TMK – Torchmark Corp: Insurance with a Flair for Flare

By Saul Sterman

04/17/2007

A quick search through the New York Times archives reveals that TMK has not been mentioned in the news since 2004. Is this good or bad?

Overview

In the 90’s, it seemed that TMK was announcing some deal every other day

I recall the 1994 American Income Holding acquisition for $35 cash ($560+M) and the sale of Gulf oil and gas assets for a $22M profit.

Two years later, TMK announced a $130M loss on a start-up (yes, TMK folks are very scientific minded!) called Black Warrior (I have a theory about the name as well) that was supposed to figure out a way to produce gas from coal in the ground – or something along those lines. In rank with a genuine military covert operation, TMK immediately hired Morgan Stanley to discuss ways of improving shareholder value and announced that it was considering splitting into two companies. Naturally, that never happened.

In 1998 TMK spun-off Waddell & Reed Financial, a mutual fund subsidiary, in an initial public offering commandeering $580+M. This was an ingenious maneuver.

Since 2004 TMK has not been mentioned at all in the NYT. Upon reading a recent negative analysis by a prominent analyst, I realized what the problem was; NYT reporters and analysts just don’t get it!

Birds of a feather…

TMK is a consortium of four semi and fully independent agencies; United Investors, Military Agency, Liberty National and American Income. The exclusive military agency is independent and markets insurance products to military officers and personnel through former commissioned and noncommissioned officers. In other words, if upon retiring from the military you need a job, TMK is hiring.

I may be a Liberal Democrat that makes Ted Kennedy look like a redneck Republican, but I am a true Liberal, not the phony type that is liberal when it suits the cause. Such being the case, my way is not the only way and I now understand what makes TMK tick. This company is run like a mean clean military machine. (My humble apologies to all my redneck brethren – just a figure of speech, derogatory convention not intended.)

Recruitment

Though TMK has maintained profitability for over a decade and sports an above average ROE for the past ten years (15.1% 2006), analysts call attention to TMK’s apparent failure to recruit, hold and grow its independent sales force for three of its divisions.

I did a little research and found this website; Rip-Off Report. All of the complaints resulting from searching "Torchmark" seem to be the same. Here is an example;

So you felt like "a piece of meat", nah, maybe like a piece of raw meat! They too, just don’t get it. If you don’t have a military background, you are going to think that you were misled or duped etc. A good soldier doesn’t ask silly questions when accepting a new assignment. You are told what to do, when to do it and given the equipment to carry out the mission. In return you get three square meals a day and a roof over your head. Simple!

If you are not the type to take orders, TMK is not for you. Be like the New York Times; if you don’t get it, just stay away.

All TMK has to do is change its military like culture for the non-military divisions, and the recruitment problem will vanish. Of course this suggests that upper management has to retreat from the trenches as well. Then again, maybe the current culture is just dandy.

At least half of TMK’s potential recruits may not be capable of seeing things through TMK’s binoculars. There is nothing wrong with both ways; it is just a different prescription.

The Numbers

I actually like TMK as a business. I may not want to work there, but who cares! The luxury I have as a potential investor is that I can make money without taking orders. I give them – to my broker of course!

Medicare Part D is in decline and should have a negative impact on revenue throughout 2007.  Liberty National agent recruitment is the positive upcoming surprise for 2007. In 2006, Liberty National lost almost a quarter of its agents. TMK is well aware that the division heads need to be replaced and that the ‘old boys’ network isn’t working well. Also the internet recruitment program is a bomb. We (CrossProfit) don’t expect any improvement for Q1, however we should be hearing soon enough about substantial changes at Liberty National.

With all these problems in 2006, TMK was able to increase revenue from 3,126M in 2005 to 3,421M in 2006 (9.4%). EPS was up from $4.68 in 2005 to $5.13 in 2006. We take into account that 4.4% out of the 9.6% EPS gain was due to share buy-backs. TMK has reduced outstanding shares from 115M in 2003 to 101M in 2006. Without the buy-backs, EPS growth would have been 5.2% in 2006. This means margins contracted.

The dividend rate was recently increased to $0.52, nothing to write home about. What I like about TMK is its solid balance sheet. On a slowdown, recession or whatever, TMK is a defensive stock (no pun intended) that should be able to weather any desert storm (pun intended).

We estimate 2007 EPS at $5.35 and 2008 EPS at $5.90. We may have to revise 2007, depending on Liberty National. Hopefully it will be upwards.

Disclosure: No conflicts.

http://www.crossprofit.com