A.M. Best Affirms Ratings of Torchmark Corporation and Its Key Subsidiaries

OLDWICK, N.J.--(BUSINESS WIRE)--

A.M. Best has affirmed the financial strength rating (FSR) of A+ (Superior) and the issuer credit ratings (ICR) of “aa-” of the key life/health subsidiaries of Torchmark Corporation (Torchmark) (McKinney, TX) TMK. Concurrently, A.M. Best has affirmed the ICR of “a-” and all existing debt ratings of Torchmark and Torchmark Capital Trust IV and V. Additionally, A.M. Best has upgraded the ICR to “a+” from “a” and affirmed the FSR of A (Excellent) of Torchmark's separately rated subsidiary, Family Heritage Life Insurance Company of America (Family Heritage) (headquartered in Cleveland, OH). The outlook for all ratings is stable. (See below for a detailed listing of the companies and debt ratings.)

The ratings reflect Torchmark's diversified and consistent operating earnings in addition to being a niche provider of ordinary life insurance. 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) (headquartered in Waco, TX), which focuses on labor unions; Liberty National Life Insurance Company (Liberty National) (headquartered in Birmingham, AL), 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) (headquartered in Oklahoma City, OK), which is one of the largest writers of juvenile direct mail life insurance in the United States. These companies have produced consistent individual life insurance premiums and earnings for Torchmark.

One of Torchmark's strengths is its ability to generate consistent operating earnings from each of its subsidiaries. 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 material earnings diversification. A.M. Best views favorably that the majority of Torchmark's earnings and premiums are derived from individual life insurance, which is seen as generally more creditworthy than annuity and health insurance products. Improved persistency, ongoing expense management and consistent overall premium growth have been key drivers of Torchmark's success in the individual life market.

A.M. Best also notes that Torchmark's adjusted GAAP financial leverage is approximately 25%, while interest coverage remains strong at over nine times earnings. Both ratios are well within A.M. Best's guidelines for the organization's current ratings.

While sales of Torchmark's life insurance products continue to provide the corporation with the majority of its earnings, A.M. Best remains concerned with the ongoing premium challenges in its other product lines and the impact they will have on Torchmark's future growth. The challenges of operating under The Patient Protection and Affordable Care Act and increased competition led to the discontinuation of several limited benefit health products in 2010. Furthermore, while American Income's agent count has been growing, Liberty National continues to face challenges recruiting and retaining agents. A.M. Best notes that Liberty National has implemented with modest success programs to improve the retention and productivity of its agency force. Although the number of producing agents has improved in recent quarters, Torchmark is likely to continue to experience declining sales at Liberty National should the declining trend in agent count continue.

Additionally, A.M. Best remains concerned with the long average 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, which 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 could result in sizeable realized and unrealized losses for Torchmark, which would likely stress its targeted level of risk-adjusted capitalization. However, this risk is mitigated by Torchmark's liability profile, which is weighted toward non-interest sensitive products, as well as by its financial flexibility and strong earnings capacity, which would allow it to quickly restore lost capital under most scenarios. 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 consolidated targeted regulatory capital level. A.M. Best also notes that Torchmark has been active in increasing the capitalization levels of both companies in recent years.

Furthermore, the upgrading of Family Heritage's ICR reflects its greater level of integration with Torchmark in addition to its improved earnings and increasing premium trends.

A.M. Best believes the potential for positive rating actions on Torchmark is unlikely in the near term due to management's current capitalization strategy. Factors that could lead to negative rating actions include the organization's capitalization falling below targeted levels, a material decline in operating earnings and/or a significant decrease in net premiums in Torchmark's core lines of business.

The FSR of A+ (Superior) and ICRs of “aa-” have been affirmed for the following life/health subsidiaries of Torchmark Corporation:

• Liberty National Life Insurance Company
• Globe Life and Accident Insurance Company
• United American Insurance Company
• First United American Life Insurance Company
• American Income Life Insurance Company
• National Income Life Insurance Company

The following debt ratings have been affirmed:

Torchmark Corporation—
-- AMB-1 on commercial paper

Torchmark Corporation—
-- “a-” on $250 million 6.375% senior unsecured notes, due 2016
-- “a-” on $300 million 9.25% senior unsecured notes, due 2019
-- “a-” on $300 million 3.80% senior unsecured notes, due 2022
-- “a-” on $200 million 7.875% senior unsecured notes, due 2023
-- “bbb” on $125 million 5.875% junior subordinated debentures, due 2052

The following indicative debt ratings available under the shelf registration have been affirmed:

Torchmark Corporation—
-- “a-” on senior unsecured debt
-- “bbb+” on subordinated debt
-- “bbb” on preferred stock

Torchmark Capital Trust IV and V—
-- “bbb” on trust preferreds

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information — source. For more information, visit www.ambest.com.

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