A.M. Best Affirms Ratings of Torchmark Corp. and Its Subsidiaries [Professional Services Close – Up]

A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of "aa-" of the life/ health subsidiaries of Torchmark Corp. (Torchmark) (McKinney, TX) (NYSE: TMK). Concurrently, A.M. Best has affirmed the ICR of "a-" and all existing debt ratings of Torchmark.

The outlook for all ratings is stable. (See below for a detailed listing of the companies and ratings.)

The ratings reflect Torchmark's status as a niche provider of life insurance, in addition to its diversified and consistent operating earnings. The organization specializes in providing life and supplemental health insurance to middle class Americans through multiple distribution channels. Key subsidiaries of Torchmark include: American Income Life Insurance Company (American Income) (headquartered in Waco, TX), which focuses on labor unions; Liberty National Life Insurance Company (Liberty National) (headquartered in Birmingham, Ala.), which provides individual whole life and term insurance to the middle and lower-middle income marketplace; and Globe Life and Accident Insurance Company (Globe Life) (headquartered in Oklahoma City, OK), which is one of the largest writers of juvenile direct mail life insurance in the United States. These companies have produced consistent individual life insurance premiums and earnings for Torchmark.

One of Torchmark's strengths is its ability to generate consistent operating earnings from each of its subsidiaries. Additionally, A.M. Best notes the recent acquisition of Family Heritage Life Insurance Company of America (Family Heritage) (headquartered in Cleveland, OH), which also should contribute to Torchmark's premium and earnings growth. While Torchmark's life insurance products generate the majority of the organization's earnings, its individual annuity and supplemental health insurance lines of business continue to provide material earnings diversification. A.M. Best views favorably that the majority of Torchmark's earnings and premiums are derived from individual life insurance, which is seen as generally more creditworthy than annuity and health insurance products. Improved persistency, ongoing expense management and consistent overall premium growth have been key drivers of Torchmark's success in the individual life market.

A.M. Best also notes that Torchmark's adjusted GAAP financial leverage is approximately 24 percent, while interest coverage remains strong at roughly nine times earnings. Both ratios are well within A.M. Best's guidelines for the organization's current rating level.

While sales of Torchmark's life insurance products continue to provide the corporation with the majority of its earnings, A.M. Best remains concerned with the ongoing premium challenges in its other product lines and the impact it will have on Torchmark's future growth. The challenges of operating under the Patient Protection and Affordable Care Act (PPACA) and increased competition have led to the discontinuation of several limited benefit health products. Furthermore, while American Income's agent count has been growing, Liberty National continues to have challenges recruiting and retaining agents. A.M. Best notes that the company has implemented programs to improve the retention and productivity of its agency force with modest success. However, Torchmark is likely to continue to experience declining sales at Liberty National should the declining trend in agent count persist.

Additionally, A.M. Best notes the relatively long average duration of Torchmark's fixed income portfolio, which could be susceptible to significant fluctuations in market value should interest rates begin to rise. Additionally, the company maintains an above average allocation to below investment grade bonds, as well as an elevated exposure to "bbb" category securities within its fixed income portfolio, which together expose Torchmark to a higher overall level of credit risk than many of its similarly rated peers. Given the characteristics of its investment portfolio and its relatively modest risk-adjusted capitalization targets as measured by the National Association of Insurance Commissioners risk-based capital model, A.M. Best believes a significant downturn in the credit cycle could result in risk-adjusted capital ratios, which do not support the current rating levels. However, this risk is mitigated somewhat by Torchmark's financial flexibility and strong earnings capacity, which would allow it to quickly restore lost capital under most scenarios.

A.M. Best believes that Torchmark and its subsidiaries are well- positioned at their current ratings. Factors that could lead to negative rating actions include a deterioration in the organization's risk-adjusted capital, a sustained decline in operating earnings or a material increase in credit risk within the investment portfolio.

The FSR of A+ (Superior) and ICRs of "aa-" have been affirmed for the following life/health subsidiaries of Torchmark Corp.:

-Liberty National Life Insurance Company

-Globe Life and Accident Insurance Company

-United American Insurance Company

-First United American Life Insurance Company

-American Income Life Insurance Company

-National Income Life Insurance Company

The FSR of A (Excellent) and ICR of "a" have been affirmed for Family Heritage Life Insurance Company of America, a life/health subsidiary of Torchmark Corp.

The following debt ratings have been affirmed:

Torchmark Corp.-

-- AMB-1 on commercial paper

Torchmark Corp.-

-- "a-" on $100 million 7.375 percent senior unsecured notes, due 2013

-- "a-" on $250 million 6.375 percent senior unsecured notes, due 2016

-- "a-" on $300 million 9.25 percent senior unsecured notes, due 2019

-- "a-" on $300 million 3.80 percent senior unsecured notes, due 2022

-- "a-" on $200 million 7.875 percent senior unsecured notes, due 2023

-- "bbb" on $125 million 5.875 percent junior subordinated debentures, due 2052

The following indicative debt ratings available under the shelf registration have been affirmed:

Torchmark Corp.-

-- "a-" on senior unsecured debt

-- "bbb+" on subordinated debt

-- "bbb" on preferred stock

Torchmark Capital Trust IV and V-

-- "bbb" on trust preferreds

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at ambest.com/ratings/methodology.

A.M. Best Company is an insurance rating and information source.

((Comments on this story may be sent to [email protected]))