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As a part of its yearly review exercise, rating agency Moody’s has confirmed the insurer financial strength (“IFS”) rating of ‘A1’ for Torchmark Corp.’s (TMK - Analyst Report) subsidiary Liberty National Life Insurance Company. The company’s senior debt rating has also been affirmed at ‘Baa1.’ All the ratings carry a stable outlook.

Moody’s rating affirmation acknowledges Torchmark’s strong capital position and solid cash flow. Torchmark had $16.7 billion in assets and $3.8 billion in shareholder equity as of March 31, 2012.

The rating agency also acknowledges Torchmark’s performance in maintaining its life insurance premiums and underwriting profitability through underwriting discipline, despite the soft insurance market and an overall sluggish U.S. economy. The rating affirmation of Torchmark’s subsidiary Liberty National comes on the back of its strong operating profitability and capital strength.

However, dwindling sales at the company’s health insurance business is one of the factors that offset the ratings. Health premium declined 6% in 2011, 3% in 2010 and 10% in 2009. The decreases in both the years were the result of de-emphasis and discontinuation of sales of limited-benefit hospital-surgical health products as well as decline in agent counts in the distribution units that market health products.

These factors have caused reduction in net sales of health products, which have consequently limited premium growth. Though Medicare Supplement remains the largest contributor to total health premium, increased competition has dampened the sales of this product in recent years, resulting in premium declines in each successive year. Weakening sales at Torchmark’s life insurance business is also a cause of concern.

The rating agency also outlined the factors, which may cause an uptick in ratings. These include maintenance of risk-based capital of at least 375% and successful mitigation of its agent related issues.

The rating agency may take a reverse action if risk-based capital falls below 325%, financial leverage is higher than 30%, total adjusted leverage breaches 30% and cash coverage ratio drops below 4-6x. The agency also requires Torchmark to reduce its exposure to below investment grade securities to a level consistent with its other “A” rated peers.

Torchmark also scores strongly with other rating agencies. Fitch Ratings has recently confirmed the IFS rating of ‘A+’ and long-term issuer credit rating (“ICR”) of ‘A-‘ for Torchmark Corp. and its insurance subsidiaries. All the ratings carry a stable outlook.

A.M. Best also affirmed Torchmark subsidiaries’ financial strength rating (FSR) of "A+" and ICR of "aa-," while the parent has been assigned an ICR of "a-," along with its existing debt ratings. All the ratings hold a stable outlook.

Torchmark, which competes with Assurant Inc. (AIZ - Analyst Report) and W.R. Berkley Corp. (WRB - Analyst Report), currently retains a Zacks #3 Rank corresponding to a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on its shares.

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