Analyst: Tax Reform to Cut Torchmark RBC Ratio

GOP tax reform proposals could reduce Torchmark’s risk-based capital ratio by 50 basis points, senior company executives said in a Wednesday conference call with Wall Street analysts.

The statements are the first from a life and annuity company on the potential effects of tax reform.

Risk-based capital ratios are considered a key measure of a company’s capital strength and any change in that ratio would presage a change in an insurance company’s capital management plans.

“Since RBC (risk-based capital) charges are tax effected, management estimates corporate tax reform ... could initially reduce its RBC ratio by 50 points,” wrote Keefe, Bruyette & Woods analyst Ryan Krueger in a client note issued after Wednesday’s call.

The centerpiece of the GOP tax reform plan is to reduce corporate tax rates from 35 to 20 percent.

“That said, the potential regulatory and rating agency reactions are highly unclear, as capital thresholds could be reduced and RBC formula changes could also take time,” Krueger wrote.

Future earnings would also increase and Torchmark “would not anticipate changing its share repurchase plans in this scenario,” he added.

“This could impact all life insurers,” not just Torchmark, Krueger wrote.

In a research note to clients published earlier this month, Morgan Stanley analyst Nigel Dally wrote that risk-based capital ratios were expected to come under “meaningful pressure,” from any tax rate changes.

Analysts this week and next will be looking for guidance from insurers on the significance of those pressures.

Hurricanes Slow Sales, Recruiting

Torchmark’s subsidiaries specialize in life and supplemental health insurance for the middle-income market and the company’s subsidiaries sell insurance contracts through direct response, exclusive and independent agency channels.

The holding company is based in McKinney, Texas, 30 miles north of Dallas.

Hurricanes slowed sales and recruiting at the company’s exclusive agencies during September, Torchmark co-CEO Larry M. Hutchison also told analysts.

“We think recruiting and sales should return to normal levels during the fourth quarter,” Hutchison said.

Hurricane Irma, which hit Florida in September, caused sales of Torchmark subsidiary United American Insurance to be lower than expected in the third quarter, he said.

Direct response sales were not affected by the hurricanes during the third quarter. Still, sales will be down between 1 and 2 percent in the fourth quarter, he said.

Torchmark Surpasses Estimates

On Tuesday Torchmark beat analysts’ forecasts and reported third-quarter net income of $153 million, an increase of less than 1 percent compared to the year-ago period.

The company said it had net income of $1.29 per share. Earnings, adjusted for non-recurring gains, were $1.23 per share.

The average estimate of six analysts surveyed by Zacks Investment Research was for earnings of $1.20 per share.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].