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Fitch Assigns 'BBB-' Rating to Torchmark's Junior Subordinated Debentures
November 17, 2017 / 8:59 PM / in 24 days

Fitch Assigns 'BBB-' Rating to Torchmark's Junior Subordinated Debentures

(The following statement was released by the rating agency) CHICAGO, November 17 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to Torchmark Corporation's (TMK) issuance of $125 million of junior subordinated debentures due 2057. The rating being assigned to the new debt is equivalent to the ratings assigned to TMK's existing junior subordinated debentures and reflects standard notching for a hybrid with its risk characteristics. Based on Fitch's rating criteria, the securities are notched using a baseline recovery assumption of Poor and a non-performance risk assessment of Minimal. No equity credit has been assigned to the issuance. Fitch affirmed TMK's existing ratings with a stable outlook on Nov. 16, 2017. The new debentures are offered under Regulation 144A and will have a maturity date of Nov. 17, 2057. Net proceeds are expected to be used to repay $125 million of existing junior subordinated debentures due 2052. Fitch considers the debt to be neutral in terms of TMK's financial leverage. KEY RATING DRIVERS Fitch's ratings on TMK reflect the company's very strong and stable operating profitability, strong competitive position in its niche, small face amount life and supplemental health insurance markets, reasonable financial leverage and below-average exposure to interest rate risk. The ratings also reflect the quality of the statutory capitalization of TMK's insurance subsidiaries, which is negatively affected by the companies' investment in parent-company senior debt and preferred stock. Fitch considers TMK's operating earnings and cash flow to be very strong and stable. The company has consistently generated an ROE of between 13%-15% over the past decade. Through the first nine months of 2017 (9M17), the company's pre-tax operating earnings were approximately $636 million and ROE was 14.4%, down modestly from the same period in 2016. This level of earnings resulted in interest coverage of 11.1x for 9M17, 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 given the company's focus on protection-oriented life and health insurance businesses. However, the company's ability to grow excess interest income margins continues to be constrained due to ongoing low interest rates. Fitch considers TMK's financial leverage to be reasonable for its operating profile and within expectations for its current rating category. Financial leverage was 27% at Sept. 30, 2017, essentially unchanged from year-end 2016. Fitch considers TMK's debt service to be strong, supported 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 its active share repurchase program. Fitch views TMK's Prism score of 'Strong' to be reasonable for the company's current 'A+' IFS rating given the stability of its earnings and cash flow. The company's consolidated total adjusted capital (TAC) and NAIC RBC ratio at year-end 2016 were $1.5 billion and 324%, respectively, which is in line with management's target RBC ratio of 325%. Due to their ownership of a portion of TMK's outstanding senior debt and preferred stock, Fitch believes the insurance subsidiaries' quality of capital is weaker than reported RBC would imply. These parent-company investments are taken into consideration in the company's Prism score. RATING SENSITIVITIES Key rating sensitivities that could lead to an upgrade include: --Improved capital adequacy that results in a Prism score approaching 'Very Strong', or an RBC ratio above 350% with sustained or improved capital quality; --Financial leverage of 20% or below and total financing and commitments ratio below 0.40x; --GAAP earnings-based interest coverage ratio 13x or above. Key rating sensitivities that could lead to a downgrade include: --ROE of 12% or less; --A reduction in capitalization that results in a Prism score of 'Adequate' or an RBC ratio below 290% with sustained or worsened capital quality; --Financial leverage above 30% or total financing and commitments ratio above 0.55x; --GAAP earnings-based interest coverage ratio below 8x. FULL LIST OF RATING ACTIONS Fitch has assigned the following rating: --5.275% junior subordinated debentures due 2057 at 'BBB-'. Contact: Primary Analyst Bradley S. Ellis, CFA Director +1-312-368-2089 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Nelson Ma, CFA Director +1-212-908-0273 Committee Chairperson Douglas M. Pawlowski, CFA Senior Director +1-312-368-2054 Date of Relevant Rating Committee: November 15, 2017 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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