Torchmark Poised For Long-Term Growth, Expenses A Drag

On Dec. 11, 2015, we issued an updated research report on Torchmark Corporation (TMK – Analyst Report). Torchmark’s focus on niche markets, steady capital deployment and strong operational growth are expected to drive long-term prospects. Currently, expected long-term growth is pegged at 7.2%.

The company’s inorganic growth also remains impressive. Acquiring Family Heritage Life Insurance Company is estimated to improve health sales by 6–7% in 2015 and by 5–10% in 2016.

Torchmark remains well positioned given its sustained superior performance at American Income and Global Life. Initiatives taken by the company to build its distribution channel – American Income Exclusive Agency – will drive premiums higher.

Torchmark has been generating stable cash flow that helps it to engage in shareholder friendly moves. For 2015, free cash flow is expected in the range of $350–$360 million.

However, Torchmark has been witnessing an increase in administrative expenses. This is mainly attributable to higher pension costs due to the required implementation of a new mortality table and further investments in IT systems. For 2015, the company expects administrative expenses to increase by 7–9% and be about 5.9% of premiums.

A lower investment income is also a concern. Torchmark expects excess investment income to decrease about 1–2% in 2015.

With respect to quarterly results, Torchmark’s third-quarter net operating earnings surpassed the Zacks Consensus Estimate and improved year over year on higher premiums from both life and insurance business.

Torchmark expects operating income between $4.20 and $4.26 per share in 2015 and between $4.25 and $4.55 per share in 2016. The Zacks Consensus Estimate for 2015 lies at the mid-point of the company’s guidance, whereas the same is a couple of cents above the mid-point for 2016.

Zacks Rank and Stocks to Consider

Torchmark currently carries a a Zacks Rank #3 (Hold). Some better-ranked life insurance providers are Amar Equity Investment Life Holding Co. (AEL – Snapshot Report), Primerica, Inc. (PRI – Snapshot Report) and Symetra Financial Corp. (SYA – Snapshot Report). Each of these stocks hold a Zacks Rank #2 (Buy).