According to analyst Vincent Lui with Morningstar, McAndrew has a couple of important wins under his belt recently, getting credit for modernizing Globe Life’s direct-response operations and overseeing the restructuring of American Income.

The firm reported fourth-quarter earnings earlier this month, increasing operating income for both the year and the quarter by double digits from a year ago. The life insurance division led a 21% underwriting margin improvement.

As most of its insurance conglomerate peers are trending toward the high-income segment of the population and offering bundled services like estate planning, insurance, asset protection and investment services, TMK is doing the exact opposite.

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Limited sales staff, simple products and a focus on keeping expenses low are its mantra. It has done a good job of carving out a niche serving households with annual incomes of $25,000 to $75,000. The U.S. has around 50 million such households, so that niche market is certainly nothing to sneeze at.

The shares are off to a fantastic start this year, up over 12% already, yet they’re trading at just 8.3x next year’s earnings. Torchmark is in excellent financial shape for an insurer and has cut its debt-to-equity ratio to levels it hasn’t experienced since 2005. It’s a good buy on pullbacks to the 20-day average.

Endnotes:
  1. TMK: http://studio-5.financialcontent.com/investplace/quote?Symbol=TMK
  2. [Image]: http://investorplace.com/wp-content/uploads/2012/02/Markman-torchmark_1-3-1.png
  3. [Image]: http://investorplace.com/wp-content/uploads/2012/02/Markman-torchmark_2-3-1.png

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