CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Torchmark Corporation's (TMK) Issuer Default Rating (IDR) at 'A-'and the Insurer Financial Strength (IFS) rating for TMK's insurance subsidiaries at 'A+'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Fitch's ratings for TMK reflect the company's strong and stable operating profitability, strong competitive position in its niche small face amount life and supplemental health insurance markets, and below-average exposure to interest rate risk. The ratings also reflect the company's relatively aggressive capital management strategies, which have resulted in financial leverage at the high end of rating guidelines and risk-based capital at the low end of rating guidelines. Further, the quality of the statutory capitalization of TMK's insurance subsidiaries is negatively impacted by the companies' investment in parent company senior debt and preferred stock.
Fitch considers TMK's operating earnings and cash flow to be strong and stable. The company has consistently generated return on equity of between 13% and 15% over the past decade. Through the first half 2015, the company's pretax operating earnings were $398 million and ROE was 14.7%, which is down from $407 million and 15.3% for the same period in 2014. The modest decline in earnings was driven primarily by an uptick in mortality in the company's direct response business relative to that experienced in 2014. This level of earnings resulted in interest coverage of 11.7x for the first half 2015, which is in line with Fitch's expectations for the company's current rating category.
TMK maintains a strong competitive position marketing individual life and supplemental health insurance in a number of niche markets such as union and credit union members, juvenile and senior life insurance consumers, and active and retired military officers. Its competitive position benefits from distinct distribution channels that target these specific niches.
Fitch views TMK as having below-average exposure to interest rate-sensitive businesses. However, the company's ability to grow excess interest income margins continues to be constrained due to ongoing low interest rates.
TMK's financial leverage of 28% at June 30, 2015, which is up from 26% at yearend 2014 on higher commercial paper borrowings, is considered to be modestly above expectations, but is somewhat mitigated by the consistently strong operating performance of TMK's insurance subsidiaries, which provide the holding company with robust cash flow. TMK uses these cash flows mainly for debt service and significant share repurchases.
Fitch views TMK's risk adjusted capitalization as adequate for its current 'A+' IFS rating. The company's consolidated total adjusted capital (TAC) and NAIC Risk Based Capital (RBC) at year-end 2014 were $1.4 billion and 327%, respectively. The company's RBC was down from 341% year-end 2013, and management targets RBC at 325% or above. Due to the ownership of a portion of TMK's outstanding senior debt preferred stock, Fitch believes the insurance subsidiaries quality of capital is modestly weaker than reported RBC would imply.
RATING SENSITIVITIES
Key rating triggers that could lead to an upgrade include:
--Statutory capital adequacy above 350% RBC and sustained or improved capital quality;
--Financial leverage of 20% or below and total financings commitments ratio below 0.40x;
--GAAP earnings based interest coverage ratio 13 times or above.
Key rating triggers that could lead to a downgrade include:
--Return on equity of 12% or less;
--Statutory capital adequacy below 290% RBC and sustained or worsened capital quality;
--Financial leverage above 30% or total financings commitments ratio above 0.55x;
--GAAP earnings based interest coverage ratio below eight times.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings:
Torchmark Corporation
--Long-term IDR at 'A-';
--Short-term IDR at 'F2';
--9.25% senior debentures due 2019 at 'BBB+';
--7.875% senior notes due 2023 at 'BBB+';
--3.8% senior notes due 2022 at 'BBB+';
--6.375% senior debentures due 2016 at 'BBB+';
--5.875% junior subordinated debentures due 2052 at 'BBB-';
--Commercial paper at 'F2'.
Liberty National Life Insurance Company
United American Insurance Company
Globe Life & Accident Insurance Company
American Income Life Insurance Company
--IFS at 'A+'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Insurance Rating Methodology (pub. 14 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868367
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990245
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990245
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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