As part of its yearly review exercise, rating agency A.M. Best has affirmed the financial strength ratings (“FSR”) and the issuer credit ratings (“ICR”) of Torchmark Corp. (TMK) and its subsidiaries. Torchmark's subsidiaries witnessed affirmation of FSR of "A+" and ICR of "aa-," while Torchmark has been affirmed with an ICR of "a-." Also Family Heritage, acquired by Torchmark in Nov 2012, received an upgradation to its ICR ratings. All the existing debt ratings have been avowed, and kept at a stable outlook.
A.M. Best acknowledges Torchmark's solid market presence as well as broad product profile that offers annuities, whole and term life insurance, accidental death insurance, health insurance, Medicare supplements, and long-term healthcare policies, making it a specialized player in the life insurance industry. The rating agency also favorably views the positive contribution made by Torchmark’s subsidiaries, Liberty National Life, American Income Life Insuranceand Globe Life and Accident Insurance.
A.M. Best has a positive view on the product diversification benefit from the company’s individual annuity and supplemental health insurance lines of business. The rating agency notes that though diversification provides its inherent benefit, the company generates much of its business from individual life insurance.
Cost reduction measures adopted by the company, improved consistently, leading to higher business from the life insurance market. The rating agency highly appreciates this.
Moreover, the rating agency likes Torchmark’s business mix which primarily consists of individual life insurance products that provide more stable earnings than the supplemental health insurance business.
However, the rating agency views premium challenges in some lines of businesses. The company’s health insurance business continues to be affected by the changes related to the Patient Protection and Affordable Care Act. In response to the changes required to be made as per the act, the company has discontinued selling some of the products in this segments, which has directly hit the contribution from it.
Torchmark also continues to face issues relating to agents in Liberty National. The company has undertaken efforts to make agents’ appointment and retention but these have yielded only modest results. The rating agency is concerned about declining contribution from Liberty National if the agent base does not improve substantially.
In addition, Torchmark’s long-duration investment portfolio, with a high concentration of fixed maturity assets, which may cause market value to decline in the event of a rise in interest rates from the current low levels, also proved to be an offsetting factor to the ratings. The rating agency also notes that the company has a high level of fixed assets, which are rated "bbb." Both these features of the company's investment portfolio would make it vulnerable to investment impairments, if there is a downturn in the credit cycle.
A.M. Best also acknowledges Torchmark’s leverage ratio which stood at roughly 24%. Its debt servicing capability is also strong as witnessed by interest coverage ratio of 9x.
A.M. Best stated that the ratings will be subject to downgrade if risk-adjusted capitalization deteriorates to a level that does not support the ratings or if operating performance falls markedly short of A.M. Best’s expectations.
Financial strength and credit ratings, which intend to measure a company’s ability to meet policyholder obligations, are important factors affecting public confidence and the creditworthiness of a company, and hence its competitiveness. Securing an investment grade debt rating with a stable outlook reflects optimism about the company.
Notably, Torchmark’s peers Assurant Inc. (AIZ), Genworth Financial Inc. (GNW) and Protective Life Corp. (PL) carry an investment grade rating from A.M.Best.