Torchmark Corporation (TMK - Free Report) announced the pricing of $550 million aggregate principal amount of Senior Notes. The notes carry an interest rate of 4.550% and are scheduled to mature on Sep 15, 2028, subject to certain requirements.
The aforementioned senior notes will pay interest on a semi-annual basis and become the company’s general unsecured senior obligations. The senior notes will be ranked junior to the life insurer’s secured indebtedness, if any, to the extent of the collateral securing such indebtedness. Moreover, these notes will be structurally subordinated to all liabilities of the insurer’s units.
The company plans to utilize the net proceeds from the sale of these notes together with cash in hand to redeem its outstanding 9.25% senior notes totaling $293 million, which are set to mature in 2019. The redemption will include payment of about $11 million of “make-whole” premium plus accrued and unpaid interest but will exclude the redemption date. This apart, the proceeds will be used to fund $150 million of additional capital to its insurance subsidiaries. The life insurer plans to utilize the remaining portion for general corporate purposes that might include additional holding company liquidity and the repayment of part of its outstanding commercial paper.
The company displays its prudence by issuing senior notes amid a still low interest rate environment to procure funds. By capitalizing on the low interest rate environment, the company is attempting to reduce its interest burden, thus facilitating its margin expansion. Also, the company’s operational strength should enable it to service debt uninterruptedly, thereby maintaining the stock’s creditworthiness.
However, with the new issuance, interest expense will increase. But we still believe in the company’s strong position to clear debts, banking on operational efficiencies, largely driven by organic growth.
As of Jun 30, 2018, total debt of the company was $1.5 billion, up 3.6% from $1.4 billion from the year-ago quarter. The debt-to-capital ratio on Jun 30, 2018 was 21.1%, down 110 basis points from 22.2% in the prior-year period. However, the latest offering will increase the debt-to-capital ratio by 570 basis points.
Moody’s Jumps Into Action
Subsequently the credit rating giant Moody’s Investors Service has assigned a Baa1 rating to the aforementioned senior notes. The outlook for the same remained stable.
The assigned rating represents normal notching on the basis of seniority of the issuance of notes. Despite the debt issuance exceeding the company’s upcoming debt maturity that will increase the insurer’s leverage and coverage metrics, both the metrics will be within Moody’s rating expectations. The rating agency estimates Torchmark to maintain its adjusted financial leverage in the mid-to-upper 20% range.
The rating assigned to the company’s business profile is attributed to its unique market position pertaining to the distribution of life and health products. The credit rating giant has further added that the life insurer has successfully maintained its profitability streak in the past few years while exhibiting solid financial flexibility, fueled by a strong cash flow generation and an encouraging earnings performance.
The rating giant has disclosed some factors that could lead to a rating upgrade. These include keeping the company’s adjusted financial leverage below 20%, improvement in the credit quality of its investment portfolio wherein the exposure level to Baa-rated bonds will be reduced as well as the company’s sustained consolidated NAIC RBC ratio of at least 375% Company Action Level (CAL).
On the flip side, the causes that could lead to rating downgrade include the company’s less-than-300% consolidated NAIC RBC ratio, a persistent deterioration in its profitability, an above 30% adjusted financial leverage as well as its earnings and cash coverage lying below 6 and 4 times, respectively.
Rating affirmations or upgrades from credit rating agencies play an important role in retaining investor confidence as well as maintaining the stock’s credit worthiness. Whereas rating downgrades not only hamper business but also raise the cost of future debt issuances. We believe that such ratings will help Torchmark retain investors’ trust and write more businesses going forward.
Zacks Rank and Share Price Movement
Currently, Torchmark carries a Zacks Rank #2 (Buy). Shares of the company have gained 9.7% in a year’s time against the industry’s decrease of 10.1%. We expect a consistent segmental performance, premium growth and a solid capital position to drive the stock higher in the near term.
Other Stocks to Consider
Investors interested in other top-ranked stocks from the insurance industry may also consider Alleghany Corporation (Y - Free Report) , Primerca, Inc. (PRI - Free Report) and The Navigators Group, Inc. (NAVG - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Alleghany provides property and casualty reinsurance and insurance products in the United States and internationally. The company delivered positive surprises in three of the trailing four quarters with an average beat of 17.61%.
Primerica distributes financial products to middle income households in the United States and Canada. The company pulled off positive surprises in three of the previous four quarters with an average positive surprise of 5.89%.
Navigators Group underwrites marine, property and casualty plus professional liability insurance products and services in the United States as well as globally. The company came up with positive surprises in three of the preceding four quarters with an average earnings surprise of 19.54%.
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