Fitch Affirms Torchmark Corporation's Ratings; Outlook Stable

Mon May 12, 2014 12:02pm EDT

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(The following statement was released by the rating agency) CHICAGO, May 12 (Fitch) Fitch Ratings has affirmed the 'A-' Issuer Default Rating (IDR) of Torchmark Corporation (TMK) and the 'A+' Insurer Financial Strength (IFS) ratings assigned to TMK's insurance subsidiaries. The Rating Outlook is Stable. A complete list of rating actions appears at the end of this release. KEY RATING DRIVERS The affirmation of TMK's ratings and its Stable Outlook reflect Fitch's view that the company's financial and operating profiles continue to be predictable, stable, and consistent with rating expectations. Fitch also believes that ample resources are available to return financial leverage to historic levels and rating expectation levels by year-end 2014. TMK's financial leverage of 26% for March 31, 2014 is considered slightly above expectations but is partially mitigated by the consistently strong earnings of TMK's insurance subsidiaries, which provide the holding company with robust cash flow. TMK uses these cash flows mainly for debt service and share repurchase. The speed and level of TMK's financial leverage reduction and retained earnings growth will be largely influenced by the dedication of cash flow to TMK's share repurchase program. Fitch estimates TMK's total financing and commitment (TFC) ratio to be 0.41x at March 31, 2014, which is in line with Fitch's expectation of less than 0.55x and is lower than that of most peers. Based on TMK's reported results for 2013, the company's pre-tax operating return on assets (ROE) of 15.4% and GAAP earnings based interest coverage of 10.4 times(x) is in-line with historical levels (ROE 12%-15%, and interest coverage 10x-13x). TMK's overall profitability and interest coverage ratios are in-line with rating guidelines. However, TMK's profitability is also better than similarly rated peers, which averaged an ROE of 8.7% in 2013. While profitability remains intact and interest rates improved in the latter half of 2013, Fitch notes the low interest rate environment continues to weigh on TMK's ability to grow excess interest income margins. Fitch also notes the small shift towards supplemental health related business which has lower margins and higher earnings volatility than TMK's traditional individual life business. Fitch views TMK's capital as adequate for its current 'A+' IFS rating. Fitch estimates TMK's total adjusted capital (TAC) and NAIC Risk Based Capital (RBC) at year-end 2014 were $1.5 billion and 342%, respectively. These figures are consistent with TMK's 2012 levels and the 325% RBC target set by TMK. However, due to their purchase of a meaningful portion of TMK's recent senior debt issue, Fitch believes the insurance subsidiaries quality of capital has weakened, although not enough to affect ratings. RATING SENSITIVITIES Key rating triggers that could lead to an upgrade include: --A sustained statutory capital adequacy above 350% RBC and sustained or improved capital quality; --Sustained financial leverage 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; --A sustained statutory capital adequacy below 290% RBC and sustained or worsened capital quality; --Sustained financial leverage above 25% or total financings commitments ratio above 0.55x; --GAAP earnings based interest coverage ratio below eight times. Fitch affirms the following ratings with a Stable Outlook: Torchmark Corporation --Long-term IDR at 'A-'; --Short-term IDR at 'F2'; --Senior debt at 'BBB+'; --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+'; --Junior subordinated debt at 'BBB-'; --5.875% junior subordinated debentures due 2052 at 'BBB-'; --Commercial paper rating at 'F2'. Liberty National Life Insurance Company United American Insurance Company Globe Life & Accident Insurance Company American Income Life Insurance Company --IFS at 'A+'. Contact: Primary Analyst Bruce Cox Director +1-312-606-2316 Fitch Ratings, Inc. 70 W. Madison, Chicago, IL 60602 Secondary Analyst Bradley Ellis Director +1-312-368-2089 Committee Chairperson Julie Burke Managing Director +1-312-368-3158 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Insurance Rating Methodology' (November 2013). Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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