Torchmark's CEO Presents At BAML 2012 Insurance Conference (Transcript)

Torchmark Corporation (TMK)

Bank of America Merrill Lynch 2012 Insurance Conference

February 16, 2012 - 11:45 a.m. ET


Mark S. McAndrew – Chairman and Chief Executive Officer

Gary L. Coleman – Executive Vice President and Chief Financial Officer


Edward Spehar – Bank of America Merrill Lynch


Edward Spehar – Bank of America Merrill Lynch

Our next presenter is Torchmark. We're very happy to have Mark McAndrew, CEO; and Gary Coleman, CFO, with us today to tell us the Torchmark story. As I mentioned this morning, there's a lot of focus in our new primer about cash flow, transparency of cash flow, return of cash to shareholders. And any of those measures, when you look historically, there's one company that is at the top of the list, and that's Torchmark.

So I'm going to pass it to Mark for an update on the TMK story.

Mark S. McAndrew

Thanks Ed. Well, first off, I've been told by my General Counsel that I have to share this slide. So everybody can read that real quick, but good morning, everybody.

Torchmark was formed back in 1980 when Liberty National Life from Birmingham, Alabama acquired Globe Life out of Oklahoma City. For the first 15 years of our existence, we grew rapidly, both internally as well as through acquisition. The company also became much more diverse as we acquired a mutual fund company, started an oil and gas subsidiary, a real estate development company, as well as a major expansion of our property and casualty subsidiary.

Over the past 15 or so years, the complexion of Torchmark has changed significantly. We have spun off Waddell & Reed. We also spun off Vesta, which was our property and casualty subsidiary. And we sold Torch Energy. Other than our administrative offices and our Direct Response facilities, we have sold off all of our real estate holdings. And a year ago, we also sold off United Investors, a subsidiary which basically was our variable life business.

We have simplified the company and have focused on growing our core businesses. This changing company direction has also changed the way company is perceived by analysts and investors. The most common terms used to describe Torchmark today are safe and predictable, particularly in difficult economic climate. I would have to say that those terms are accurate. If you look at this first chart, you will see that our operating earnings per share showed remarkably consistent growth from 1995 through 2011.

The compound annual growth rate was 8.7%. For 2011, we grew our operating earnings per share by 9.6%. And if we achieve the midpoint of our current guidance, we will see operating earnings per share growth of 12.2% for 2012, which would be our best year in the past 10 years. Excluding the net unrealized gains or losses on our fixed maturities, our growth in book value per share has also been remarkably consistent.

For the period 1995 through 2011, the compound annual growth rate was 10.9%. Our GAAP book value per share has also increased significantly over the same period, although not with the same consistency due to fluctuations in the market value of our portfolio. But over the past 16 years, our compound annual growth rate has been 11.4%. Now there are three keys to Torchmark's success. First, we have very high underwriting margins.

In fact, I believe our underwriting margins are among the best, if not the best, in our industry. How are we able to achieve these high underwriting margins and maintain them? There are really several key factors. First, we sell basic protection products. We focus on life and higher-margin supplemental health products. We do not market investment products or high-risk, volatile, primary healthcare products. Second, we operate in relatively noncompetitive markets.

Our market is middle income America, a market which we consider to be vastly underserved. Third, we control our distribution. Our three primary distribution systems are all controlled. They are either captive agencies or Direct Response. Unlike companies who operate through independent distribution channels, we don't have to directly compete for an agent's business through higher compensation, product enhancements, or lower rates.

And lastly, we control our expenses, both administrative and acquisition. As Ed can attest, he's been a part of the cultural of Torchmark since its inception. We are constantly finding ways to be more efficient while improving our service. The next chart shows a split of our business between life and health insurance. Over the last 16 years, our life underwriting margins have increased from 56% to 78% of our total. This shift was by design.

We chose to exit the underage 65 primary healthcare market, and we did that for a number of reasons. The business was high risk. It had very poor persistency. It had low underwriting margins. And it had much higher potential for litigation and regulation. Our largest and most profitable distribution system is American Income Life, which we acquired in 1995. As you can see from this graph, it has enjoyed a long history of growth with life premiums growing at a compound annual growth rate of 9% since 1995.

American Income's traditional market has been labor unions. American Income is one of the few all union companies. Both our agents, as well as our Home Office employees are members of OPEIU. We currently have the endorsement of 88 international labor unions. While this continues to be a core market for us, over the last 10 years, we had made a concerted effort to expand beyond that market. Today, only 28% of our new sales at American Income come from union endorsed lead cards.

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