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Rating agency Fitch Ratings has confirmed the insurer default rating (IDR) at ‘A-’ and insurer financial strength (IFS)  at ‘A+‘ of Torchmark Corp. (TMK - Analyst Report) and its insurance subsidiaries. The ratings were given a stable outlook, up from the previous negative outlook.
 
Fitch’s rating affirmation acknowledges Torchmark’s strong capital position and solid cash flow. Strong operating performance of its subsidiaries ensures consistent operating cash flow to the parent. Used for debt repayment and share repurchases, it has strengthened the parent’s capital and bottom-line earnings.
 
Fitch also reviewed Torchmark’s profitability, taking into account its Return on Assets (ROA), which stood at 4.1% at the end of fourth quarter 2012. Its debt service capability, as measured by interest coverage ratio, also stood at 10.1x. Fitch noted that both these metrics were in line with the historical average of 4-5% and 10x-13x for ROA and interest coverage respectively, and it fared relatively better than peers with 1.4x and 8.0x for similar metrics.
 
The affirmation of Torchmark’s IFS ratings comes on the back of its adequate risk-based capital levels. According to Fitch, the company’s current risk based capital and adjusted capital stands at 330% to 340% and $1.3 to 1.4  billion, respectively, which aligns with the 325% limit for risk-based capital set by the company itself.
 
One of the factors offsetting the strong ratings was Torchmark’s enhanced financial leverage, which stood at 28.1%.  However, the rating agency views this as a temporary phenomenon driven by issuance of new debt for the acquisition of Family Heritage Life. 
 
On the positive side, the rating agency, however, notes that Torchmark has a strong capital profile, which will enable it to fulfill its commitments reflected through its total financing and commitment ratio of 0.45x as of Dec 31, 2012. This is stronger than most of its peers and within the comfort range of 0.55x set by Fitch Ratings. 
 
The rating agency also laid out the factors, which may cause an uptick in ratings. These include maintenance of risk based capital of more than 350%, sustained financial leverage of 20% or below, total financing commitments ratio below 0.40x and GAAP earnings based interest coverage ratio 13x or more.
 
The rating agency could take a reverse action if the company incurs more-than-expected losses in its investment portfolio; the risk based capital falls below 290%, financial leverage is higher than 25%, total financing and commitment ratio breaches the maximum limit of 0.55x and interest coverage ratio drops below 5x.   
 
Other players from the same industry Assurant Inc. (AIZ - Analyst Report), Genworth Financial Inc. (GNW - Analyst Report), and StanCorp Financial Corp. (SFG - Analyst Report) carry an investment grade rating from leading rating agencies.

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