Torchmark ( TMK), the life and supplemental health insurance group, announced its third-quarter results Thursday evening, revealing net income of $63.2 million, down 53% from the same quarter a year ago but in line with preannounced results. The company's report makes apparent that Torchmark is one of many insurers -- which, despite avoidance of the excessive risk-taking of larger rivals like AIG ( AIG) -- have been significantly affected by the woes on Wall Street, woes that trickle down to shareholders and policyholders. Despite a modest 2% increase in operating income, Torchmark wrote down $93 million on investments and debt it held with Lehman Brothers in Washington Mutual ( WM) and Fannie Mae ( FNM), recording a net loss on investments of $71.4 million. Torchmark emphasizes in its earnings release that the investment portfolio contains no securities backed by subprime mortgages, no counterparty risk because it doe not use credit default swaps or other derivatives contracts nor, unlike AIG, does it participate in securities lending. Despite this apparent conservative approach, Torchmark, like many other insurance companies this quarter, has had to recognize large losses. It also has $1.4 billion in unrealized losses, double the amount that was reported for the second quarter and blamed on the general economic crisis.
Torchmark is intending to hold these investments to maturity, and so it has no intention to take any further losses at this time. The company states that due to the strong liquidity position of the group, it has the ability to hold on to these investments. The table below indicates the overall financial strength, investment safety and liquidity ratings for the Torchmark insurance companies rated by TheStreet.com Ratings.
It is concerning is that despite the relative strength and conservative investment approach of Torchmark, the company has had to recognize extremely large losses and potential losses. This may not be more than a temporary reduction in profits for some companies, but for those that have taken a riskier approach to investments, these losses at Torchmark, where 93% of the portfolio is investment grade, could be the tip of the iceberg.
|Torchmark's Insurance Companies|
|A = Excellent, B = Good, C = Fair, D = Weak, E = Very Weak|
The insurance business is regulated by the National Association of Insurance Commissioners and has had very strict liquidity and capitalization requirements for some time. This is why, despite AIG's risky practices, the insurance companies are intact and liquid. As the current financial crisis unwinds and if the markets remain depressed, there could well be significant pressure on insurance companies. The longer it continues, the more likely it is that the rate of failures will increase. TheStreet.com Ratings issues financial strength ratings for 4,000 life, health, annuity, and property/casualty insurers are available at no charge on the Insurers & HMOs Screener. In addition, the Financial Strength Ratings on each of the nation's 8,600 banks and savings and loans are available on the Banks & Thrifts Screener. And for more coverage from TheStreet.com Ratings team, check out TheStreet.com Ratings section.