Torchmark's Acquisition Of Family Heritage Life Insurance Is Nice Little Addition

| About: Torchmark Corporation (TMK)

Torchmark (TMK) the insurance holding company announced on Wednesday that it has signed a definitive agreement to acquire Family Heritage Life Insurance Company of America. Shares of Torchmark rallied almost 3% over the past week after the announcement of the deal.

The Deal

Torchmark announced that it will acquire Family Heritage Life Insurance company for a total consideration of approximately $218.5 million. Currently the supplemental health insurance provider is privately-held. Family Heritage which focuses on life insurance serves over 220,000 policy holders and employs 1,200 sales agents. In 2011 Family Heritage reported assets of $488 million, GAAP net income of $21 million on direct premiums written of $162 million. This values Family Heritage at 1.3 times annual direct premiums written and 10 times its GAAP net annual income.

Torchmark's CEO's Coleman and Hutchison commented on the acquisition, "this transaction meets the criteria we established when we began looking at possible acquisition several years ago. Family Heritage offers protection-oriented insurance to middle income families through a captive agency force that we believe can help grow."

The deal value which is subject to closing adjustments, will be funded from internal cash flows from Torchmark. The acquisition is expected to be immediately accretive to earnings per share in 2012, while hardly impacting Torchmark's ability to buy back their own stock.

Torchmark which is known from its brands, Global Life and Accident, American Income Life and Liberty National Life expects to close the deal by the fourth quarter of the year.

Valuation

On the 25th of July, Torchmark announced its second quarter results. The company reported second quarter underwriting margins of $173.6 million, for underwriting income of $134.2 million. Second quarter net income came in at $1.32 per share. As such the company guided for full year 2012 net operating income per share of $5.08-$5.26. This values the company at roughly 10 times annual earnings, or roughly $5.0 billion.

Not included in this guidance is the accretive effect of the acquisition of Family Heritage. 2012's operating earnings will increase by $0.01-$0.03 per share as a result of the acquisition and by $0.13-$0.17 per share for the full year of 2013.

Currently, Torchmark pays a quarterly dividend of $0.15 for an annual dividend yield of 1.2%

Investment Thesis

Torchmark's shares have returned 18% so far this year. Shares have been benefiting from the fact that the firm's fixed income portfolio has performed very well in the continuous flight to safety. As such the firm now carries about $1.2 billion in unrealized gains on its balance sheet.

Shares continue to trade near all time highs as the company has been steadily repurchasing its own shares. Between 2008 and today the company has repurchased roughly a quarter of its shares outstanding, steadily boosting the company's earnings per share. At the same time it managed to keep growing the business.

Wednesday's latest acquisition is a nice addition to Torchmark's existing portfolio, increasing earnings by approximately 5%. While integration costs will limit the earnings per share accretion in 2012, synergies should provide a little boost to 2013s earnings and beyond.

Torchmark is being well led and has steadily grown its business in a sensible way, while employing a shareholder friendly strategy. For long term investors, it is a perfect addition to any investment portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.