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WIKI ANALYSIS
Torchmark Corporation (TMK) sells life and health insurance to unions members, members of the U.S. military and low to middle income individuals. Because the company focuses on a handful of niche markets that are often overlooked by larger domestic insurance companies,[1] it faces only limited competition. For instance, TMK is one of only two companies that specializes in selling insurance to unions. The company also benefits from the endorsement of the AFL-CIO.
On the health insurance side, the company specializes in limited benefit and supplemental plans. Under limited-benefit plans, customers pay a much smaller premium than with normal health insurance in exchange for a much lower level of coverage that excludes "catastrophic" events, mental health treatment, and hospital visits.[2] Customers with supplemental plans pay a small premium in exchange for insurance that covers only particular health hazards (i.e. cancer, accidental death, dismemberment, etc). These two types of plans may offer much smaller premiums, but they have also proven to be much lower risk. For instance, in 2007 Torchmark's labor union-targeting subsidiary, American Income, had a claims ratio of only 34%[3] (compared to a typical Medical Loss Ratio of approximately 80%).
Medicare revenue accounted for approximately 59%[4] of Torchmark’s total revenue in 2007. The 2006 Deficit Reduction Act aims to cut Medicare by over $6 billion by 2011 and experts predict Medicare and Medicaid funding cuts totaling over 30% .[5]
Company Overview
Torchmark Corporation's main subsidiaries include Liberty National Life Insurance, American Income Life Insurance, United Investors Life Insurance, United American Insurance, and Globe Life and Accident Insurance. The company classifies its operations into four insurance segments and an investment segment. Torchmark's revenues are generated by three major business segments: the life insurance segment, the health insurance segment, and the investment segment.
Torchmark’s Revenue stream has increased by approximately 11.5% from $3.126 billion in 2005 to $3.847 billion in 2007.[6] This follows Torchmark’s historic pattern of slow but steady growth; its last acquisition came with American Income in 1994 .
Operating income has increased by just 9% between 2005 and 2007. This increase is primarily due a $20 million margin increase in the life insurance segment from 2006 to 2007, attributable to both premium growth (in both members and rates), as well as favorable mortality rates among their customers.[7]
| Source: TMK 10-K[8] | 2005 | 2006 | 2007 | |
|---|---|---|---|---|
| Total Revenue ($M) | 3,125.9 | 3,421.2 | 3,486.7 | |
| Operating Income ($M) | 731.5 | 773.6 | 796.8 | |
| Source: TMK 10-K[9] | 'Life Insurance | Health Insurance' | Investment | Other | Total | |
|---|---|---|---|---|---|---|
| 2007 Total Revenue ($M) | 1,570.0 | 1,244.1 | 648.6 | 24.0 | 3,486.7 | |
| 2007 Operating Income ($M) | 417.0 | 208.3 | 323.8 | (152.5) | 796.8 | |
Life Insurance (45% of Revenue) [10]
The Life Insurance segment provides life insurance primarily through its American Income (labor union affiliates), direct response (targeted at juvenile and senior life coverage for lower middle-income families), Liberty National (lower middle-income families), and Military channels. The segment provides either whole or term life insurance, where whole life insurance offers an investment (bonds, stocks) option in the plan for a higher premium, and term life insurance offers life coverage only in exchange for a lower premium.
Health Insurance (36% of Revenue) [11]
The Health Insurance segment provides health insurance primarily through United American, which markets supplemental health insurance (such as hospital/surgical, cancer, and accident plans) to individuals 50 years of age and older. It also markets limited-benefit plans through its American Income, direct response, and Liberty National channels to lower middle-income families, as well as fee-for-service plans for those on federal Medicare. In 2007, 75% of the segment's revenue was generated by United American.[12]
Investment (19% of Revenue) [13]
This segment invests the company's retained earnings in stocks, bonds and other appreciating assets.
Trends and Forces
Targeting niche markets creates stable customer base
Torchmark employs unique distribution channels to target low to middle-income clients, who are often overlooked by larger domestic insurance companies who seek more affluent customers.[14] Three of the company’s subsidiaries, Liberty National, Globe Life and Accident Insurance, and United American, focus exclusively on this segment by means of direct mail and solicitation (by which Torchmark recruits more than 30% of their customers) as well as exclusive agents.[15] Furthermore, American Income is one of the only union-specific insurance channels is the country, giving Torchmark a dominant position within this segment and allowing it to spend less on overhead and marketing.[16] Furthermore, American Income, Torchmark's labor union-targeting subsidiary, has a claims ratio of only 34%, compared to a typical loss ratio of ~80%, making it the most profitable entity in the company.[17]
Reduced government funding for Medicare threatens Torchmark’s profit margins
Revenue from Medicare and Supplement premiums, all paid by state and federal governments, accounted for 42% of Health Insurance revenue in 2007, with Medicare Part D (Prescription plans) accounting for another 17%.[18] Already, Medicare Part D only provides Torchmark with an 11% margin, well below its overall health insurance margin of 17%. The 2006 Deficit Reduction Act mandated $6.4 billion of Medicare funding cuts before 2011, and experts predict nine years of over 34% of cuts from the Centers for Medicare and Medicaid Services.[19]
Investment behavior creates high credit risk in a tumultuous market
Given the credit market turmoil in the United States during the first half of 2008, companies with a large proportion of their income invested in risky assets are facing lesser cash availability for infrastructure growth and subsidiary acquisitions, a historic weakness of Torchmark. The company currently has over $9 billion invested, with 44% of their investment in BBB quality investments – the lowest level of investment grade maturities. Furthermore, while Torchmark is invested a wide variety of places (with at least 2% of its investment in each of 12 different industries), a 200 basis point (bps) increase would cost the company almost $1.5 billion in fair market value of its securities.[20]
Competition
Torchmark competes on the prices and comprehensiveness of benefits, location and choice of health care providers, quality of customer service, and reputation. Its greatest health insurance competition comes from geographically diverse, national account companies such as Aetna (AET) and UnitedHealth Group (UNH), which offer HMOs, PPOs, and other healthcare benefits. In the life insurance sector, it competes with companies such as MetLife (MET) and Prudential Financial (PRU). Torchmark, founded in Birmingham originally as stand-alone Liberty National Life Insurance Company, also competes with AFLAC (AFL), Assurant (AIZ), and fellow Birmingham competitor Protective Life (PL), . Still, Torchmark's niche position, especially in the labor union segment, offers it some protection from these market giants, and allows it to maintain its low-cost market strategy.
As Medicare is sponsored by government funding, companies insuring these individuals generally compete primarily on the comprehensiveness, quality, and availability of their benefits and customer service. Top competitors for Torchmark’s Medicare-covered clients include Humana (HUM) and WellPoint Health Networks (WLP).
| Torchmark[21] | Aetna (AET)[22] | MetLife (MET)[23] | Humana (HUM)[24] | ||
|---|---|---|---|---|---|
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