A.M. Best Co. has affirmed the financial strength ratings (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of the life/health subsidiaries of Torchmark Corporation (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, its consistently favorable earnings and improved investment results. 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), which focuses on labor unions; Liberty National Life Insurance Company (Liberty National), 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), which remains one of the largest writers of juvenile direct mail life insurance in the country. These companies have produced consistent individual life insurance premiums and earnings for Torchmark.
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 earnings diversification. Ongoing expense management, improved persistency and agent growth within some of its subsidiaries are key drivers to Torchmark’s future growth. Additionally, A.M. Best notes the improved performance of the group’s investment portfolio, which was in a net unrealized gain position of nearly $900 million as of March 31, 2012.
Offsetting these positives are the ongoing premium challenges within some of Torchmark’s product lines and the impact it will have on its future growth. Although the agent count has improved within American Income’s distribution force, Liberty National and United American Insurance Company (United American), continue to have challenges recruiting and maintaining agents. A.M. Best notes that the company has implemented programs to improve the retention and the quality of its agency force. However, if the agent count deteriorates, Torchmark is likely to continue to experience declining sales in several product lines at Liberty National and United American.Additionally, A.M. Best remains concerned about the long duration of Torchmark’s fixed income portfolio and its considerable—albeit reduced—exposure to financial sector bonds. While the organization maintains a manageable level of below investment grade bonds, it has an elevated exposure to “bbb” category securities within its fixed income portfolio that remains susceptible to large fluctuations in market value, should interest rates start to rise. Given the characteristics of its investment portfolio, A.M. Best believes a significant downturn in the credit cycle would result in sizeable unrealized losses for Torchmark, which would likely stress its targeted level of risk-adjusted capitalization. A.M. Best notes that while the organization currently maintains adequate risk-adjusted capital on a consolidated basis, two of its core subsidiaries are below Torchmark’s targeted regulatory capital level due partially to the reclassification of certain bank hybrid securities in 2011.