A.M. Best Rates TMK, Outlook Stable

As a part of its yearly review exercise, rating agency A.M. Best affirmed the financial strength ratings (“FSR”) and the issuer credit ratings (“ICR”) of Torchmark Corp. ( TMK - Analyst Report ) and its subsidiaries. Torchmark's subsidiaries have been assigned FSR of "A+" and ICR of "aa-", while Torchmark has been bestowed with an ICR of "a-", along with its existing debt ratings. All the ratings hold a stable outlook.

A.M. Best acknowledges Torchmark's solid market presence as well as a broad product profile that offers annuities, whole and term life insurance, accidental death insurance, health insurance, Medicare supplements, and long-term healthcare policies. Torchmark makes these offerings through its subsidiaries, Liberty National Life, American Income Life Insurance, United Investors Life Insurance, United American Insurance and Globe Life and Accident Insurance.

The rating agency has a positive view of the product diversification benefit from the company’s individual annuity and supplemental health insurance lines of business.

Cost reduction measures adopted by the company, improved persistency and agent recruitment at some of its major subsidiaries contributed to the rating affirmation.

Agent count at the end of first quarter 2012 was 5,104, up 26% from the year-ago period. It recorded a 17% increase during the quarter. The company has done well to counter the decline in agent recruitment and sales. In mid-February this year, the agent count at Liberty National hit a low of 1,228. Since then, there has been a consistent increase in agent count, which is now 1,321, an increase of 7.5% in a two-month span. The rating agency is optimistic about this trend and expects it to continue going forward, resulting in improved sales at Liberty National for the rest of the year.

Despite aggressive efforts by Torchmark to increase agent count, the rating agency remains a bit skeptical about agent retention by the company. Moreover, the rating agency also views premium challenges in some lines of businesses.

However, Torchmark’s long-duration investment portfolio, with a high concentration (95%) 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. The rating agency, however, noted that the recent unrealized gain of $900 million at the end of first quarter 2012 points to an improved portfolio performance.

A.M. Best also acknowledges Torchmark’s risk based capital ratio, which stood at 325%. Though this ratio is lower than some of its peers, it is sufficient for Torchmark in light of its consistent statutory earnings and relatively lower risk of its policy liabilities.

A.M. Best stated that 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.

Peer Assurant Inc. ( AIZ - Analyst Report ) also carries an ICR of “bbb” with a stable outlook. Torchmark currently retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. We are also maintaining our long-term “Neutral” recommendation on its shares.