Fitch Rates Torchmark Corp. Debt Issuance; Affirms Ratings; Outlook Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned ratings to Torchmark Corporation's debt securities issued on Sept. 17, 2012. The new securities include senior notes assigned a 'BBB+' rating and junior subordinated debentures assigned a 'BBB-' rating. Fitch also affirmed the 'A-' long-term ratings and 'A+' Insurer Financial Strength (IFS) ratings of Torchmark Corp. (TMK) and its insurance subsidiaries. The Rating Outlook has been revised to Negative from Stable. A complete list of the ratings appears at the end of this release.

The new securities were issued to facilitate the acquisition of Family Heritage Life Insurance Company (FH), recapitalize a higher yielding trust preferred security, and prefund a note maturing in August, 2013.

The affirmation of TMK's ratings reflects Fitch's view that TMK's operating profile continues to be consistent with rating expectations. The revised Outlook reflects the increased financial leverage of recent periods and Fitch's view that leverage will remain higher than historical levels and guidelines for the current rating category through 2013. Financial leverage has increased partially due to the revised financing method for the FH acquisition to debt, rather than the originally planned internal cash flow. Fitch estimates TMK's pro forma financial leverage to be 29% after the new security issuance and favorably adjusting for prefunding of the 2013 maturity. Fitch's pro forma calculation reflects TMK's unusually high level of commercial paper (CP) present at June 30, 2012, although Fitch believes outstanding CP will return to a more normal level in future reporting periods.

TMK's high financial leverage is partially mitigated by the consistently strong earnings at TMK's insurance subsidiaries, which provide the holding company with robust cash flow that is used mainly for debt service and share repurchases. Fitch believes the company's future plans for financial leverage reduction hinge mainly on growth in retained earnings and the reduction of outstanding CP in the third quarter, which should provide approximately 1.5% reduction in pro forma leverage. The speed and level of TMK's financial leverage reduction and retained earnings growth will be largely influenced by the dedication of cash flow to TMK's share repurchase program. TMK has indicated share repurchases will most likely continue in line with its plans prior to the acquisition and financing.

For the first six months of 2012, TMK had pre-tax operating return on assets (ROA) of 4.0% and GAAP earnings-based interest coverage of 9.9x, down slightly from historical levels of ROA 4%-5%, and interest coverage of 10x-13x. However, TMK's overall profitability and interest coverage ratios continue to exceed credit factor medians for TMK's rating level. Additionally, they are better than similarly rated peers, which have comparable measures of about 1.4% and 8x, respectively, for 2011.

Fitch views TMK's capital as adequate for its current 'A+' IFS rating. Fitch estimates TMK's total adjusted capital (TAC) and NAIC Risk Based Capital (RBC) to be $1.4 billion and 331%, respectively (at June 30, 2012). These levels are in-line with the previous two quarters and the 325% RBC target set by TMK. TAC and RBC will change relatively little after the FH acquisition given its relatively small size. However, due to plans for TMK's insurance subsidiaries to purchase a meaningful portion of the new senior debt issue, Fitch believes the insurance subsidiaries' quality of capital has weakened, although not enough to affect ratings.

TMK reported $17.2 billion in assets and $4 billion in shareholders' equity on June 30, 2012.

Key rating triggers that could lead to a downgrade include:

--Investment losses beyond Fitch's expectations;

--A sustained NAIC risk-based capital ratio below 290%;

--Inability to return financial leverage to historical levels of approximately 25% or lower and maintain a total financings commitments ratio above 0.6x;

--GAAP earnings-based interest coverage ratio below 5x.

Fitch assigns the following ratings:

Torchmark Corporation

--3.8% senior notes due 2022 'BBB+';

--Junior subordinated debt 'BBB-';

--5.875% junior subordinated debentures due 2052 'BBB-';

Fitch affirms the following ratings with a Negative Outlook:

Torchmark Corporation

--Long-term IDR at 'A-'.

Liberty National Life Insurance Company

United American Insurance Company

Globe Life & Accident Insurance Company

American Income Life Insurance Company

--IFS at 'A+'.

Torchmark Corporation

--Short-term IDR at 'F2';

--Senior debt at 'BBB+';

--9.25% senior debentures due 2019 at 'BBB+';

--7.875% senior notes due 2023 at 'BBB+';

--7.375% senior notes due 2013 at 'BBB+';

--6.375% senior debentures due 2016 at 'BBB+';

--CP rating at 'F2'.

Torchmark Capital Trust III

--7.1% trust preferred due 2046 at 'BBB-';

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 22, 2011).

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Fitch Ratings
Primary Analyst:Bruce Cox, +1 312-606-2316
Director
Fitch, Inc., 70 W. Madison, Chicago, IL 60670
or
Secondary Analyst:Bradley Ellis, +1 312-368-2089
Director
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Committee Chairperson:Julie Burke, +1 312-368-3158
Managing Director
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Media Relations:Brian Bertsch, +1 212-908-0549
Email: [email protected]

Source: Fitch Ratings